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Feature: Russian steel demand showing signs of recovery as COVID-19 restrictions ease

London — Russian demand for steel is gradually returning as COVID-19-related restrictions ease and construction activity picks up.

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The first three weeks of August saw Russian consumers' expenses restored to the level they were a year ago, Sberbank reported, and Russia's Purchasing Managers' Index, which had collapsed to 34 in April-May, recovered to 49 in June-July.

The second half of 2020 remains challenging. However, mills said they were determined to maximize sales in Russia, the market where they normally sell most of their high margin products, and hence make most of their profit.

Moving back to normal

Like most countries, Russia responded to COVID-19 with a steel production cut. Russia's output fell by 3% on the year to 35.3 million mt in the first half of 2020, Worldsteel figures showed.

The period saw an 11% fall in Russian steel consumption to little over 19 million mt, according to Evraz.

At the first signs of a Russian market downturn amid the coronavirus pandemic, mills started looking for export opportunities to hedge against weak domestic demand.

As a result, in January-June, Russia's steel exports grew between 3% and 6% on the year to 14.5 million mt. That was 41% of the country's output in that period. High value added product supplies suffered the most as exports comprised mainly billet, slab, pig iron and hot-rolled coil -- the least profitable products.

The average share of exports in the second-quarter sales of NLMK, Evraz, MMK and Severstal exceeded 50%. Exports comprised almost 70% of NLMK's Russian mills' shipments in May-June.

As NLMK put it, the market volatility and uncertainty faced by steelmakers in Q2 were unprecedented, with demand for metal products in Russia down by 20%.

Yet business activity in the country recovered strongly near the end of June, and in July-August, steel demand appeared similar to what it was in the same months last year.

Some companies' sales within Russia have been steadily rising since late June. NLMK said its domestic sales have come close to their normal levels.

NLMK, MMK and Severstal said they presently find the home market robust. The easing of restrictions, monetary policy support and more affordable mortgage rates should keep it stable, but further improvement depends on a few "ifs."

Worldsteel forecasts a 10% decline in steel consumption in Russia this year. Severstal sees it at 6%, if recovery continues at its current pace, while a 10% drop would represent the worst-case scenario.

Construction driving recovery

Market recovery began with the construction sector, which absorbs 65%-70% of domestic steel. What kick started real estate demand was a series of interest rate cuts by Russia's central bank and consequently falling mortgage rates.

Although the sector was the first to recover, given its seasonal fluctuations and a serious loss in uptake in the H1, when demand fell by 15% for beams, by 7% for rebar and by 21% for structural steel products, Evraz said this year will still see a 10% drop in demand for construction purpose long-rolled steel products.

Over January-July, Russia's car production slumped by 30% on the year, and a similar drop was initially expected in the full-year results.

But July saw an increase in output for the first time since 2020, which made industry analysts improve their forecasts. They now reckon auto production in Russia will fall by no more than 20%.

Pipe manufacturing -- another important end-user sector -- was hurt by the pandemic and by oil prices collapsing February-March. Although the oil price has since exceeded $40/b, it has not recovered sufficiently for pipe mills to feel positive.

This year, both consumption and production of steel pipes in Russia could well decline by 10%-11% year on year, according to Russia's pipe industry development fund. Production will contract to just over 10 million mt, while demand may not exceed 9 million mt.

Capacity utilization remains high

Russian steelmaking capacity utilization has remained above 80% over the last two years, supported by the competitiveness of Russian mills in export markets. The first half of this year was no exception.

In Q2, many steel producers stepped up maintenance -- some scheduled and some brought forward -- to make the most of the market downtime.

Except for the facilities suspended for repairs, flagship mills managed to utilize their steelmaking capacity close to the maximum, thanks to intensified exports, and they have no plans of curbing production any time soon.

MMK recently completed a capital revamp of a hot strip mill, which has added 800,000 mt of primary coil capacity, and NLMK is completing upgrades, which will expand its crude steelmaking by 1 million mt/year 2021 onward.

Whether capacity will continue to be utilized at high levels will depend on the state of the economy and mills' global competitiveness. Severstal said only a significant slowdown of Southeast Asian markets could justify production cuts at its flagship Cherepovets mill.

Evraz also plans to maintain full capacity utilization for liquid steel in 2021, although it is difficult to foresee what its product mix would be like and whether the company will have to maintain a high share of unprocessed semis in its portfolio in order to maximize sales.