How sanctions affected the Russian steel market

In 2022, steel production in the Russian Federation decreased by 7.2%, and steel consumption – by 5%

The initiators of the sanctions and many analysts were confident that the restrictions imposed throughout 2022 against Russia and Russian companies would lead to quick results that point to the unprofitability of the Russian Federation’s war against Ukraine. However, the damage to the Russian steel industry turned out to be an order of magnitude lower than expected.

Sanctions chronology

The imposition of sanctions against the Russian steel sector consisted of several stages. As part of the fourth package of sanctions, the European Union has banned the import of steel products from Russia included in the import quota system (rolled steel and pipes) from April 1, 2022. The ban on deliveries to the EU affected Russian steel products worth €3.3 billion.

Through the eighth package of sanctions against the Russian Federation, the European Union expanded the previously introduced restrictions on the import of steel products (it is estimated that the damage to Russia from the introduction of the eighth package will be € 7 billion): the EU extended the ban not only on the import of Russian steel products, but also steel products from third countries if it was made from Russian steel.

Taking into account the eighth package of sanctions and previously introduced restrictions, the import of goods of group 72 «Ferrous metals» (carbon steel, semi-finished products from it, various types of corrosion-resistant steel, etc., except for 7201 «Pig iron» and 7202 «Ferroalloys») 73 «Products from ferrous metals».

The 8th package of sanctions will come into full force from September 30, 2023, with the exception of certain steel semi-finished products – square billets and slabs, for which separate deadlines are provided. The import of square billet (code 7207 11) is prohibited from April 1, 2024, and the import of slabs (code 7207 12 10) – from October 1, 2024.

At the same time, quotas are introduced for the import of square billets and slabs from the Russian Federation. Quotas for square blanks provide for a gradual decrease in imports from Russia: in the first period of the quota – by 10.1% compared to the average monthly import in 2022, in the second period – by 37.1%, in the third period – by 64.1%. Permitted monthly slab imports will be only 20% below the actual average monthly imports in 2022.

According to GMK Center analyst Andriy Glushchenko, it will not be a big problem for European producers to refuse from import products that are not semi-finished carbon steel products. But in the EU there are rolling mills (including Russian companies) that operate on imported semi-finished products. Therefore, the European re-rollers were primarily against the ban on imports of slabs from Russia.

“The sanctions imposed by the European Commission do not create significant problems for the European steel industry. Deliveries of critically important semi-finished products from Russia will continue for another two years. For other products, there is an opportunity to find alternative suppliers, especially since the volume of imports from Russia is already declining,” notes Andriy Glushchenko.

Despite the fact that the sanctions are extensive and supplies from the Russian Federation to the EU are declining, the export of iron ore, pig iron, slabs, and square billets continues.

US and UK

Initially, US sanctions did not oblige a broad phase-out of Russian steel. The country introduced import duties of 35% on a number of pig iron and steel products of a fairly narrow range, but including slabs. However, on February 24, 2023, the United States announced the introduction of protective duties on aluminum and a number of other metals from Russia. Duties on most metals and steel products increased to 70%. According to US estimates, duties should cost Russia about $2.8 billion. However, for Russian ferrous metals, US duties do not matter due to low volumes of deliveries. The exception is pig iron – in 2021, the Russian Federation exported more than 2 million tons of pig iron to the United States, but in 2022 this figure fell to 637.9 thousand tons (deliveries were carried out exclusively from January to May 2022).

The sanctions from the UK have focused on trade restrictions. In March 2022, the country introduced additional duties of 35% on imports of goods originating from Russia and Belarus, including pig iron and steel, products made from them, and iron ore.

In addition to the above sanctions, restrictions were also imposed on Russian iron and steel companies and their owners. In particular, in April 2023, the United States imposed sanctions against the assets of the Russian Metalloinvest of the Russian billionaire Alisher Usmanov – Lebedinsky and Mikhailovsky Minings, OEMK and the Swiss Metalloinvest Trading. The blocking of these assets could affect the global trade in steel billets and hot briquetted iron.

Results of the sanctions

The imposed sanctions had a significant impact on the Russian steel industry. According to the Worldsteel association, steel production in the Russian Federation in 2022 decreased by 7.2% – to 71.5 million tons, but the decline in production and exports did not meet the expectations of countries that imposed sanctions. In the first half of last year, market participants predicted a decline in production by about 15%. Worldsteel expected a 20% fall in steel consumption in Russia in April 2022, but in October it improved its forecast to a 6% decline. In reality, in 2022, the demand for steel in the Russian Federation decreased by 5% – to 41.7 million tons.

Similarly, there was a decline in the segment of export deliveries of iron ore. According to Metals & Mining Intelligence, total exports of iron ore concentrate and pellets from Russia in 2022 fell by 39%, to 13.6 million tons (despite the absence of sanctions). At the same time, the volume of exports of iron ore from the Russian Federation to the EU countries decreased by 4 times compared to 2021 – to 2.9 million tons in 2022, and the export of pellets to China increased three times – up to 1.5 million tons. Iron ore concentrate export to China decreased by 2.5% – to 7.8 million tons.

The following factors had a negative impact on the profitability of steel and iron ore exports:

Strengthening of the ruble. According to various estimates, for the profitability of the export of steel products from the Russian Federation to China, it is necessary to depreciate the ruble to 85 rubles per dollar.
Rising cost of logistics: workload of BAM, Trans-Siberian and Far Eastern ports. In particular, the transportation costs of Severstal reached 20-40% of the cost of production due to the cessation of export supplies to Europe and reorientation to new markets.
Dumping prices for export shipments of steel products – from spring 2023, Russian producers have provided discounts of 15-40%.

The sum of these factors led to unprofitable exports of steel and iron ore in the second half of 2022 for almost all Russian producers. According to BCS Global Markets analysts, only NLMK showed positive export profitability due to the supply of steel semi-finished products to the European market.

According to the Russian Ministry of Industry and Trade, sanctions affected the export of 3.9 million tons of finished steel products, 700 thousand tons of semi-finished products and 200 thousand tons of pipes.

Potentially, the adaptation of the logistics system and the weakening of the ruble could support the export of Russian iron and steel products. However, the slowdown in housing construction and budget revenues will have a negative impact on domestic demand.

According to BCS Global Markets analysts, the profitability of supplies of steel products to the domestic market of the Russian Federation is more than 30%, so many Russian steel producers have reoriented to the domestic market. Starting from July 2022, the situation in the construction, automotive and gas industries has stabilized. In April 2023, the Russian authorities decided not to limit domestic steel prices and not to regulate the profitability of steelmakers, despite complaints about rising prices. Now, according to the estimates of the Ministry of Industry and Trade of the Russian Federation, the loading of steel enterprises is 90-95%.

Regarding Russian rolling mills in Europe, a strange situation has developed. On the one hand, Severstal had to leave the European market – the European Commission approved a deal to acquire Italian Marcegaglia, a subsidiary of Severstal, SIA Severstal Distribution. On the other hand, NLMK, on the contrary, claims to acquire two Liberty Steel rolling mills in Belgium and is building up its presence in the EU.

It can be concluded that the impact of sanctions on the Russian iron and steel complex was limited to a negative impact on the profitability of exports due to discounts, an increase in the cost of logistics and reorientation to less marginal markets. The impact of sanctions on the domestic market and consumption of steel is still small. Worldsteel expects steel demand in Russia to decline by 5% in 2023 – to 39.6 million tons (in the October forecast for 2023, by 10%, to 37.2 million tons). Estimates for 2024 are also negative – a decrease in steel consumption by 7% – to 36.9 million tons.

How the Russian Federation reduces the impact of sanctions

In the global world, there are many opportunities to reduce the effect of sanctions, and the Russian Federation and its trading partners have been able to implement them. Russia produces about 70 million tons of steel per year, the domestic market consumes about 40 million tons, and there is a serious task to export 30 million tons of steel products per year under sanctions.

After the EU, UK and US premium markets closed to Russian steel imports, Russia began active exports to China, East Asian states, India, Turkiye and the MENA countries – these countries have not imposed any sanctions and remain fully open to imports from Russia. In addition, the EU continues to import Russian semi-finished products, pig iron, square billets, iron ore.

Although the United States imposed secondary sanctions at the end of March last year for helping Russia circumvent the sanctions imposed on it, this did not stop the export flows of Russian companies.

Since April last year, Russian suppliers have supported the export of products through discounts (15-40% of world prices). On the one hand, China and Turkiye took advantage of the market situation in order to gain an additional price advantage amid high prices for raw materials and energy carriers. In the spring of last year, it was more profitable for Turkish companies to purchase Russian semi-finished products and pig iron, rather than scrap metal. Total Turkiye increased import of Russian semi-finished products by 8 times. According to TUIK, Turkiye last year imported 3.4 million tons of Russian semi-finished products, about 2 million tons of the total volume were slabs.

On the other hand, the same China and Turkiye continue to protect their markets and limit access to them for Russian steel. Cheap Russian steel products had a negative impact on the performance of steelmakers in importing countries. Thus, in conjunction with supplies from Southeast Asia, steel imports from the Russian Federation had negative influence on the price level in the Chinese market.

Today, the main beneficiaries of sanctions are China, which, after a long break, began to supply slabs to Europe, as well as Turkiye, Brazil and India, which replaced supplies from Russia and Ukraine to the EU and the USA. In addition, Turkiye and India benefited from the fact that the EU redistributed Russian export quotas for the supply of their rolled products. Ukrainian products in the EU were replaced by Asian ones, in particular, imports from India, Korea and Japan.

What’s next?

Europe has almost reached the physical limit of the possibility of imposing new sanctions, and subsequent restrictions can only clarify or increase the responsibility for circumventing previously imposed bans.

Association of European Steel Producers EUROFER supports tightening sanctions against the export of Russian steel products and iron ore to the EU.

Already existing restrictions contain a loophole giving a two-year delay to many Russian producers to supply semi-finished products to the EU. European importers who buy Russian semi-finished products at reduced prices have an advantage over other producers in the European Union who voluntarily abandoned products from the Russian Federation. The largest importers of Russian semi-finished products are traditionally Belgian and Italian companies. In particular, there is a subsidiary of a Russian steel producer in Belgium.

“Therefore, the latter Metinvest plants in Italy and the UK are in a disadvantageous position. This is an unpleasant situation. Russia is unfairly taking market share from more prudent producers, such as Metinvest and other European producers, who refuse to buy from Russians because of their reluctance to sponsor the Russian economy. I hope this loophole will be closed in the next two packages of sanctions” told Yuri Ryzhenkov, CEO of Metinvest.

The Ukrainian authorities are of the opinion that all Russian steel products should be subject to sanctions.

“Ukraine is interested in replacing Russian iron ore and steel products on the European market. This is important for the further sustainable development of the pan-European steel complex,” noted First Deputy Prime Minister – Minister of Economy Julia Sviridenko.

In the current conditions, it is important to create conditions so that the products of the Ukrainian iron and steel complex can gradually replace similar Russian products on the European market. According to Stanislav Zinchenko, CEO of GMK Center, by replacing Russian suppliers in the EU market, Ukraine can increase exports of iron and steel products for $74 million monthly. This is taking into account the volumes of iron ore and pig iron supplied by Russian companies to the EU market last year and the production capacities that remained on the territory controlled by Ukraine. The maximum possible potential for increasing the export of iron ore and pig iron is $230 million per month. This is provided that the steel enterprises remaining in the territory under the control of Ukraine will be able to resume production to pre-war levels.