How Russian Steelmakers Could Capitalise in a Post COVID-19 World

Russia is among the biggest steel exporters in the world, delivering to a wide range of destinations. However, steel demand in all regions diminished as the world was hit by COVID-19 and most steel producers globally have struggled. Unlike steelmakers in other regions, Russian producers did not idle capacity but extended maintenances and lowered capacity utilisation in order to reduce output. Going forward, however, they will have to decide whether to take more decisive measures to keep production restricted, dependant on their ability to leverage their cost competitive advantages and the growth opportunities that export markets present.

Given that domestic steel demand is expected to remain weak in 2020, we believe that Russian mills will increase exports due to their low-cost advantages. There will be stronger exports to the EU, with expanded quota volumes, and to Southeast Asia, where demand is expected to recover faster than in other regions. This will not be enough, however, to sustain 2019 output levels and production in Russia will decline by 8% y/y.

Even during 2021, Russian demand is not expected to recover to pre-pandemic levels and output will be dependent on export demand. There is a risk of lower exports to the EU ultimately, due to the possible introduction of carbon border tariffs that could, feasibly, be introduced during the year. Sales to Southeast Asia, however, will be strong as demand there will be rising fast. As a result, net exports will rise and steel production will return to pre-COVID-19 levels by end-2021.

A strong domestic market premium reduced Russian steel exports in 2019

In 2019, carbon steel exports from Russia reduced by 12% y/y, to 27 Mt, as sales to traditional markets, such as Turkey, North America and the EU, fell sharply. On the other hand, exports to Asia rose by 9%, with Taiwan remaining the main destination and receiving over 3.5 Mt of material.

Total exports were lower for a few reasons. Firstly, domestic demand for finished steel products in Russia increased by almost 10% during the year, while crude steel production remained virtually unchanged due to an already high capacity utilisation. This pulled the domestic market premium higher—for rebar it was $55 /t in 2019 compared with just $5 /t in 2018 and, for HR coil, the premium was $107 /t in 2019 compared with $55 /t a year earlier. With high premiums, producers naturally diverted more material to the domestic market to maximise profits.