By John Helmer in Moscow
A report issued this week warns that Russian steelmills may try to export their way out of the current global economic crisis, exploiting their low-cost power and raw material advantages, and creating a potential glut in global steel supplies for another twelve months or longer. Steel analysts from the Swiss bank UBS produced the report on April 8.
“We see a severe looming export threat from Russia and its neighbors for several reasons”, UBS claims to clients. “The ruble has devalued ~30% vs the US dollar and domestic demand has fallen sharply with energy’s slump. The CIS are among the lowest cost producers and are running at ~65% capacity utilization. Exports are a great solution to their woes, and their prices are very competitive with global mills given low freight costs. We believe the worst-case scenario of a global mkt share battle is emerging.”
Included in the analysis of an export surge is steel from the Ukraine, Kazakhstan, and Belarus. “The CIS is a major global steel exporter, particularly to both the US and Europe. We believe the region has the capacity, motivation, and low costs to be a sizable export force in 2009. UBS estimates capacity utilization in the region is about 65% but generally weak domestic markets and balance sheets are motivating producers to try to return to full utilization…We estimate 50-60M tonnes available for export on an annualized basis, which eclipses recent Chinese exports at a run rate of 12-15M tonnes, and approximates the maximum annual exports from China of 52M tonnes in 2007.”
The report appears to endorse protectionist measures, including anti-dumping penalties and other trade curbs. The UBS team claims that decade-old import quotas imposed on Russia and Kazakh steel will restrain the export surge to the European Union (EU), while mininum price curbs, also more than a decade old, will restrain the growth of Russian exports to the US. “Our trading contacts tell us that the U.S. has a minimum price set quarterly on Russian HRC and Ukrainian plate, which has effectively blocked import on those products for the past six months. The minimum price cannot move more than 10% in a quarter. Products other than HRC have a quota, but the quantities set in the quotas have risen over the years. Imports to Canada can be an indirect way for CIS product to pressure the U.S. market. In the near term, lack of demand and credit is a powerful deterrent to imported tons but we hear CIS exporters have offered very competitive prices into the U.S.”
A flood with nowhere to go may not be quite Armageddon for the steel industry which UBS believes. It is unclear from the UBS report, for example, what destinations are forecast for the Russian and CIS export surge.
The UBS team notes that CIS steel imports to Western Europe have been shrinking in proportional terms — from 35% in 2005 to 29% in 2008 — principally because of a sharp increase in Chinese steel supplies. In import volume in the West European market, these jumped from 8% in 2005 to 27% in 2008. However, even if Chinese exports start to decline as the experts forecast for the rest of this year, EU quotas will curtail the growth of CIS steel to fill the gap. Turkey and the Middle East already comprise 34% of CIS steel exports in 2008 — compared to 31% in 2005 — but according to UBS, there are indications that Turkish producers like Erdemir are intent on securing anti-dumping duties to limit further growth in Russian or Ukrainian deliveries.