Russia finally introduces ferrous scrap export quota

The Russian government has finally restricted ferrous scrap exports outside the Eurasian Economic Union (EEU) by implementation of regional quotas for four months starting on 1 September. The appropriate decree was officially issued on 31 August and made public yesterday.

The document broadly enshrines provisions outlined in the government's announcement from mid-June and a draft bill from mid-July and determines an overall quota of ferrous scrap permitted to be exported from Russia in the period from 1 September to 31 December at 1,009,200t.

Russia's industry and trade ministry is prescribed to distribute this amount by issuing one-time licences to exporters proportionally to tonnage they shipped in the period from 1 January 2016 until 31 December 2018 from all regions, with an adjustment coefficient applied for every region.

The coefficients will be applied in order to increase or decrease tonnage meant for exports. In particular, most northwest Russian regions, including St Petersburg, which is a key outlet for Russian ferrous scrap exports, have received a 0.8 coefficient (see table).

Exporters Argus contacted for feedback have critically assessed the decree, noting that the document is still lacking details on how the proposed quota mechanism will be implemented. In particular, it continues to be unclear how one-time licences will be issued and how cargoes sold before 1 September but not yet shipped will be treated.

"Aimed to finally clarify the questions about export restrictions, the new decree increases the uncertainty instead," one exporter said.

Russia's ferrous scrap exports totalled 2.44mn t in the first half of this year, down by 13pc on the year, customs data show, with the decrease driven by weak global demand and lower seaborne prices.

The downtrend in Russia's scrap exports was broadly in line with the slowdown of the country's overall ferrous exports in January–June and are likely to start deteriorating faster on the back of the Russian government's introduction of a quota system.

Initially, the introduction was scheduled for 1 July, with a draft bill tabled by the trade and industry ministry, economy ministry and federal anti-monopoly watchdog FAS before 25 June. But the document was presented only in mid-July and agreed upon and approved by the end of August.

In late July, the Russian government also proposed that the country's ferrous scrap exporters only be permitted to ship material purchased through exchange tenders that are subject to official oversight, with the introduction of such system targeted for 1 January 2020.

The lower supply from Russian ports is not expected to have much effect on seaborne scrap prices in the short term as many Russian exporters have already been preparing their unsold export cargoes for September shipment. Weak global steel demand today means that seaborne scrap prices are under downward pressure irrespective of scrap supply becoming slightly more limited in the immediate and long term.

Rostov supply has been very limited this year as a result of strength in southern Russian domestic demand and the concern that this export quota could come into place at any moment.

Around 25,000t of Rostov-origin material was exported by the two major Rostov ports loading in the Azov and Black Sea every month in 2019, down from around 80,000t/month exported from Rostov/Yeisk in 2016-2018, according to Rostov sources.

Rostov sources expect that 15pc of Russian Black Sea short-sea export supply will have disappeared today. This 15pc comprises a number of small Rostov suppliers that tend to change their company name frequently in order to negotiate debt obligations. None of these companies will be given an export quota as they will not be able to show three years of historical export data.

One Arkhangelsk exporter will not be subject to any Russian export quota. It said that this is probably a result of the much smaller amount of volume shipped from the region compared to the St. Petersburg market and the view that its volumes exported do not restrict scrap availability for Russian steelmakers.

Four St. Petersburg exporters said that they cannot today commit to calculating what may happen to their export scrap volumes in the next two years given they have only just learned about this investigation, and in turn need to hold internal meetings to work out long-term strategy.

There is already market discussion about how St. Petersburg exporters will cope with managing the 20pc of supply they have exported over the past three years that can now no longer go overseas.

The Russian domestic market firstly will be able to find more volumes, which is the main purpose of the export quota.

Some market participants said St. Petersburg exporters could attempt to team up with Baltic scrap exporters in Estonia, Latvia and Lithuania to sell combined large bulk cargoes to Turkey. None of the St. Petersburg exporters will wish to sell smaller cargo tonnages to Turkey as they may then be required to pay higher freight rates.

Baltic exporters already often combine tonnages with each other to ship cargoes at lower freight rates, or if they are struggling with tight supply.

But two of the largest Baltic exporters said today that despite their expectation for these enquiries to soon come from St. Petersburg exporters, neither expect agreements will come to fruition with Russian parties.