Russian steel exports eye Asia on widening sanctions

Russian hot-rolled coil (HRC) may emerge in the Asian spot market after a gap of 4-5 months on wider economic sanctions on Russia, while Russian billet exports may be diverted to China should it fail to transact with traditional buyers.

Select Russian banks will be disconnected from global financial messenger service provider Swift, the leaders of the US, EU, France, Germany, the UK and Canada said in a joint statement issued at 4:45pm ET on 26 February. Iran was also previously barred from Swift amid US sanctions. The list of banks is yet to be finalised but the US and EU have already placed sanctions on major Russian banks that collectively account for 80pc of the country's financial transactions.

Chinese steel exporters said today that they were expecting support for steel prices, anticipating lower exports from Russia should its banks be kicked out of Swift. The drop in Russian exports are expected to result in global steel supply tensions and drive up Chinese steel export prices and volumes. For the time being, Russia is not offering spot cargoes and no one would consider buying from Russia, a Chinese exporter said.

The sanction on Russia's Swift access would drive inflation in commodity prices, including the steel sector, an eastern China trader said.

The most-traded May HRC futures on Shanghai Futures Exchange stood at 4,952 yuan/t ($785/t) at 3pm local time, up by 3.5pc from the previous settlement price.

"Some Russian banks were sanctioned, but that is not an issue, as we can change to other banks to do business. If Russia is sanctioned on financial settlements using US dollar, in the way Iran is, then exports will fall significantly," an east China-based trader said last week before the fresh Swift sanctions were announced.

Russia has not been a significant seller of steel to Asia over the past months on unfavourable export prices to the region, compared with Russian domestic and regional levels. The country's rebar exports to Hong Kong dropped to 55,000t last year after surging to 220,000t in 2020. No rebar sales were heard to Singapore last year. Rising steel production at Vietnamese mill Hoa Phat, which started offering rebar to Hong Kong and Singapore last year, is a factor that may cushion the Asian markets against any immediate Russian supply disruptions. But alterations to trade flows may occur. Hoa Phat produced 707,000t of crude steel last month, up by 5pc over the same period last year. Its sales volume stood at 631,000t, with construction steel accounting for 382,000t, twice the volume compared with the corresponding period of 2020, the company said last month.

Russia sells around 30,000t of HRC to Vietnam in a month, implying that the country accounts for a small proportion of HRC trade in Asia. Russian HRC offers to Vietnam have been limited since October 2021 as the southeast Asian country has enough domestic and regional supplies to meet its demand.

But a drop in Russian HRC exports to Europe and the US may result in more Indian steel exporters diverting their sales to buyers in those regions and away from Asia, especially Vietnam, where the bulk of the shipments go.

Russia exported 13mn t of semi-finished steel in 2020, with China as the destination for 6.7pc of the shipments. China accounted for 5pc of Russia's 14.9mn t of semi-finished exports last year. China's share of Russian billet exports, which accounts for the bulk of the semi-finished steel that the country imports from Russia, may rise as a result of widening sanctions on the country.

It is unclear if Asian steel market participants, including in China, would be able or willing to transact with Russian banks or trade Russian commodities. Coking coal buyers in China highlighted concerns about buying Russian coal last week amid trade finance uncertainties. The reluctance was highlighted despite China's increasing reliance on Russian coal, following its refusal to import Australian coking coal in 2020 resulting from political tensions with the country.

Activity in the Black Sea market stopped later last week as Ukrainian billet producers restricted production, with key ports ceasing operations. Buyers were reluctant to trade with Russian mills because of uncertainty over potential sanctions, with some turning to Turkish suppliers.