Game changer: Ukraine war to transform global pig iron trade for years to come

The Russian invasion in Ukraine sent shockwaves to most commodities markets worldwide. With Ukraine and Russia accounting for around 60% of global merchant pig iron exports, the war has been a complete game changer for the global pig iron trade.

Alternative export routes

The Russia-Ukraine war that started on Feb. 24, 2022, has turned a large part of the bustling trading region of the Black Sea into a war zone.

As a result of Russia's direct attacks, blockages or occupation, the Ukrainian Black Sea and Sea of Azov ports, including Odesa, Chornomorsk, Yuzhny and Mariupol, became unavailable for Ukrainian companies to use for trade. This had particularly negative consequences on the Ukrainian steel industry, which traditionally exported most of its output mainly via Black Sea ports.

Under the international pressure, Russia agreed to sign the UN-brokered Black Sea Grain Initiative in July 2022 with Turkey and Ukraine, allowing for the safe passage for Ukrainian grain exports from the Black Sea ports. As the grain agreement was due for a review and renewal earlier this year, market players wondered if Ukraine would be able to secure safe passage for its metallurgical industry as well, particularly since Ukrainian pig iron plants are either located in the proximity of the Black Sea and the Sea of Azov ports or connected via rail. No such agreement has been made so far.

Pig iron and steel exports are major sources of tax revenue, foreign currency and employment, and are of strategic economic importance to Ukraine. To ensure the flow of exports, Ukrainian steelmakers will have to keep using alternative and more difficult routes in the foreseeable future.

The new routes involve long and costly shipment by rail to Poland's Baltic ports or a combination of rail and inland waterways to the Constanta port in Romania, the Ukrainian port cluster on the Danube or even ports in northern Adriatic.

Diminished pig iron output, exports

Data shows that the export tonnage of Ukrainian pig iron has been fluctuating between 84,330 mt in April and 177,080 mt in February. The average level between December 2022 and April was at 126,260 mt/month, according to Kyiv-based consultancy GMK Center.

The US market was and remains the key outlet for Ukrainian seaborne pig iron. Total pig iron exports for 2022 were 1.325 million mt -- averaging 110,000 mt/month -- down from 3.235 million mt in 2021, GMK Center reported.

Bringing the exports back to pre-war levels at roughly 250,000 mt/month is currently impossible due to the extensive capacity destruction at Metinvest's plants in the Mariupol region. At least 40% of the lost Ukrainian capacity was from the companies in Mariupol.

The output from the remaining operational producers is also hard to predict due to the continuing massive Russian attacks on public utilities, including power generation and distribution.

Higher logistics costs and bottlenecks related to the new transport routes also play against Ukrainian exports growth.

In a very unpredictable future, Ukrainian pig iron exports recovery may be prevented or at least delayed by the inevitable boom in the domestic steel demand once the war ends.

Russia finding new markets

For Russian pig iron exporters, the impact of the war is most felt in the sanctions and the pig iron pricing altered by the new market reality.

Russia exported 1.1 million mt of pig iron in the first quarter of 2023, down 29% on the year, according to the Russian metal industry information platform Metaltorg.

The traded volumes are still below pre-war norms as the reallocation of the huge volumes from the US to other markets is going to be a lengthy task, an industry consultant said, adding that in 2022 Russian pig iron exports fell by 1 million mt, down 23% on year, to 3.3 million mt.

Russia's monthly export deliveries fell to 230,000-280,000/mt since 2022 from 350,000-400,000/mt in previous years, according to estimates by Platts, part of S&P Global Commodity Insights.

Shipments to the US, accounting for around 50% of Russia's pig iron exports before the war, practically stopped for a few months after the war started. While other suppliers, including those from Brazil, Ukraine and even India, were filling the gap left by Russian supply in the US, Russian pig iron suppliers have been tacking the loss of its export markets by cutting production through temporary blast furnace stoppages, changing their product mix and ramping up sales to alternative markets.

The European Union, taking severe measures against Russian steel, left Russian pig iron free to import except for the mills directly targeted by the sanctions.

Italy, by far the largest EU buyer of Russian pig iron, continues its import significant volumes. Turkey, a second or third largest market for Russian pig iron before the war, is estimated to be the number one outlet now.

Turkey's imports of Russian pig iron increased 34% on year in Q1 to 223,700 mt. Turkey's combined pig iron import fell, however, by 8% year on year to 318,700 mt, Turkish Statistical Institute, or TUIK, data shared with S&P Global showed. Russia accounted for 70% of Turkish pig iron import last quarter.

China, already an emerging market for the CIS pig iron, is likely to become an increasingly important buyer of the Russian material. However, China has a very different steel production model compared to the US, making it unlikely to become a very regular and predictable buyer for Russia.

Much will depend on Chinese domestic steel demand, idling of old capacity and environmental policy. Bids from China are often very low and not acceptable for Russian suppliers, and the costs to ship to China are higher.

Market players said payments for Russian pig iron were no longer made in the US dollar but in newly adopted currencies including Turkish lira, Russian ruble, Emirati dirham and Chinese yuan. With offices located in the UAE or Turkey, Russian exporters seem to be able to transact relatively freely.

Regional divergence

Black Sea pig iron prices have significantly diverged from the Brazil-US pig iron market.

With the huge Russian pig iron supply taken out of the US market, US buyers face higher import prices coming from Brazil or Ukraine. At the same time, Russian suppliers were put in a tight corner by losing their largest market and facing more squeeze from buyers elsewhere.

With most market players seeing higher risks and costs in trading with Russia under sanctions, buyers in Turkey and elsewhere seem to have more leverage to negotiate lower prices for Russian pig iron.

Previously competing for the US market, Brazilian and Russian prices remained in a relatively narrow range, with Platts FOB Black Sea assessment on average only a few US dollars higher than FOB Brazil, mainly due to quality differences.

In the last 12 months, the Platts weekly FOB Black Sea pig iron assessment has on average been $108/mt lower than the FOB Brazil assessment. On June 22, Platts assessed its FOB Black Sea pig iron price at $355/mt FOB compared with $437.50/mt FOB Brazil.

This is perhaps the most visible change resulting from the new market reality for Russian pig iron exporters is the pricing. Previously on par with Brazilian competitors, Russian mills are now trading their pig iron some $100/mt below Brazil, on FOB basis.

This remarkably wide spread could close only if Russia gets access to the US market again, or cuts its pig iron allocation by half. Neither scenario looking very likely to happen. The third way, which has actually been adopted by most Russian merchants, is trying to reduce the pig iron export allocation by making more steel combined with efforts to divert volumes from the US to Turkey, Europe, the Middle East and Far East Asia. This often meant the necessity to change the ways of doing business including switching from the US dollar to other currencies, establishing sales offices in new locations and finding new shippers.

While Turkey and most Asian pig iron markets are unlikely to put embargoes on the Russian imports, the ongoing sanctions on Russia in the EU raises questions on whether pig iron will eventually fall more closely under the EU's radar.

In the US, Brazilian pig iron exporters' dominating position seems unchallenged by less frequent and more opportunistic shipments from Ukraine and India. Overall, it may be impossible to replace the huge volumes of good quality Russian pig iron imports, which poses questions about boosting domestic pig iron capacity and investments in other metallics in the US.

Ukraine pig iron supply, indefinitely curbed by the damaged capacity and crippled by ongoing war, is improving but is set to stay reduced and fluctuate depending on the war progress, power generation, output level, logistics and steel prices.