Russia set to dominate Black Sea steel market in Q1, Ukrainian industry crippled by war

With Ukraine's steel production infrastructure destroyed, idled or under Russian control, the Black Sea export market is unlikely to return to pre-war patterns any time soon and prices in the region will predominantly reflect Russian exports for the foreseeable future, market sources have told S&P Global Commodity Insights.

Ukrainian steel exports to the spot market, although ongoing despite the devastating impact of Russia's invasion, have been significantly reduced in both volume and product range. But Black Sea ports remain unused by Ukrainian steel producers.

In January-November, Ukraine's output was 6.16 million mt, down 69% on the year, according to Worldsteel data. With the destruction of the Azovstal and Mariupol steelworks last year, the two main integrated mills owned by Metinvest, Ukraine's steel production is set to remain well below historical levels.

However, some iron ore, pig iron and finished steel products sales, mainly transported inland and sold to Europe or shipped from ports in the EU, are expected to continue in 2023. Pig iron exports from Ukraine plunged 1.23 million mt in January-November, dropping 58% on the year, according to Kyiv-based market analysis and consultancy organization GMK Center.

Volumes are set to dwindle further for December and possibly through 2023, after ArcelorMittal Kriviy Rih, one of the main merchant pig iron exporters in Ukraine, was hit in a missile attack in early December and subsequently idled its blast furnaces. The ongoing bombing by Russia and blackouts in Ukraine's power generation and distribution networks will continue to disrupt the local steel industry, sources said.

The impact of the war is clearly seen in Ukraine's exports to its main Black Sea market, Turkey. Ukrainian semi products exports fell to 164,000 mt in January-November, down from 1.417 million mt a year earlier. At the same time, pig iron exports dwindled to 148,000 mt from 439,000 mt.

Industry sources also highlighted that Ukrainian exports to Turkey often come from the Russia-controlled Donbass region in eastern Ukraine, rather than the Zaporizhzhia, Kriviy Rih and Mariupol regions.

Russian exporters eye Asian markets

At the same time, Russia's steel industry is also experiencing an impact from the war, with producers having cut their output due to the abrupt loss of export markets and lower domestic demand.

Russia's crude steel production for January-November was 65.88 million mt, down 7% on the year, according to Worldsteel data.

Russian steel exporters, still active in the spot Black Sea market, are cutting production, boosting domestic sales or trying to export more to Asia and maintain their firm position in the Turkish market, where the impact of western sanctions is indirect.

With Ukrainian pig iron exports to Turkey having fallen by 291,000 mt in January-November 2022, Russian exports have increased by 263,000 mt. In the semi-finished products, Russian exports to Turkey have dropped by around 10% on the year, to 3.2 million mt, as some Turkish buyers have opted for non-Russian origin material instead and some Russian exporters have redirected more volumes to the Far East and Southeast Asia.

One Russian pig iron seller said that the country's exports would not grow unless some "boom" in demand comes from China.

"If nothing happens in China then it will be like it was in 2022," he said, adding that exports of Russian pig iron and steel cannot grow with the ruble remaining strong against the US dollar.

"The ruble exchange rate can be minimum 70-75/US, then it is interesting for steel suppliers to export. When the ruble is 60-65 suppliers leave the market," the pig iron seller said.

The Russian currency, having traded at around 74-77 to the dollar in the year prior to the invasion of Ukraine, strengthened to around 60/dollar in the second half of 2022. Only in December did the ruble weaken again to 70/dollar, ending the year at 73.50/dollar, according to Euronet data.

Russian export prices in the Black Sea market will very much depend on demand from its key outlets, including Turkey and Asia, trading sources said. The price environment in Turkey will likely be affected by persistently weak demand for its finished products, particularly exports, they added. This will continue to put pressure on Russian mills as the key suppliers of input for Turkish re-rollers and other processing companies.

One supplier of Russian billet said he expected the high production cost to continue being a headache for Turkish mills, while predicting that steel demand would stay low.

It is "the worst [kind of] market," he added.

A UK-based trader said he expected Russian mills to adjust further to the crippling sanctions, but he added that he was not overall positive about the market in 2023.

"The main issue will be cautious approach by end users to their production. I wouldn't believe in any optimism from China either," the trader added.

"I am not optimistic with the Q1 due to the ongoing COVID cases in China, high energy costs and the weak global demand," a billet trader based in Turkey said.