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Ferrous metals: The potential impact of escalating conflict

From:SINO BEARINGS2022-08-17
Fears of a disruption to trade in resources and industrial goods between Russia and Ukraine have risen after the conflict escalated and Europe and the US imposed further sanctions on Russia. In 2021, the net exports of billet and finished steel products from Russia and Ukraine accounted for 34% and 66% of crude steel production, respectively. If foreign trade is blocked due to war and sanctions, domestic steel production of the two countries will be significantly affected. Exports of finished steel products from Russia and Ukraine together account for about 7% of global trade volume, while billet exports account for more than 35% of global trade volume. Cis steel exports mainly flow to the European Union and other European regions, North America and Asia account for a relatively large proportion. Among them, Russia's export of steel products (including semi-finished products) to the EU accounts for about 6.4% of the EU's crude steel output, and Ukraine accounts for more than 3%. Therefore, if Russia-Ukraine exports continue to be blocked, the impact on EU steel supply is most obvious. Turkish and Indian steel and billet export prices have risen rapidly following the escalation of the conflict, but other regions have yet to follow suit.
 
★ China's export driving indirect, China-Russia trade changes or affect the price of steel billet:
 
China is a net steel exporter and net billet importer of Russia and Ukraine, and the billet import has increased significantly in the past two years. If the Sino-Russian trade remains normal, it is expected that the billet import volume will increase, which will suppress the price of billet and long material chain. However, with the recent escalation of risks, the uncertainty of normal trade with Russia increases. If the trade is also blocked, the domestic billet price will be boosted and the blank price gap will be compressed at the same time.
 
Since China's direct exports to Europe and the United States are limited, the external demand will be relatively indirect. Do not rule out increasing exports to East Asia and Southeast Asia to Europe and the United States indirectly. Going forward, the focus will remain on price movements in Asia. From the perspective of varieties, overseas supply is expected to shrink, the rise of overseas local steel prices and domestic real estate demand is weak so that the plate appears strong pattern, with the rapid widening of the recent spiral price gap, the subsequent need to pay attention to the actual overseas demand to undertake the situation.
 
★ Risk tips:
 
The situation in Russia and Ukraine has changed significantly and its domestic policy is affected.
 
The full report.
 
1. With the escalation of sanctions against Russia, the supply of steel and semi-finished products from the EU has been significantly reduced
 
The conflict between Russia and Ukraine has escalated since late February. Fears of disruption to trade in resources and industrial goods between Russia and Ukraine intensified after the US and Europe imposed sanctions on Russia, excluding a number of Russian banks from Swift. The nature of the impact of conflict on foreign trade between Russia and Ukraine is different. The main problem of Ukraine lies in the disorder of the armed conflict on domestic industrial production and port transportation, and the time to ease depends on the duration of the conflict. Russia's problem lies more in the economic sanctions imposed by the US and Europe and the form of those sanctions.
 
From the perspective of the steel industry, Russia, Ukraine in the CIS region is an important steel production and exporting countries. Russia is the fifth largest steel producer in the world, producing about 76 million tons of crude steel in 2021, accounting for about 4% of global production, according to the WSA. Ukraine produces 21.4 million tons of crude steel, accounting for 1.12 percent of global output. In terms of trade, Russia exported about 30.54 million tons of billet and steel in 2021, with net exports of 26.08 million tons, accounting for about 34 percent of its domestic crude steel production. And Ukraine 2021 semi-finished and finished steel net exports accounted for the proportion of crude steel production reached more than 65% of the proportion. Therefore, from the perspective of Russia and Ukraine, once the steel trade is blocked, domestic demand is unlikely to undertake such a large supply return, which will eventually affect the production of domestic steel enterprises.