Steel does not bend under sanctions

Steel production in Russia in 2022 decreased by 7%, to 71.5 million tons. The situation turned out to be better than the gloomy forecasts of the first half of 2022, when companies predicted a fall of 15%. Nevertheless, the prospects for the recovery of output in 2023, according to analysts, look ambiguous. On the one hand, production will support the growth of export profitability as logistics are reconfigured and the ruble weakens. On the other hand, demand in the domestic market may decline due to a slowdown in housing construction.

Steel production in Russia at the end of 2022 fell by 7.2%, to 71.5 million tons, follows from the data of the World Steel Association (WSA), published on January 31. The total world production amounted to 1.8 billion tons, which is 4.2% less than in 2021. In the top 10 largest steel producers, only India (an increase of 5.5%, to 124.7 million tons) and Iran (an increase of 8%, to 30.6 million tons) were able to increase output. Among all countries, the largest drop is observed in Ukraine, whose production decreased by 70.7%, to 6.3 million tons.

Russian metallurgy has suffered as a result of sanctions and the EU embargo on Russian metal. However, the final output figures look more optimistic than the forecasts given during 2022.

NLMK Vladimir Lisin in June 2022 predicted a decline in production in the Russian Federation at the end of the year by 15%. The WSA last April expected a 20% fall in steel consumption, but in October it improved the forecast to a 6% decline.

A representative of Severstal told Kommersant that the decline in consumption in the steel market is about 3% year-on-year, and the total market volume amounted to 43.2 million tons.

The main consuming industries have demonstrated relative stability in the current environment, including due to the measures taken by the state.

In the construction segment, the decline was about 4%, but the largest was in the engineering segment: 18% yoy. The decline in demand was due to a shortage of components and a rupture in supply chains, shutdowns of part of the production facilities and the departure of foreign OEMs from the Russian market, Kommersant’s interlocutor notes. According to him, the fuel and energy complex was the main driver in the rolled metal market in 2022, where consumption growth amounted to 28% and was associated with the implementation of Gazprom’s largest investment program over the past five years. The production and field development segment also showed growth against the backdrop of low activity in 2020-2021. NLMK and MMK did not provide any comments.

According to Severstal estimates, it is not yet clear whether the decline in metal production in Russia in 2023 will be less than in 2022. “For the dynamics of metal consumption this year, the state of the residential real estate market will be important. In 2022, there was a record commissioning of housing in Russia – 102.7 million square meters. m. This, on the one hand, indicates a high need for new housing, on the other hand, creates risks of decline from the achieved high levels. In general, housing construction remains one of the most stable sectors of the Russian economy in the face of a breakdown in external relations, since here the dependence on imports is low and demand is driven by internal factors. And this is one of Severstal’s focus markets,” the metallurgical company notes.

BCS’s Kirill Chuiko expects output to recover in 2023 “given that steel exports are finally becoming profitable due to the devaluation of the exchange rate and growth in steel prices, which is likely to continue further this year.” Boris Krasnozhenov from Alfa Bank believes that in 2023, metal production in Russia can be expected to remain at the level of last year. In his opinion, increasing the pace of construction in the current conditions is a rather difficult task, since a number of large infrastructure projects have longer horizons, where the most metal-intensive phase is beyond 2023. The development of other metal-intensive industries, including automotive, power engineering and shipbuilding, may also require more time. The analyst believes that growth in steel consumption in Russia can be expected on the horizon of 2024–2025.

According to Metals & Mining Intelligence, steel production in Russia decreased by 7-8% in 2022, says Ilya Kolomeets, director of the company for business development and consulting practice.

“The main factors for the decline in production were worked out in the first half of the year – in June, the largest decrease in production volumes was noted (minus 17% compared to June 2021). In the second half of the year, production managed to bounce back, closing the gap on 2021. In 2023, output volumes can be expected to stabilize, while external events, mitigation of recession expectations and activation of infrastructure projects in the Russian Federation will remain significant factors of influence,” he says.

This year, production may drop to the level of 70 million tons, Sergey Grishunin from the NRA expects. Nevertheless, he notes, the restructuring of export flows from the Russian Federation continues.

In addition, a shortage of rolled steel is gradually forming on the world market against the backdrop of excessively high energy prices.

All this can lead to an increase in the supply of Russian rolled products to world markets in the second half of 2023, the analyst admits, and domestic demand can be supported by stimulating the construction industry and developing infrastructure projects.

Evgeny Zainullin