Russia’s metal export duty a ‘broadside shot’

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Russia’s plan to introduce from Aug. 1 a temporary export duty on metal exports has brought varied reactions from European industry watchers and market participants.

“It’s about showing the strength of the Russian metals industry,” one analyst told MetalMiner.

Russia’s planned tariff may also be a retaliatory measure against Europe and its proposed carbon tax on metals imports from high-carbon producers, of which Russia is one, the analyst added.

“It feels like it is a broadside shot,” the analyst said.

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Russia export duty to cover steel, base metals

tariff

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The Russian Federal Government’s Decree No. 988 of June 25 stipulates a 15% export duty from Aug. 1 to Dec. 31 on all steel – semi-finished and finished – as well as on copper nickel, and low-grade aluminum leaving the country and the wider Eurasian Economic Union (EAEU).

Member states of the EAEU include Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. In addition, Cuba, Moldova and Uzbekistan are observer states.

One of the more likely beneficiaries in Europe from the duty is the steel sector, sources told MetalMiner.

“Everybody loves this,” one analyst said about Russia’s tentative export duty, as it could further push up already-high prices for steel products in Europe.

Domestically produced hot rolled coil for Q4 production within Western Europe is now €1,170-€1,200 ($1,390-1,420) per ton exw, traders said. That marks an increase from the €1,120-1,130 ($1,370-1,385) reported earlier in June.

Planned shutdowns of rolling equipment or banking of hot ends for maintenance over Europe’s summer months could also further push up prices in the face of high demand throughout Western Europe, the analyst stated.

One steel trader voiced a similar opinion.

“This is great for everybody” the trader noted, as the decree will push up steel prices on both the domestic and import markets.

“Who’s gonna wait until the end of the year to acquire steel if Russia is out of the market?” the trader rhetorically asked.

Ukraine’s Metinvest is likely to also benefit from this. The group is a major supplier of long products into the E.U. Resulting higher prices will also mean more revenue.

Exports to the E.U.

The 27-member European Union is also Russia’s second-largest destination market for steel exports, including finished, semi-finished and tubular products. Exports exceeded 4.02 million metric tons in 2019, the analyst said.

That number may have been over 20% lower on the year from 5.17 million metric tons. However, the bloc retained its place as Russia’s second-largest export market.

Russia is also the E.U.’s fourth-largest supplier of steel products. Russian steel product exports to the bloc exceeded 4.5 million metric tons in 2018, the analyst added.

Economic Development Minister Maksim Reshetnikov officially raised the prospect of introducing the export duty at a June 24 meeting of the Council of Ministers of Russia.

He noted that export prices for steel and non-ferrous metals have risen by 30% and 50%, respectively, year over year through the first five months of 2021.

Those increases have caused steel prices on Russian domestic market to rise by 60-100% in some cases. It has even translated to higher costs for building projects, Russian First Deputy Prime Minister Andrei Belousov said. Belousov expressed his support for the duty at the meeting.

Russia also exports 35-40% of its steel products, Reshetnikov said, and added that a correction in metals prices for steel is also unlikely to occur in 2021.

Those increases have brought producers an additional ₽570 million ($7.67 billion) in profit for Q1. That is over three times the profit brought in during the same time in 2017, 2018 and in 2019, Reshetnikov stated.

Economic impact

The duty is also likely to bring in a total ₽163 billion ($2.15 billion) in revenue into the federal budget, Belousov said.

He also stressed that the duty is not punitive against producers. The federal government is undertaking the measures in an effort to protect the domestic market from higher prices on the world market.

“Our economy is not prepared for what I would say is an avalanche-like onslaught of global prices that we have seen over the past year coming onto the domestic market,” Belousov added.

In late May, Belousov criticized Russian metallurgists and said that they “squeezed” ₽100 billion ($1.34 billion), after having increased their revenues at the cost of higher prices on the internal market, and that they should return this amount in the form of a tax.

NLMK could take a hit

Russian producers with assets in the bloc, such as Novolipetsk Steel (NLMK), could feel the export tax’s pinch, the analyst noted.

That group can produce 1.75 million metric tons plate at NLMK DanSteel, NLMK Clabecq and NLMK Verona, respectively in Denmark, Belgium and Italy. The group uses slab produced at the Russian group’s main producer at Lipetsk.

The plate market is in good shape for now. However, it remains unclear where prices will be after Europe’s summer, the analyst warned.

NLMK also imports slab into Europe for its La Louvière plant, also in Belgium, which can roll up to 1.68 million metric tons of hot rolled coil. The plant can also produce cold rolled coil.

Semi-finished exports from Lipetsk into Europe totaled 4 million metric tons in 2019, up 3.8% year over year from 3.86 million metric tons.

Ever-rising prices

Continuously rising steel prices within Europe could create further problems connected with the Russian export tax. The analyst added it could become difficult to determine the exact duty amount if steel prices continue to rise.

Analysts expressed more concern over the what the duty would mean for the three non-ferrous metals that the duty covers.

“It is going to have a big impact on companies like Norilsk,” the first analyst warned.

Europe is Russia’s second-largest consumer of copper at approximately 3.4 million metric tons per year of refined material, a third analyst noted.

The export tax might be difficult for sellers and buyers of those metals. However, profit margins for copper and nickel remain high, the first analyst said.

The estimated cash cost to produce copper is approximately $3,000 per metric ton, while three-month buyer price for copper on the London Metal Exchange (LME) reached $9,483 per metric ton on July 7.

That price is down 11.5% from $10, 720 on June 2. Still, it is almost 20% higher from the $7,931 on Jan. 4.

Another potential problem for the non-ferrous producers is that the export duty could mean a build-up of stocks at the plant, one researcher warned.

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