Rising metal prices: Who runs the show?

The price of steel products keeps growing in Russia against the backdrop of geopolitical games and spectacle. The price of rolled steel has already exceeded the pre-crisis level of 2008 and keeps growing. In their turn, Russian steel workers point out the unstable pricing policy on the global market and the unprecedented demand for steel. Participants in the related industries — construction, machine-building and the automotive industry — are telling the Russian government that such maneuvers will lead to rising prices of their products as well.

S. Soloviev / RIAN
S. Soloviev / RIAN

Metal prices have been growing since the summer 2020, that is, since the lockdown was lifted. In April 2020, hot rolled steel sold at some RUR 30K per metric ton, and in December the price increased to almost RUR 50K, that is, by 65–67%. This price surge in late 2020-early 2021 forced construction market participants and manufacturers to submit a series of proposals to the Russian government. It took their request into account and on February 1, 2021 introduced restrictive duties on exports of ferrous scrap (5% providing the price of at least EUR 45 per metric ton). This measure allowed for compensating from 10% to 20% on various steel products, but only for a short term.

Last March and April also witnessed soaring prices of rolled metal. Anton Glushkov, president of the National Constructors Association, cited by TASS news agency, said that the prices grew by 20% in that period. A similar situation happened after the long May and June holidays.

“Prices of flat-rolled products kept growing at a high rate (+ RUR 9K per metric ton in April), and reached the highest level since 2008. At the same time, the price of rolled section steel did not see a hike, which held down the price of scrap metal,” Severstal commented.

“Rolled steel that is used to manufacture engineering structures has jumped from RUR 50K to RUR 150K per metric ton, that is, by 110%. It’s more than a double increase,” says Nikolai Khankov, CEO of Electrostal Holding. “What do we do with the implementation of contracts that entailed old prices? Apparently, nobody wants to deal even at large manufacturers’ request. I’m not one hundred percent sure what the price of metal will be. Some say that it can reach RUR 140K per metric ton. To do business in such conditions is the same as flipping a coin and trying to guess which side it will fall on.”

According to Electrostal experts, rolled metal products are used in housing construction and their share is 10%-15% of the cost of the entire bulk of construction materials. As for the prices of bricks, cement and concrete, market representatives say that there is no information on their increase. But, at a conservative estimate, the price of rolled metal products jumped by 70% in the period between April 2020 and March 2021. It means that the housing can become 10%-15% more expensive, considering the share of metal in its construction.

Also, most housing is built with the use of steel bars. For instance, their share in high-rise apartment blocks that are built using the Cube-2 and Cube-3 fast construction technology is 20–25%. With this technology, real estate prices can grow even more because of the amount of steel it uses. However, metal workers do not agree with the developers’ opinion that the growing prices of steel bars and other rolled products were the reason the speed of housing delivery has slowed down and the performance of construction business deteriorated.

According to experts, surging prices of rolled metal products are not caused by some whim of Russian steel makers, but by an entire complex of factors, most of which are of global, including geopolitical, nature. China is experiencing a boom in the consumer sector due to a massive government support and economic growth. This has resulted in Chinese companies reducing their exports of steel products. Suspended activities of certain metallurgical plants in Europe amidst the COVID-19 pandemic have become another cause of the deficit. Low deposit interest rates and the tense global situation are forcing people to actively invest their savings and purchase movable and immovable property such as houses, cars and equipment. Rising costs of raw materials for production, such as iron ore and scrap metal, is having significant impact as well.

A reduction in stock resources of steel products has been another cause. When steel prices initially fell amidst the first wave of the coronavirus pandemic, everyone expected a further decline and was quick to sell stocks. Then the demand for metal soared, which resulted in empty warehouses.

“The key driver is a demand from the manufacturing sector, including automotive industry and household appliances producers, which is recovering from lockdowns and gaining benefits from a shift in consumer spending from services to durable goods. The practice of low warehouse stocks has led to a lack of opportunities for promptly satisfying the soaring demand. As a result, we are observing extremely extended lead times,” Severstal experts noted.

The rise in prices for steel products is a global trend. Recently, ArcelorMittal steel manufacturing corporation has announced another increase, with the cost of hot rolled steel amounting to €1,050 per ton. In the United States, this type of rolled metal cost $1,650 per ton in early May.

“Russian metallurgy companies are raising prices amidst the situation in the global market, where prices for steel products are growing. It appears that dollar and euro prices of steel products are increasing against the weakening ruble, which results in high prices; they are not going to cut them as they avoid resale. They can buy metal, say, from Severstal at a reduced price and then export it, so they equalize prices. As a result, we are facing a situation where there is no domestic competition,” Electrostal Holding CEO Nikolai Khankov says.

The current situation has affected Severstal’s financial and production indicators. According to the company’s official report, during this year’s first three months steel production increased by 7% as compared to the last year’s fourth quarter and amounted to 2.96 million tons. The share of sales in export markets reached 52%. During the same period, the company’s revenues grew by almost one third and amounted to $2.22 bln, while net profit increased from $386 mio to $721 mio.

When can we expect adjustments?

In late April, Russia’s Federal Antimonopoly Service (FAS) initiated legal actions against the country’s three major metallurgy manufacturers — Novolipetsk Steel (NLMK), Magnitogorsk Iron and Steel Works (MMK), and Severstal, stating that the companies were raising prices for hot-rolled flat products faster than prices of raw material prices were growing. In case the Antimonopoly Service proves the companies’ guilt they may face turnover-based fines. Meanwhile, all three manufacturers flatly deny any collusion.

Russia’s Ministry of Industry and Trade has offered its options that would have effect on prices of steel products. In particular, they imply a possible inclusion of metal products on the list of goods essential for the domestic market, which will allow the government to impose temporary export bans. The proposals also imply efforts to abolish the recovery of some part of VAT refund to exporters and set special prices for supply of metal products to the domestic market; any overpricing will result in either withdrawal of some part of manufacturers’ profit or introduction a higher income tax. In addition, the government proposed signing direct contracts between metallurgy manufacturers, regions and construction companies, as well as contracts on implementation of large infrastructure projects. So far, no final decisions have been made. Yet, market players are confident that a cut in metal prices will not occur soon. According to a Severstal expert, the industry in Europe is likely to reach normal stock levels in June, which will determine the start of price reversal. Also, a seasonal decline in demand may occur in Asia this summer due to rains and a flow of metal products from the East to the West.

“A possible scenario may include fixing prices at a high level by the end of 2021 due to a longer-term growth in final demand, which will retain the deficit in the market,” Severstal experts said.

By Igor Stratulat

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