As trade between Russia and West comes under a growing list of sanctions and companies are breaking off ties, Russia is looking for new markets to buy its metals.
China is eyeing the rebalancing of Russian metal exports and will be the first port of call. China already enjoys significant trade in a number of metals with Russia, including imports of aluminium, nickel, copper and metallurgical coal.
In many metals Russia is already one of the dominant suppliers or has significant market power. It supplies a tenth of the world’s aluminium and copper, and a fifth of battery-grade nickel. Its dominance in precious metals such as palladium, key in the automotive and electronics industries, is even greater. The US and European aviation sectors are going to struggle without access to Russian titanium.
A wide range of commodity prices have already jumped and are set to surge further amid supply disruptions as a result of Russian counter-sanctions on the West.
Russia is the fourth-largest exporter of aluminium in the world and already considered by the US to be too big to be removed from the metal markets.
Rusal shipped 3.9mn tonnes of aluminium in 2021, with sales to the EU and the US accounting for 49% of its total sales, according to company data.
In 2018 when sanctions were imposed on oligarch Oleg Deripaska and his Rusal aluminium supplier, prices spiked by 40% overnight. That caused so much pain to US producers that the US Treasury Department (USTD) was forced to ease sanctions before finally lifting them completely the following January – the only sanctions on Russia to have been withdrawn since its annexation of Crimea in 2014. In the current round of sanctions Deripaska’s Rusal has been exempted from the regime due to its importance to the global metals market.
China’s primary aluminium imports from Russia were 291,036 tonnes in 2021, accounting for 18.4% of the country’s total aluminium imports.
Russia exported 15.9mn tonnes of semi-finished steel and 16.8mn tonnes of finished steel in 2021, trade data showed. The top five destinations of Russian's semi-finished steel were Mexico, Belgium, Taiwan, Turkey and Kazakhstan, accounting for about 70% of the total exports.
Severstal’s Alexei Mordashov has been hit with sanctions in the current round and has to find new markets. Fellow tycoon Alisher Usmanov has also been included on the US list, but his Metalloinvest group of metallurgical companies, one of the biggest in Russia, have largely been exempted for similar reasons for Deripaska’s exemption.
The USTD order exempts companies where Usmanov owns 50% or more that are not listed on the SDN (Specially Designated Nationals) list and says those companies will not be subject to sanctions. Their accounts are available and transactions are allowed, the USTD said. Specifically, Usmanov owns less than 50% of Metalloinvest and so that company is not under sanctions and is working normally, the management told bne IntelliNews in an emailed statement.
Metalloinvest is a major iron ore producer and the world’s largest producer of hot-briquetted iron. The company’s iron ore production reached 40.8mn tonnes in 2021, according to company data.
Russia exported 15.9mn tonnes of semi-finished steel and 16.8mn tonnes of finished steel in 2021, trade data showed. China currently plays a small role in Russia’s steel trade, importing 0.8mn tonnes of semi-finished steel from Russia in 2021, and almost no finished steel at all.
The top five destinations of Russian’s semi-finished steel were Mexico, Belgium, Taiwan, Turkey and Kazakhstan, accounting for about 70% of the total exports. Meanwhile, the top five markets for Russian’s finished steel were Turkey, Kazakhstan, Belarus, Poland and Uzbekistan, accounting for about 47% of the total exports, according to trade data.
While Russian companies are looking at China as a potential new market there is not that much room, as China itself has huge steelmaking capacity of 1.2bn tonnes per year (tpy).
Russia is already a major producer of copper, but its share in the global copper trade still remains small. However, that is expected to change. Currently there is a global surplus of copper production, but thanks to the ongoing digital revolution, and especially the rapid expansion of the electric car industry, the demand for copper is expected to soar.
As bne IntelliNews featured in “copper is the new gold”, there are two huge new copper mines under development in Russia. The Udokan Copper mine went online last year, which also belongs to Usmanov and has not been sanctioned. With the irresistible rise in demand and prices – copper prices are currently at all-time highs after they passed $10,000 per tonne last year – Russia is on course to become a major supplier of the metal.
Russia is already a major supplier of copper to China, which imported 390,442 tonnes in 2021, accounting for 11.4% of the country’s total copper imports, according to customs data.
China also imported 428,767 tonnes of copper concentrate in 2021, an intermediate stage in its production, which accounted for 1.8% of the nation’s total, according to China’s customs data.
The giant Norilsk Nickel mine in Russia’s Far North has also not been included in the current sanctions regime, nor its owner, oligarch Vladimir Potanin.
Russia supplies about 10% of the world's nickel and Russia's Nornickel is the world's biggest supplier of battery-grade nickel at 15%-20% of global supply, according to JPMorgan analyst Dominic O'Kane as cited by Reuters. NorNickel is also a leading producer of PGMs (platinum group metals). All these metals are crucial for the production of electric cars.
The International Energy Agency (IEA) forecast earlier this year that nickel demand in electric vehicles (EVs) will grow by a factor of eight from 2020 to 2030.
The United States produced 0.7% of nickel worldwide in 2020 and 2021, but imports most of its nickel from Canada. Moreover, the US imports 35% of its palladium, a critical element in catalytic converters, a component in gas-powered vehicles, from Russia, more than any other country
China’s nickel imports from Russia were 44,693 tonnes in 2021, accounting for 20.3% of China’s total nickel imports, according to China’s customs data, making Russia the major supplier of this metal.
The threat to Russian nickel exports caused the biggest crisis on the London Metals Exchange (LME) in decades this week, after the world’s biggest metal exchange was forced to halt trading after nickel prices topped $100,000 per tonne on March 7.
The explosive gains saw prices quadruple over the past week after two major traders faced off against each other, according to Reuters sources.
The surge in prices was blamed on short covering by one of the world's top producers and cost brokers hundreds of millions of dollars in losses. Amid market panic sparked by Russia's invasion of Ukraine, buyers are scrambling for the metal crucial for making stainless steel and EV batteries.
"The current events are unprecedented," the LME said in a notice to members. "The suspension of the nickel market has created a number of issues for market participants which need to be addressed."
While Russia has large shares in the global supply of many metals, none are so important as those in the production of titanium and titanium forgings.
Russia is the third-largest producer with a share of around 13 to 13.5% after China and Japan, and Ukraine has a share of 2 to 2.6%. Russia and Ukraine combined account for 16% of global output.
Since demand for titanium has reduced due to the pandemic, the data for 2019 has also been examined, and shows Russia having a share in sponge production of 22% and 4% for Ukraine. So, Russia holds a key role in the titanium market and titanium is extremely important not just for commercial aircraft, but is also used for the production of defence equipment and as a result is of paramount importance for national security.
Titanium and titanium alloys are highly prized for their very high weight to strength ratio that makes them the ideal material for building planes, spacecraft and the defence sector in particular.
Titanium alloys account for approximately 15% of the Boeing 787 airframe by weight. In the Airbus A350XWB, it is about 14%, and is used in landing gear, pylons, attachments, door surrounds, frames, and other parts.
Boeing employs several thousand people in Russia, Ukraine and a handful of former Soviet states and has a major design centre in Moscow. The company also runs a flight training campus and research and technology centre in the city.
On each Boeing 787-9, there is over 19 tonnes of titanium. Titanium sheets cost around $20.85 per kg. Not counting the costs of producing the titanium parts and scrap material, there would be around $0.4mn worth of titanium on each Boeing 787. With a sales price of around $135mn to $145mn for a Boeing 787-9, $0.4mn might seem small but that only covers the price of sheet metal and not the complex processing and manufacturing of the actual parts. So as a cost component, this could go up significantly and cover around $14mn to $17mn per aircraft, representing up to 12.5% of the sales price of a Boeing 787-9.
Separately, titanium dioxide is the principal pigment in white paint, and it is also used in paper, plastics and cosmetics.
VSMPO-AVISMA Corporation is the largest titanium producer in the world and owned by the state organ Rostec. It is located in Verkhnyaya Salda, Russia, about 1,800 km east of Moscow and around 550 km from the border with Kazakhstan.
Russian production of titanium is so important that Boeing has made major investments into Russia, producing many of its parts for planes as Russian facilities in partnership with VSMPO. It set up the Boeing-VSMPO Innovation Centre in 2000 as well as a joint venture, Ural Boeing Manufacturing, in 2009, on the site of the VSMPO factory, which was expanded in 2018 to produce more parts.
At the Dubai Air Show of 2021, Boeing and VSMPO-AVISMA signed a memorandum of understanding (MoU) affirming that the company would remain the biggest supplier for Boeing’s commercial airplanes programmes in the future. So the Russian involvement in the supply chain is big and not easily replaceable.
Notably Boeing has only suspended its activities in Russia, but not pulled out. On March 2 the company said it would stop supplying parts and services to Russian companies but didn't comment on its investments and joint ventures in Russia. Boeing has been trying to diversify its titanium supply in recent years, and it said it had enough of the metal on hand to keep making commercial aircraft in the near term.
The Seattle-based manufacturer said: “We have suspended major operations in Moscow and temporarily closed our office in Kyiv. We are also suspending parts, maintenance and technical support services for Russian airlines. As the conflict continues, our teams are focused on ensuring the safety of our teammates in the region,” the company said as cited by the Guardian.
The European plane maker Airbus has also stopped working with Russia. Boeing and Airbus planes account for almost two-thirds of the Russian fleet – 332 Boeing and 304 Airbus aircraft.
The US remains particularly vulnerable to disruptions in the global titanium supply chains, as it imports 95% of the titanium it consumed in 2019.
Russia is the world's third-largest coal (thermal and coking) exporter and the EU relies on Russia for some 40% of its coal imports. Russian coal accounts for roughly 30% of European metallurgical coal imports and over 60% of European thermal coal imports.
The primary issue with replacing Russian coal exports in Europe is its reliance on Russia’s particular quality of coal. Coal-fired power currently accounts for around 14% of Europe’s generation mix.
Metallurgical coal is an essential ingredient in the production of steel, one of the most widely used building materials on earth. It takes around 770 kilograms of coal to make one tonne of steel, with approximately 70% of global steel produced in basic oxygen blast furnaces.
In 2021, Russia exported around 30mn tonnes of met coal, with China accounting for roughly 30% of the shipments, China Merchants Futures data showed.
China’s met coal imports from Russia in 2021 rose 60% on the year to 10.74mn tonnes, in the absence of huge volumes from its traditional suppliers Australia and Mongolia, data by China Coal Transportation and Distribution showed.
Russia’s Ministry of Energy aims to lift total coal exports of metallurgical and thermal coal to China to 100mn tpy in the next 3-5 years.