Ukraine steel exports swell amid worries over impact of US sanctions

Ukraine steel exports swell amid worries over impact of US sanctions
By bne IntelliNews June 14, 2018

Ukraine's external exports swelled by 19.6% year-on-year in April on the back of booming metals exports that surged 65.8% y/y to $1bn – the sector’s best result since August 2014.

Buoyant global demand has kept commodity prices high. The global price environment became more favourable for Ukrainian exporters in the first quarter of 2018, mainly on the back of higher prices for ferrous metals, iron ore, and grain, despite some downward adjustment seen on some markets at the end of the quarter, according to the National Bank of Ukraine (NBU).

Global steel prices remained high, boosting iron ore prices as well, and were driven by the ongoing restrictions on steel production in China. In addition, a benign business environment, the strengthening euro, and effective antidumping policies in European countries have helped maintain robust demand for steel products (especially from Austria, Germany and Italy), while also pushing up the prices of these products.

"The prices of steel products edged down in the latter half of March, as China gradually stepped up its steel production," the NBU said in its April's inflation report. The introduction of import tariffs on steel and aluminium by the United States was an additional factor, and provoked a mixed response from the market.

Meanwhile, Ukrainian metallurgical enterprises are seriously concerned about the changing situation in the global metal products markets due to US 25% duties on steel imports, in particular, from the EU.

In March, the US imposed additional import tariffs on steel (25%) and aluminium (10%) with a view to protecting its domestic market. Although these tariffs apply to all countries, a temporary exemption was granted to Canada and Mexico, which will apply until a new NAFTA deal is signed.

Tariffs were also suspended for the EU, Australia, Argentina and Brazil until early May, while talks continued. Other countries can negotiate exemptions by convincing the United States that their products are unique for the US market, and pose no threat to the country’s national security. 

According to the Ukrmetalurgprom association, Washington's decision of was expected, but it carries significant risks for Ukrainian steel products. If steel supplies to the US from Ukraine make up 1.3%, then to the EU more than 30%. Moreover, a few weeks ago Turkey also announced a protective investigation after the introduction of protective measures by the US, the association believes.

The head of the association Oleksandr Kalenkov believes that the markets of the EU and Turkey are priority for the supply of Ukrainian steel products. "More than half of total exports of Ukrainian steel products worth over $5 billion fall under the risks of protective measures of the EU and Turkey," Interfax quoted Kalenkov as saying on June 1.

At the same time, the NBU believes that there will be little direct impact on Ukraine from the Washington import tariffs imposed on steel and aluminium, since in 2017 the US accounted for only about 2% of total Ukrainian exports, and about 6% of exports of ferrous metals and products made of them.

"However, secondary effects from any countermeasures taken by other countries could carry more profound adverse implications for Ukraine by decreasing global commodity prices and slowing global economic growth," the NBU's inflation report reads. "This could be partly offset by an expansion of Ukraine’s share of the agricultural markets of the countries that take countermeasures, such China and the EU states."

The central bank forecasts that prices for ferrous metals will remain high despite a correction triggered by the rise in Chinese production after the expiry of current restrictions, and excess inventories in some markets caused by trade wars.

Prices will mainly grow on a further expansion of demand for ferrous metals driven by global economic growth, especially in the construction and engineering industries, as well as by a continued decrease in excess capacity in China.

Over 2016-2017, a Chinese government programme resulted in the elimination of more than 200mn tonnes of excess steel production capacity, and another 30mn-50mn is to be cut by in 2018. Consequently, steel production in China will grow by only 0.6% y/y in 2018, whereas demand growth will accelerate to 2.1%. Demand from the US, India, and Europe is expected to rise as well.

Despite steady demand for ferrous metals, iron ore prices will decline on robust market supply. This will be primarily due to the global leaders - Australia and Brazil - increasing their production amid lower production costs. At the same time, China’s demand for iron ore will be flat in 2018, held back by record-high inventories. As in 2017, high-quality iron ore will be especially in demand, the NBU believes.