After an annual increase of 80% in 2021, steel prices have increased by 35% year-to-date due to the impact of the Russia-Ukraine crisis. Russia and Ukraine are the world's leading suppliers of steel and raw materials. In 2021, steel exports from the two countries totaled approximately 45 million tons, accounting for around 10% of the global steel trade. On the raw material side, Russia is the world's fifth largest iron ore producer, while Ukraine ranks seventh.
However, out of control raw materials spoiled the taste of steelmakers. In addition to the economic sanctions imposed by the EU and the USA on Russia, Ukraine ceases its operations in the Port of Odessa; This causes all cargo shipments to stop and a sharp increase in raw material prices. As a matter of fact, the prices of iron ore, coke and scrap, which are the primary raw materials in steel production, increased by 20%, 70% and 42%, respectively, year-to-date.
What is the impact of the Russia-Ukraine conflict on Turkish steel producers?
The Turkish steel industry will have the opportunity to increase its exports to the EU and MENA countries. As a matter of fact, after the removal of the quotas granted to Russia within the framework of the EU's sanctions decisions, the quotas were distributed proportionally to the existing countries and an increase of 15% was achieved in Turkey's steel export quotas. The revised quota based on Turkey's 6,25 million tons quota in 2021 will reach 7,25 million tons as of the beginning of April. Of course, there is also the threat of rising energy and raw material prices, rising production costs and shrinking profit margins. In addition to rising coal prices, higher oil prices are putting pressure on margins due to rising freight costs. Although it is difficult to forecast steel and raw material prices, we expect normalization to begin in 4Q22.
Profitability will be higher for manufacturers who guarantee raw material inventory until after the storm. There is a 1.5-2 month lag between Turkish steelmakers' contract sales prices and spot steel prices. On the other hand, the delay between raw material purchase prices and spot prices generally extends to 3.5 – 4 months due to two-month stock levels. While Erdemir adheres to the two-month stock level policy for its raw material needs, Kardemir is in a good position against the current high coke prices by supplying its 5-month coke need. Kardemir does not plan to procure coke at these record price levels, as it guarantees the coke requirement for 5 months. In addition, Kardemir is protected against the instability in international iron ore spot prices by procuring 70% of its iron ore needs from the domestic market with annual contracted TL prices.
What is expected for Kardemir and Erdemir shares?
Both Erdemir and Kardemir achieved historically highest EBITDA margins and high EBITDA per tonne levels in 2021 thanks to the increase in steel sales prices driven by the sharp recovery in demand. Considering Erdemir's higher performance compared to Kardemir in the last year, it is thought that the positive effect of the delayed normalization on steel prices is reflected in Erdemir's share price rather than Kardemir's share price, and Kardemir is relatively well positioned against current commodity price shocks. .
What are the risks?
The main risks of the sector are the shrinkage in steel demand due to the increasing stagflation risk of the global economy, the earlier-than-expected normalization in steel prices, the disruption in raw material supply, the higher increase in energy costs, the higher-than-expected raw material prices due to the longer-than-expected Russia-Ukraine war and the extended sanctions imposed on Russia. factors are thought to occur.
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