The on going decline in global oil prices is causing fresh concerns about Russia's economy and the Russian Rouble fell to a new low against the dollar Tuesday, falling 2.3% to 63 versus the dollar. The Rouble's value fell sharply to 68.3 on December 17th and since then, Russian government has sought to restore confidence in the currency by selling foreign confidence and offering loans to domestic banks as it recovered to 51.5 on December 26th but the steep fall in oil prices is proving to be a death knoll and Rouble is weakening since then on daily basis.

While, the plunge in global crude prices has caused havoc for the Russian economy, where the oil and gas sector accounts for more than half of the country's revenue, and is magnifying the impact of pain of international sanctions related to its actions in Ukraine, the fall in Rouble is proving to be a boon for some Russian steel makers who thrive on steel exports as they are able to offer lower prices for exports wiping out Chinese competition

According to the worldsteel, Russia produced about 69 million tonnes of steel in 2013 and exported 34% to overseas clients. Russian crude steel production in 2015 is likely to cross 70 million tonnes in 2014 as they have produced 64.794 million tonne in January to November period of 2014

On the other hand, Russian mills are finding it increasingly difficult to maintain steel export volumes to Europe due to toughening sanctions and are also burdened with additional volumes of HR after US withdrew order exempting them form AD in last quarter. Moreover, at this point of time domestic steel demand reduces due to slows down in manufacturing activity due to sever winter conditions and holidays. In other words, stage is set for surge in steel exports from Russia

While the surge is Russian steel exports is happening at most of the important destinations, the situation in India is quite precarious as deals for import of large volumes of HR have been inked in last 2 months displacing Chinese mills

The initial deals for CR grade HR import from Russia were reported in mid December at about USD 475 per tonne CFR India for January Rolling & February shipments. But the recent information outlines that more than 100,000 tonnes of CR grade HR has been booked by a host of Indian cold rolling mills in prices ranging from USD 445 to USD 450 per tonne CFR India for shipments in late February and March. It is also heard that a large dia pipe maker has inked a deal for about 40,000 tonnes of HRC at similar levels from Russian sources. Latest unconfirmed reports from market also say that a deal has already been inked at USD 435-440 CFR levels

Incidentally, the similar situation prevails with Japanese HR imports into India. Japanese Yen has fallen to about 120 in last quarter from last year's norm of about 100 giving enough elbow room to Japanese steel mills to go down on prices. The latest news is that Japanese trading houses which were offering USD 470 per tonne CFR may reduce to USD 460 per tonne CFR next week for allocations available with them. Japanese HR imports enjoy import duty differential of about USD 25+ per tonne as the import duty under FTA is just 1.7% as compared to 7.5% from other countries including Russia. In other words Japanese offers, on like to like basis, are likely to go down to USD 435 CFR levels to Indian clients

Thus it seems that USD 435 CFR level has already come into play or is quite likely in near future

These CFR prices as such are quite competitive as compared to last Chinese deals at about USD 455-460 CFR India levels (USD 470 per tonne CFR Paradip for narrow width HR) and Indian domestic levels of about INR 34,500-35,500 per tonne. Considering the current USD:INR exchange rate of about 62, the landed price of Russian & Japanese HR ranges INR 30,500 to INR 31,000 per tonne net of MODVAT but inclusive of applicable import duty and USD 20 per tonne towards port expenses leaving import parity gap of about INR 4,000-4,500 per tonne.

While Indian HR producers have kept January prices unchanged, buyers are expecting correction of at least INR 500-700 per tonne during the month as steel mills are trying to maintain their volumes amid sluggish sales in the first fortnight of January

The current situation matches with our views published vide article titled “Russian Rouble rout on Tuesday can change HR price dynamics” on December 17th 2014 wherein we had presented this scenario that continued weakness in Russian Rouble would drive down HR prices further

Under this scenario wherein Russian and Japanese steel mills, both with enough room to cut prices on currency devaluation, may like to secure orders from India, buyers do not rule out possibility of further correction of USD 20-30 in import prices if Rouble and Yen remains above 60 & 120 for some time, which means levels close to USD 400 CFR – not seen for a long time