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EU, Turkish steel mills concerned over record-high energy costs

Posted on 17 September 2021

European and Turkish steel mills raised concerns this week over record-high electricity and gas costs across Europe, as customers hoped for softened steel prices as the scrap market weakened.

S&P Global Platts' assessment for Southern European shredded scrap was at Eur432.50/mt delivered for September contracts, down sharply from Eur480/mt for August. In Northern Europe, Platts' September assessment for domestic shredded scrap was at Eur397.50/mt delivered, down from Eur440/mt in August.

One Spanish mill source noted that customers are hoping for long steel prices to come down, as scrap levels have softened: however, with extremely high energy costs, this is not considered possible.

"The increase in electricity and gas costs are offsetting decreasing scrap, not completely, but to a large extent. Mills are not really inclined to lower prices because of high energy costs, but also because demand is good in Europe," he told Platts.

"We are fighting the whole market psychology here and that's a very interesting conversation that we are having with our customers these days," the source said.

One Italian mill source also highlighted increased gas and electricity costs, noting that Italy is the number one importer of gas in Europe. The source added that Spain and Italy are under extreme pressure from high energy costs.

"Pretty sure all mills are looking into increased energy costs with accuracy. And I am pretty sure no one is willing to lower prices. Even though everyone is talking about lower scrap, that's not the only cost," he said.

OMIP, the Iberian Energy Derivatives Exchange, assessed Spanish power prices at all-time highs, with the Q4-2021 power contract at Eur173.10/MWh ($203.55/MWh) and the year-ahead contract at Eur106.25/MWh on Sept. 15. Similarly, the European Energy Exchange assessed the Italian contracts at even higher levels, with Q4-2021 at Eur176.54/MWh and Cal-22 at Eur116.25/MWh on Sept. 15.

"Similar to our peers, Salzgitter is also affected by higher energy costs similar to other raw materials such as natural gas, coking coal and raw materials," a spokesperson for the German steelmaker told Platts.

Another European mill source expects the EU to feel the brunt of high energy costs since electricity is most expensive in Europe, and especially in the UK along with some other European countries. The cost of electricity accounts for 10-20% of total production costs so there is no way to mitigate it other than increasing steel prices, the source noted.

"The cost of electricity has gone up three times since July. Steelmakers, especially long steel producers based on electric arc furnace, cannot offset it. They have to implement urgent price increases on finished steel because it is not sustainable," the source told Platts.

"It's not true that steel mills have enough margins to pay higher electricity bill. Everything has gone down already so margins are not good as they were," he said. "All prognoses are that electricity prices won't go down until mid-2022. It is a major disruption," he added.

"The scrap is relatively cheap already so I don't think it will be possible to offset higher electricity cost by cheaper scrap. Turks have tried it and you see they didn't succeed," the source said.

Another European market participant noted that there's a lot of discussion about national governments planning to intervene because of steep increases in electricity and gas costs, but that this is mostly for individual consumers, not companies. The possible measures might include partial compensation of utility bills for small households, for instance.

UK mills may suspend operations in high energy-cost periods

Gareth Stace, director general of producers' association UK Steel, said UK steelmakers might have to suspend operations while energy costs are extremely high. Prices have jumped from levels of around GBP50/MWh ($68.90/MWh) during 2020, he noted.

"While prices have risen across Europe, wholesale prices have quadrupled in the UK and merely tripled in Germany, when accounting for carbon costs. This exacerbates the already grossly unequal electricity price disparity between UK steelmakers and our European competitors," Stace said in a statement.

"The government and Ofgem must be prepared to take action as this situation continues. Spot prices of over GBP2,000/MWh are the signs of an unhealthy energy market. Electricity prices increase in the winter months; therefore, the situation gets more urgent each and every day," Stace said.

UK power prices have maintained their position at a premium in Europe as periods of renewable shortfall have exposed the country's reliance on gas-fired generation, Platts reported. The loss of potential import flows from France due to a fire this week at National Grid UK's Sellindge site has exacerbated an already tight UK supply outlook. A large fire at UK's main electricity subsea cable is also expected to lower imports from France to one-third of a total of 3,000 MW, until the end of March 2022.

S&P Global Platts assessed the UK Q4 baseload power contract at GBP179.95/MWh Sept. 15, while further along the forward curve, the year-ahead contract was assessed at GBP113.34/MWh, both marking all-time records for Platts' pricing data extending back to 2001.

Impact on Turkish mills

Highlighting that serious rises in energy production costs have been pulling up energy prices, Ugur Dalbeler, vice president of the Turkish Steel Exporters' Association (CIB) and CEO of major Turkish steel producer Colakoglu, told Platts Sept. 16 that their energy costs have almost doubled year on year. "As renewable energy support mechanism (YEKDEM) is also raising our energy costs in Turkey, we have been facing a notable increase in steel production costs. The rise in our costs originating only from electricity prices reached Lira 220/mt ($26mt) since last year," the CEO said.

"Natural gas prices are rising too [as well as coal]," another Turkish mill source told Platts. "We [Turks] know about inflation more than EU and UK citizens but I am afraid this year both will learn – it will be terrible for the electric bill. Around 15% of a Turkish electric arc furnace's production costs [is] from electricity and heating so natural gas and coal prices directly affect the electric unit price," one Turkish mill source said, adding it will be important to mitigate these rising costs by trying to keep down prices of raw material inputs such as ferrous scrap.

"I am not waiting any uptrend [in ferrous scrap prices] - it will be a downtrend for the end of the year," the mill source added.

Platts assessed Turkish imports of premium heavy melting scrap 1/2 (80:20) at $441/mt CFR, stable on day.

Source : Platts