European steel market shaken by war in Ukraine

The European steel market is shaken as the repercussions of the war in Ukraine begin to spread across the globe.

Western nations are responding to the invasion by imposing economic sanctions on Russia, as well as Belarus for its role in allowing Russian troops to advance on Ukraine through its territory.

Representatives of EU member states agreed on Monday evening, March 14, 2022, in Brussels on a new package of sanctions against Russia due to the invasion of Ukraine.

The main sanctions decided on Monday:

• Embargo on the import of iron and steel products from the Russian Federation;
• The freezing of assets held in the EU by 15 Russian oligarchs, including Roman Abramovich;
• Embargo on the export of luxury products to the Russian Federation;
• Restrictions on cooperation in the military sector;
• Restrictions on the investments of European companies in the Russian energy sector, as well as on the financing of energy projects related to the Russian Federation;
• Total embargo on the export of technology for the energy industry of the Russian Federation;
• Exclusion of new banks from the SWIFT international payment system.

The steel market is shaken – measures taken

The sanctions that have the greatest impact on international steel markets are those that prevent Russian banks and businesses from accessing financial systems. The inability of Russian companies to receive payments for energy and steel will lead to significant reductions in the availability of these essential commodities.

As a result, European steel buyers face the prospect of severe upward pressure on finished steel values. Price volatility is expected to be a feature of the market in the short term.

However, there are four key factors that influence the price of steel:

• Finished steel products and supply of semi-finished products and;
• Raw material costs for steelmaking;
• Investor confidence and consumer spending;
• The price of energy.

Penalties

They are causing oil and gas prices to skyrocket in Russia, the world’s largest exporter of natural gas. In the EU, 40% of gas imports come from Russia.

High energy costs were already putting a lot of pressure on steel production. A number of European steel producers are reducing their production or putting their production facilities into operation. Against the background of increasing expenses for electricity and gas.

They also try to calculate a selling price for their steel products, which will prevent loss if costs continue to rise.

Discounts on the supply of raw materials

The increase in raw material costs aggravates the problem of increasing production costs.

Fewer shipments of cast iron of CIS origin may cause steel producers to rely more on scrap metal. Russia is also a major supplier of coal to rolling mills in Central and Eastern Europe.

Russia and Ukraine rank 5th and 7th in terms of global iron ore production. Iron ore values have risen by about $20 per ton since the start of the war.

A factor that adds pressure is the increase in transport costs, caused by the increase in the price of oil. Moreover, shipping lines are unlikely to carry raw materials from sanctioned nations and could avoid the Black Sea altogether due to military action in the region.

CIS steel supply chain shuts down

Of the 8.39 million tons of steel semi-finished products imported into the EU and the UK in the first eleven months of last year, more than 85% came from Russia, Ukraine and Belarus.

The European bloc imported 5.8 million tons of sheet metal between January and November 2021 from the affected CIS countries. More than 50 percent of this material was destined for Italy and Belgium. The former has already announced production stoppages, due to the lack of supply of essential raw materials.

Also, in the short term, the supply of finished steel is expected to deteriorate. CIS rolling mills accounted for a quarter of European finished steel imports in 2021. The product groups most affected by the decrease in availability will be sheets, commercial bars (round and square steel, angles, T-profile, flat strip) and reinforcing steel.

In the short term, a deficit of around 57% of import volumes for sheet metal and probably 40% for commercial and reinforcing bars is estimated.

After the steel market is shaken by the start of the war, European buyers are looking for alternative sources of supply. However, finished steel prices will inevitably rise as more customers look to use a smaller group of suppliers.

An alternative would be Indian steel, but continued port congestion and reduced ship availability will prevent substantial volumes from arriving from the country. Turkish factories are unlikely to be able to bridge the gap. Due to their heavy reliance on raw materials supplied by Ukrainian and Russian suppliers.

Consumer and investor confidence is declining

In the medium term, rising energy prices and inflation could hamper the economic recovery from the Covid-19 pandemic.

Uncertainty about future economic sanctions is likely to discourage the flow of capital to steel-using projects. In addition, supply chains have not fully recovered from the disruption caused by the pandemic. Players in the European automotive and construction sectors are highlighting renewed pressures on the availability of essential components and raw materials.

The war highlights the fragility of global supply chains and the interdependence between nations. In the long term, an accelerated transition to renewable energy and a shift in Europe’s oil and gas supply base are expected.

Article source: MEPS International.

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