Russian Invasion to Impact Steel Prices - February 2022 Steel Director's Briefing
When I originally sat down to write this month’s briefing, Russia had not begun their invasion of Ukraine and we still lived in the hope that a diplomatic solution to the crisis could be found. That hope has now been shattered and we have to cross our fingers and wish for a swift resolution to the conflict. As you would expect, my initial thoughts for the briefing have changed significantly on the back of the invasion.
I was feeling quite optimistic about market activity for the coming months. Demand was reduced throughout January, with prices falling back slightly, but not significantly. During February, positive expectations emerged that buying activity would increase and prices would strengthen.
When Tata Steel announced a price increase two weeks ago, there was a noticeable increase in buyer interest. Whilst, from a price point of view, it is important to note that Tata’s increase was only sufficient to bring them back into line with other European producers it was nevertheless a sign of increased optimism.
When I analysed European prices and contrasted them with offers from the likes of India, Vietnam and Korea, it became clear to me that steel prices have found a level, after the rapid inflation seen last year, that more accurately reflects the cost of manufacturing than at any other time during the last twenty years.
In the past, mills have operated at unprofitable and unsustainable levels. If there were any fears or expectations that prices would fall significantly or crash, they have proven to be unfounded. The cost of manufacturing steel has increased and prices have settled at a level that allows for this and enables producing mills to operate at profitable levels.
The importance of automotive demand and its impact on steel prices is well documented and it has been pleasing to see confidence return as semiconductor supply problems have gradually begun to ease. Our experience at Cooper and Jackson reflects much of this increased optimism with schedules looking healthy into May and June.
In summary, I was ready to describe an optimistic picture of increased demand, a healthy supply chain and rising buyer activity. The Russian invasion of Ukraine has challenged that assertion to say the least and added a new layer of uncertainty.
Western sanctions against Russia are being implemented quickly and are increasingly firm. They will have an impact on the global supply of steel. Ukraine is a large global supplier of iron ore, so we expect iron ore prices to be impacted. Moreover, energy costs are rising, and are expected to rise further, as sanctions result in disruption to European energy supply.
Freight prices from Asia have already doubled in recent times and ArcelorMittal, Europe’s largest steel maker, increased its hot-rolled coil offer by €180 per tonne earlier this week. Given that the conflict will impact all areas of steel manufacturing, from raw materials to Logistics, additional increases in steel prices seem inevitable.
On the supply side, Russia is the third largest steel exporter in the world with Russia and Ukraine net exporters of nearly 45 million tons of steel. Will a reduction in the availability of Russian steel be sufficient to impact steel prices? It’s not clear, but when you consider that the European Union imported nearly 9 million tonnes from Russia in 2021, making it the largest importer of Russian steel, it is likely that this material will need to be found elsewhere if prices are not going to be forced upwards.
We should also not forget that re-rollers like Marcegaglia, who depend on a supply of hot rolled coil, will see their options reduced to the extent that they will almost certainly have to pay more to source material.
A further area of uncertainty relates to the gradual recovery in the supply of semiconductors. Just at the moment when the supply chain was showing signs of recovery, there are concerns now being expressed about how sustainable the recovery is.
Putin has the tools at his disposal to cut off the supply of minerals and gases that are a vital part of semiconductor chip manufacturing. Disruption in this way would stifle automotive demand and potentially act as a brake on price increases.
It should go without saying that the impact of the Russian invasion of Ukraine will take a long time to emerge and the complexity of the situation goes well beyond the scope of this briefing.
Whilst my optimism for the future has been tempered by recent events and we are once again in a position of ongoing uncertainty, my thoughts are with the people of Ukraine who face challenges that put our own struggles firmly into perspective.