How is the steel industry supporting DRI expansion amid weak global demand?

Raw material prices have come under the pressure of falling steel demand around the world since the second half of 2023, and market participants expect the trend to extend into 2024

The use of high-grade, low-emission raw materials such as direct reduced iron (DRI) against the backdrop of weaker steel prices has become particularly contentious, with steelmakers grappling with tightening profit margins.

Fastmarkets explores the steelmaking industry’s approach to supporting the expansion of the DRI market amid falling steel prices.

Weak steel demand across major consumption hubs in 2023

A slowdown in economic activity across major economic zones caused a dip in downstream steel prices, especially for construction-related materials.

Fastmarkets’ price assessment for steel reinforcing bar (rebar) import, cfr main EU port Southern Europe averaged €616.01 ($673) per tonne at the midpoint in 2023, down by €219.09 per tonne, or 26.24%, from €835.10 per tonne the previous year.

And Fastmarkets’ price assessment for steel hot-rolled coil import, cfr main port Turkey averaged $626.20 per tonne at the midpoint in 2023, down by $123.55 per tonne, or 16.48%, from $749.75 per tonne the previous year. 2022 prices were also down by 16.16% compared with 2021.

Tighter liquidity for construction-related projects and consumer products across Europe resulted in weak overall demand for steel in Europe in 2023, a Europe-based trader said.

The trader also expected weak consumer confidence in major economies to weigh on consumption-led demand in 2024, which could lead to a continued slowdown in steel consumption.

Annual inflation in the euro area is expected to be 2.6% in February, down by 5.9% year on year, according to Eurostat data .

The inflation rate for non-energy industrial goods is expected to be 1.6% in February, down by 5.2% year on year.

“The steelmaking industry is one of the largest markets for DRI exports from the Middle East,” a steelmaker source in the Middle East said. “A slowdown in steel prices in the regions has hampered the ability of steelmakers to procure further DRI cargoes.”

Europe imported 2.6 million tonnes of DRI in 2023, down by 11% year on year, according to Eurostat data.

Weak consumer and construction demand, alongside an influx of exports from China, caused steel prices to fall across Northeast and Southeast Asia.

Fastmarkets’ calculation of the steel reinforcing bar (rebar) index export, fob China main port averaged $596.01 per tonne in 2023, down by $113.09 per tonne, or 15.95%, from $709.10 per tonne the previous year.

Fastmarkets’ price assessment for steel hot-rolled coil (Japan, Korea, Taiwan-origin), import, cfr Vietnam similarly slipped by $118.91 per tonne, or 16.03%, to an average of $632.10 per tonne at the midpoint in 2023 from $742.01 per tonne the previous year.

The dip in HRC prices in the CFR Vietnam market was more demand-led, in line with a dip in buying interest from major importers due to a slower-than-expected recovery in economic activity across Southeast Asia, a Singapore-based analyst said.

The analyst added that while HRC import prices fared better than those for long steel products in 2023, a downtrend in prices due to weakening demand and increased supply inflow could push prices lower.

Electric-arc furnace (EAF) utilization rates in China slipped to a near three-month low in early May to around 50.4% in response to weak steelmaking margins, according to the Southeast Asia Iron and Steel Institute.

EAF operators around the region were unlikely to be able to maintain steady levels of production amid weak steel prices due to the high cost of EAF inputs – which include steel and DRI – a Shanghai-based trader said.

The trader said that the high cost of DRI as a raw material is a strong deterrent for most mills that are under cost pressure, adding that the only way to support expanded usage of DRI would be through a stronger emphasis on green premiums.

Weaker DRI consumption weighs on DR pellet premiums

Premiums for direct-reduced (DR) pellets from Vale – which are settled on the monthly basis of a 65% Fe CFR Qingdao index – averaged $51.25 per tonne in 2023, down by $22.40 per tonne, or 30.41%, from $73.65 per tonne the previous year.

Weaker demand from key regional buyers in the first half of 2024 also caused DR pellet premiums to ease further.

Second-quarter 2024 premiums for DR pellets from Vale slipped by $2 per tonne to $53 per tonne, despite a tighter pellet market in Europe following the second train derailment faced by Swedish pellet producer LKAB.

“Demand for DR pellets has been on the weaker side since the second half of 2023, mainly due to lower regional steel prices, which has affected steelmakers’ ability to use more DRI material,” a second steelmaker source in the Middle East said.

“Given the expectation of steady DR pellet supplies in the region, with an increasing pellet inventory in Oman, the need to import more DR pellets has been significantly lower compared with previous quarters,” the second steelmaker source added.

Increasing DR pellet inventory among DRI producers in the Middle East in 2023 was an indication of weaker DRI demand from European steelmakers, a Singapore-based trader told Fastmarkets.

But the trader added that DRI consumption may rebound in the second quarter of 2024, when some European steelmakers are expected to put their blast furnaces (BFs) out for maintenance.

Stronger emphasis on green steel premiums to boost DRI usability

Market participants continue to doubt the economic usefulness of DRI as a steelmaking raw material due to its higher cost compared with other BF feeds.

“On its own, it makes little sense for a steelmaker to increase their consumption of DRI when steel prices are on the low side,” a second Singapore trader said. “The value of DRI as a low-carbon raw material has been severely underplayed, especially in the past few years with falling steel prices.”

Green premiums have taken a backseat in recent years due to the slowdown in economic growth, which has inherently affected prices for low-emission raw materials, a second trader based in Europe said.

A stronger price distinction between “green” steel and regular steel could translate into stronger demand for low-carbon materials such as DRI. This could have the impact of shaping the market structure into one that adds more value to low-emission products, Fastmarkets understands.

Fastmarkets’ green steel domestic, flat-rolled, differential to HRC index, exw Northern Europe averaged €200 per tonne in the first two months of 2024, up by €19.23 per tonne, or 10.64%, from €180.77 per tonne in the fourth quarter of 2023.

Further regulations over carbon tracking to establish tangible economic value on DRI use

Most market participants believed that stiffer regulatory support is required to expand the use of low-carbon raw materials against headwinds in the steelmaking industry.

Major steelmaking hubs in Asia – such as China, India and Southeast Asia – need to keep up with their regulatory controls on carbon reporting among steelmakers, a third trader in Singapore said.

The trader added that tighter carbon reporting controls from major importers of Asian steel could prompt the governments of the various steelmaking hubs to establish tighter carbon controls.

“Carbon reporting essentially places a stronger emphasis on the value of raw material inputs, adding value to raw materials that generate a smaller carbon footprint in production,” a Singapore-based analyst said.

“Tougher carbon reporting systems provide a necessary support for green steel premiums, incentivizing the use of DRI as a raw material across more steelmaking hubs,” the analyst added.

China’s National Development and Reform Commission (NDRC) announced on November 22 that it would establish a carbon footprint management system to promote the labeling of carbon products.

The ramp-up in carbon labeling is in line with the establishment of accounting and evaluation systems for the carbon footprint of major imports, including steel products, the NDRC added.

Chinese premier Li Qiang also signed additional regulations against Chinese industrial producers found to be falsifying data on emissions reductions on February 4.

CBAM as a means to reshape production norms in steelmaking

The EU’s Carbon Border Adjustment Mechanism (CBAM), expected to be fully implemented from 2026 onward, is a regulatory framework used to put a fair price on the carbon emitted in the production of imports into the EU, according to the European Commission.

EU importers will declare the emissions embedded in their imports – which include steel cargoes – and surrender the corresponding number of CBAM certificates, which are procured through a weekly average auction.

If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted.

The CBAM framework essentially levels the competitive advantages of imported steel with domestically produced steel in Europe by putting penalties on carbon emissions, according to a third source in the Middle East.

The source added that the CBAM framework incentivizes steel imports that are produced using low-carbon raw materials such as DRI, nudging steelmakers toward EAF steelmaking methods and increasing DRI consumption.

The EU is the largest net importer of steel cargoes in the world, importing around 22 million tonnes of steel in 2022, 1.4 million tonnes higher than the US.

“Based on the volume of its steel imports, the EU has the strongest potential to support DRI premiums in the medium term with its approach of back-tracing carbon emissions,” a fourth trader in Singapore said.

“But industrial-wide efforts from major steelmaking hubs such as the Middle East will remain paramount in supporting the continued expansion of the DRI market,” the trader added.

The MENA region’s potential as a production hub to boost DRI accessibility

Market participants are identifying the Middle East-North Africa (MENA) region as a key area with a strategic opportunity to scale up DRI production and sales.

Ample natural gas supplies, alongside its strategic geographical location servicing demand centers for green steel in Europe and key growth markets in India and Southeast Asia, make the MENA region a natural DRI hub, an analyst in the Middle East said.

The MENA region remains the largest DRI production hub in the world, contributing nearly 46% of total global production, with 58.48 million tonnes produced in 2022.

A total of 20 million tonnes per year of DRI capacity is expected to come online in the MENA region between 2024 and 2027 across hubs in Oman, Saudi Arabia and Algeria, according to a source in the region.

An expansion of DRI modules and EAFs in the MENA region has the potential to conventionalize the use of DRI as a raw material in steel production, by narrowing the production-cost gap of DRI with other raw material alternatives, the analyst in the Middle East said.

The analyst added that the long-term goal is for the MENA region to focus on hydrogen-based reduction for DRI production, to truly move the industry away from its carbon-intensive practice.

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