***NOTES FROM LONDON: Call to arms - EU steelmakers finally rally

Top European steel industry executives hardened their stance on the new wave of raw materials supply contracts at MB’s 8th Steel Success Strategies conference last week. The introduction of quarterly, index-linked iron ore contracts has been unpopular with steelmakers around the world. But in Europe, where raw materials are scarce and mills are largely dependent on imports, the new terms have caused outcry. Speaking at the conference last week, ArcelorMittal vp Michael Pfitzner led the charge.

Old wave, new wave: the latest raw materials contracts have caused outcry in Europe

Top European steel industry executives hardened their stance on the new wave of raw materials supply contracts at MB’s 8th Steel Success Strategies conference last week.

The introduction of quarterly, index-linked iron ore contracts has been unpopular with steelmakers around the world. But in Europe, where raw materials are scarce and mills are largely dependent on imports, the new terms have caused outcry.

Speaking at the conference last week, ArcelorMittal vp Michael Pfitzner led the charge.

“The decision by the world’s leading mining companies to restructure the iron ore market has had a huge market impact,” he said.

More volatile prices for raw materials prevent Europe’s leading steelmakers from offering long-term contracts to their customers, he said. And, ultimately, increased price volatility could encourage the substitution of steel with other products in some applications.

“Quarterly pricing does not correspond to the essential needs of our customers,” Pfitzner said. “Projects and infrastructure need stability and rely upon planning: they need forecast visibility.”

Thanks to the new system, steelmakers without captive raw materials supply are being forced to operate at a significant disadvantage, he continued. For plants in Europe, this is bad news.

“Integrated producers have not been forced to follow the price formula,” Pfitzner said, telling delegates a new two-tier pricing system is now starting to develop.

Steelmakers with their own raw material resources retain the ability to offer long-term steel prices, while those forced to pay quarterly for deliveries do not.
“This cost advantage can result in a significant [shift in] market proportion,” he told the conference.

Of course, ArcelorMittal has less cause than many to complain.

The world’s largest steelmaker is around 50% self-sufficient in iron ore – 60% if you factor in last year’s reduction in crude steel production.

Following the acquisition of Baffinland in Canada, this will grow. After more investments in Latin America and further afield, the company hopes to reach something in the region of 75%.

But Russian steelmakers are much better examples: almost all are self-sufficient. Some are merchant sellers. This, combined with cheaper prices for energy, labour and transportation, makes them much lower cost.

Of this, captains of Western Europe’s blast furnace steelmaking sector are painfully aware.

And Severstal head of strategic planning Andrey Laptev believes a shift towards CIS steelmakers shipping more semi-finished products to Europe for re-rolling isn’t out of the question.

“Semis could be used to transport some of [CIS steelmakers’] raw materials advantage,” he told the conference, suggesting that increased co-operation between European and CIS steelmakers could be to both their advantages.

The logic is hard to deny. But western European steelmakers aren’t going to give up their blast furnaces without a fight. Some are already taking action.

Ekkehard Schulz, the chairman of Germany’s largest steelmaker ThysenKrupp, called on the German government to co-operate closely with the country’s steelmaking sector and help establish a common European strategy for procuring raw materials.

“The German industry, but also the government, must rise to these new challenges,” he said. “We need a European raw materials strategy.”

“The European Commissioner for the industry, Mr Tajani, is already supporting this,” he continued. “We expect to see a decisive breakthrough at an international level next year at the G20 summit in France.”

This call to arms might not have come too late. Speaking at the conference, Pfitzner argued that, while short-term contracts seem like they are here to stay, miners should consider selling a portion of their output on long-term contracts.

Iron ore producers have only one set of end users, after all.

So, while the predominant market mechanism seems to be moving even more short term with monthly pricing already on the horizon, hybrid contracts with some long-term element might also be on the way.

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