Rising carbon, energy costs to change EU steel pricing: 2022 preview

Sharp rises in carbon and energy costs, along with the introduction of “green steel” in Europe, will lead to changes to traditional pricing mechanisms in 2022, Fastmarkets understands.

Some steelmakers have already started to implement surcharges for carbon and energy costs, whereas previously production costs have been included in the base prices of the steel products in Europe.

The response from buyers to the new surcharges has been broadly negative, mainly because they believe that both energy and emissions costs should be covered by the base price and that by introducing the new surcharges steelmakers are trying to pass on the burden of risk related to sharp changes in production costs to the buyers.

Some market participants also believe that the adoption of new surcharges will create additional points to be negotiated during deal settlements and would protect base prices from declining in a downward market.

Carbon surcharges

The growing cost of carbon emissions in the European Union is forcing steelmakers to introduce carbon surcharges, with flat steel producers most affected as their steel is mostly produced using blast and basic oxygen furnaces, which generate higher carbon dioxide emissions.

The average forecast carbon price for 2022 is €69.87 ($78.72) per tonne and for 2023 the figure is €72.04 per tonne, according to a Reuters survey.

In April this year, flat steel producer Tata Steel Europe in the Netherlands introduced a carbon surcharge on its steel products. The steelmaker, however, has not been actively using the surcharge and often includes it in the base price for coil products, meaning there was no effect on the final price of its steel yet.

In September, German coil producer Thyssenkrupp also implemented carbon surcharge for hot-rolled coil of about €23-24 per tonne.

Thyssenkrupp estimated that the cost of emissions was about €95-100 per tonne and the surcharge was calculated based on the fact that the steelmaker buys around 20% of its emission allowances.

Fastmarkets calculated its daily steel HRC index, domestic, exw Northern Europe, at €912.50 per tonne on December 15, down by €6.46 per tonne week on week and by €91.67 per tonne month on month.

Market participants believe the surcharge is likely to increase, because more carbon emissions allowances will be bought in free auctions.

Other producers in Europe, including ArcelorMittal and Salzgitter, have also been planning to introduce similar surcharges to reflect rising emissions costs.

Although the new surcharges have not yet had an impact on the prices, market participants anticipate that the practice will become more widespread as carbon costs rise amid tougher emission regulations.

Green steel

Most European steelmakers have been investing in green steel projects to cut emissions. Under the European Green Deal, the European Commission proposed a new EU target to reduce greenhouse gas emissions by at least 55% by 2030, compared with the levels emitted in 1990.

Some agreements have already been reached between European steelmakers and end consumers – including the automotive sector and white goods manufacturers – for the supply of green steel.

Due to higher green steel production costs steelmakers have introduced green steel surcharges.

Even so, green steel is likely to be in short supply for the next couple of years while producers continue to transition and modernize their equipment, sources told Fastmarkets and, as a result, green steel prices will remain at a premium to similar material produced through traditional routes.

Market participants put the extras for the green coil from Voestalpine at €55 per tonne and from ArcelorMittal at €100 per tonne.

And the number of producers introducing green steel surcharges will grow as more projects are introduced, sources said.

While many European steel buyers believe that the new extras are inevitable, some said the lack of standards on what products should be considered “green” and the general lack of qualifying material over the next couple of years will allow mills to benefit from the surcharges.

“We have little understanding about what steel is considered green right now. It seems that we will have to pay for green steel certificates, as products will be the same. But as the authorities demand everyone goes green, we will have to accept the surcharges. We also would not be able to replace the material with cheaper imports any time soon,” a Northern European distributor said.

On July 14, 2021, the EC adopted a package of proposals under the EU Green Deal, which included a Carbon Border Adjustment Mechanism (CBAM) for imports into the EU of iron, steel and aluminium, along with cement, fertilizers and electricity.

Energy surcharges

Significantly rising energy prices have forced European steelmakers to look for ways to compensate for surging production costs, with some introducing energy surcharges, while others have attempted to increase base prices.

Energy cost rises had a bigger impact on electric-arc furnace (EAF) operators – mainly producing long steel in Europe. But next year the rise in costs will become more visible as a number of steel producers begin renegotiating their long-term agreements for electricity and gas supplies, sources said.

In October 2021, prices for gas increased three-fold and electricity costs increased nearly four-fold, a mill source said.

In the same month, ArcelorMittal notified its customers in that it would be implementing a temporary energy surcharge of €50 per tonne on its long steel products in Europe, which include steel beams, rebar and wire rod, with the surcharge applicable in all new price agreements. The company has not introduced similar extras for flat steel products.

UK based British Steel also introduced temporary surcharges to reflect rapidly rising energy and transportation costs at the end of September. The temporary energy surcharge was set at £25 ($33) per tonne, and a transport surcharge of £5 per tonne.

Other long steel producers attempted to achieve increases in base prices.

But Fastmarkets’ weekly price assessment for steel reinforcing bar (rebar), domestic, delivered Northern Europe unchanged at €810-840 per tonne on December 15.

European coil producers have been less affected by rising energy costs due to long-term gas supply contracts and better self-sufficiency than long steel mills.

But heavy plate producers, and re-rollers in particular, were hit by rising energy prices and, in late October-early November, Vitkovice Steel in the Czech Republic, notified its customers about the launch of an energy surcharge of €75 per tonne.

Other re-rollers in both Central Europe and Italy have managed to achieve rises in base prices due to higher production costs and healthy demand.

Fastmarkets’ weekly price assessment for steel slab, export, fob Black Sea, CIS peaked on November 1 at $715-740 per tonne. Prices, however, had fallen back to €600-620 per tonne by December 15, due to lower production costs and a slight slowdown in demand.

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