SSS 2020: Four things we learned about European steel

Fastmarkets’ Steel Success Strategies Online event started on Monday October 26. Here are four things that we learnt during the European Steel Panel on the first day of the forum.

Carbon barriers are inevitable
The European steel industry has been heavily affected by the Covid-19 pandemic, with a number of steelmakers cutting their output, shutting down capacity or both. Even though major steelmakers have started to bring back idled capacities recently, steel output rates in the region remained below pre-pandemic figures.

Germany is the EU’s most productive steelmaking area and it showed a 9.7% year-on-year drop in crude steel output in September this year. Crude steel production in Italy, the bloc’s second-largest steelmaker, dropped by 18.71% year-on-year in the same month.

In addition to the pandemic, European steelmakers were being challenged by rising production costs, particularly a rise in the price of carbon permits.

Consequently, the European steel sector has been calling for the introduction of a carbon border adjustment that would help to create a level playing-field and enable the decarbonization of the sector.

“A mechanism for a carbon border tax adjustment is probably inevitable,” Antonio Marcegaglia, chairman and chief executive officer of Italian steelmaker Marcegaglia, said.

But this must be the result of a properly balanced study, and must be applied with the understanding that the EU steel industry will drive the transition to a CO2-free economy, he added.

“This requires effort, multilateral talks, in order to address the issue [of climate change] - not for someone else’s benefit, not [because of] disruption of supply chains. We need time, we need transparency, we need clear rules, multilateral talks, [and a] clear, realistic, economically sustainable strategy,” he said.

Flat steel exports into the EU market could be affected by possible CO2-related trade restrictions.

Major steelmaker Metinvest has suggested to the EU that its home country Ukraine, a long-time trading partner, be allowed to join the bloc’s Emissions Trading System (ETS), which will be ready early next year.

“[If that happens], a carbon border tax adjust mechanism would not be applicable to Ukraine because it would be part of the EU’s decarbonization strategy,” Metinvest CEO Yuriy Ryzhenkov said. “We are still in talks with the European Commission and we are hoping for a fair and transparent look into the situation.”

Metinvest exports steel hot-rolled coil to the EU, as well as significant volumes of steel slab, both to European customers and to its own re-rolling units in Italy.

One of these, Ferriera Valsider in Oppeano, can produce 700,000 tonnes per year of HRC using slab from the parent company. And Trametal, in San Giorgio di Nogaro, has capacity to produce 600,000 tpy of plate.

More consolidation likely
More synergies and vertical integration were expected in the European steel market, with local steel producers trying to save costs and balance their capacities in line with demand.

European Steel Panel participants agreed that consolidation would help to reshape and probably slightly downsize the European steel industry, which was struggling with overcapacity and the costs of transition to carbon-free production, among other things.

“Consolidation basically means more control of the supply, better [capacity] utilization, and more return on capital,” Marcegaglia said.

“The industry struggles with overcapacity, and that means some assets are not used,” Benedikt Zeumer, a partner with consultant McKinsey & Co, said.

Consolidation would also help European steelmakers in their transition to carbon-free production processes, he said.

“We have to be very clear that small companies can’t afford this [transition] to CO2-free production. There is a need for combination, integration,” he added. “We do not need 220 million tpy gross capacity in Europe any more.”

The transition to carbon-free steelmaking process would push some companies into scaling down their production, it was said.

“Taranto [ArcelorMittal Italia’s giant steel plant in southern Italy] would probably have to downsize to 5-6 million tpy [because its current output of] 9.8 million tpy is quite unrealistic from a long-term future perspective, and very challenging,” Marcegaglia added.

Major European steelmakers were seen to be realigning their strategies and were looking for partnerships with other companies, as Fastmarkets has reported.

Price volatility could change trading patterns
European steel producers used to have long-term contracts with big buyers such as the automotive industry, typically lasting for one year. But more price volatility in recent years, and increasing differences between spot and contract prices, have made major flat steel suppliers reconsider their trading patterns.

“Even though there is a different approach [for spot and contract prices], the difference is too big because of the high market volatility. It would be more natural to have [contracts for] a shorter term, such as six months,” Marcegaglia said.

“It’s hard to plan and predict even beyond the [current] quarter, so committing for a long-term period is becoming more difficult. I believe that we should be more prepared to manage flexibility in all things, including prices,” he added.

The price of HRC in Europe gradually started to recover in late August from the effects of the Covid-19 pandemic, in line with the recovery of the automotive industry.

Fastmarkets calculated its daily steel hot-rolled coil index, domestic, exw Northern Europe, at €497.92 ($588.64) per tonne on October 26, up by €1.25 per tonne day on day from €496.67 per tonne on October 23.

The index was also up by €1.25 per tonne week on week and by €9.90 per tonne month on month.

Last week, ArcelorMittal Europe increased the price of HRC in long-term contracts with steel distributors and service centers in the north of the EU.

European buyers expected that the producer would also increase its spot-market prices soon, and that other mills would follow.

Trade protection exacerbates imbalance in HRC
The structural imbalance in the European flat steel market remained an issue for buyers, especially in HRC, which faced the most challenges from different trade remedies.

The EU toughened its existing safeguard measures on HRC imports in June this year. In May, Turkey, a key HRC exporter to the EU, became the subject of an anti-dumping investigation, while in September European steel association Eurofer urged the EC to require registration of Turkish HRC imports.

The latest revision to the safeguard measure was expected to slash Turkish HRC exports to the EU by about 750,000-900,000 tonnes between the imposition of the measures in February 2019 and June 2021, when they are scheduled to expire, Ugur Dalbeler, CEO of Turkish steel producer Colakoglu said during his presentation.

According to statistics from Eurofer, in 2018 Turkey’s HRC exports to the EU amounted to 2.87 million tonnes. In 2019, after the imposition of definitive safeguard measures, that figure fell to 2.77 million tonnes. Over the first eight months of 2020, HRC exports from Turkey to the EU amounted to just 1.42 million tonnes, down by 30% from 2.01 million tonnes in January-August 2019.

The expiry of the EU’s safeguarding measures would offer a chance for the sector to balance supplies, because domestic producers have been deliberately self-limiting their production in line with the reduced demand, and also in hopes of promoting a price rebound.

“The structural imbalance will persist,” Marcegaglia said, “unless the safeguard [measures are] adjusted.”

Sign up here for Fastmarkets’ free webinar on November 4, 2020, beginning at 9am GMT: European flat steel market - on the mend after the Covid-19 fallout?
- Overview of EU flat steel price developments in 2020 so far
- Suppliers’ response to the drop in demand
- Fortress Europe? Toughening of trade defense measures
- The survival of European steelmakers facing high raw material costs
- Demand contraction and a slow path to recovery
- Near-term price outlook.

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