All Steels’ Current UK Steel Market Evaluation Update – 9 January 2023

It’s currently extremely difficult to determine whether it’s going to be a good year for the steel industry or not with so much economic gloom in the media. For all steel mills, traders and distributors, falling steel prices are always the most damaging and difficult to negotiate. However, it seems we have already reached the bottom of the current downward cycle, although there are still grounds for some caution with steel prices being approximately double the rates of two years ago.

Also, as we all know, demand has been extremely weak since mid-September 2022 as everyone became spooked by falling steelmaking raw material costs and a surprising collapse in energy prices. Skyrocketing inflation and no end of industrial strike action also added to the pessimism and steel purchasers just stopped buying. In times of depressed demand, it is always hard to distinguish between the reduction in underlying demand and reduced activity caused by destocking that can massively exaggerate the picture. However, what is certain, is that destocking has been taking place, but we still need to see more data to understand if the point has been reached where stock replenishment becomes a necessity. What we can say from current data is that virtually all steelmaking raw material costs have risen quite dramatically over the last 4-6 week period due to tight availability.

Scrap
Turkey remains the biggest world buyer of scrap and thus the best barometer for price direction. The bounce in price since 16 November 2022 is quite staggering where the increase has now accumulated to $84 per tonne. An established fact is that 1.1 tonne of scrap is required to make 1t of steel so the scrap price movement adds $92 per tonne to electric arc steelmaking costs (£77 per tonne). One explanation for the increase is that the world seems to be tightening up on controls on blocking steel re-rolled from Russian origin billets, slabs and hot rolled coil so this may be a kneejerk rection to such measures. Over the summer months it was known that many Turkish steel manufacturers had turned off their steel making capability in favour of cheap Russian semis so it seems logical for this switch to be reversed. In Q4 the USA made it compulsory for the origin of base raw material to be confirmed on all steel imports and the EU will undoubtedly be considering 2 similar action. In the UK, HMRC has just created new commodity code entities for Russian aluminium billet and slabs that clearly suggests wheels are in motion. We are sure ferrous billet and slab changes will follow. 

Coking Coal
This commodity is dominated by Australian supplies so is chosen as the best indicator of world prices. Again a big escalation in prices was seen from mid-November 2022 but the supercharging of coking coal prices is better understood as this all relates to Australia’s trading relationship with China. It is widely reported that Australia-China relations appear on the mend amid reports that Beijing will allow coal imports to resume for the first time since 2020. In 2020 China introduced massive quotas on many imported goods from Australia due to political tensions but market expectations of a patch up have been on the cards for the latter part of 2022. The immediate expectation here is that Australia will suddenly have access to supply the biggest buyer in the market which naturally gives rise to them having the opportunity to inflate prices. This will be bad news for Indian steelmakers as they have been the biggest beneficiary from China’s trade hostility to Australia. 0.7 tonne of coking coal is used to make 1 tonne of steel so the price growth since 23 November 2022 adds $48 per tonne to BOS route steelmaking costs (0.7 x $68 per tonne). A sterling impact of £39 per tonne. 

Iron Ore
Inflation in iron ore price completes the trio of raw material cost increases to steelmakers. Again, we saw commonality of the upward recovery in prices occurring in mid-November. However, with a large part of this price shift occurring over the long festive period for European countries the changes have been off radar but clearly it is now time to wake up to the reality of a corresponding likely shift in steel prices. The upsurge in iron ore prices from 1 November 2022 amounts to $37 per tonne. In BOS route steelmaking 1.7 tonne of iron ore is used to produce 1 tonne of steel so this cost increase translates to $62 per tonne. In sterling terms this represents £52 per tonne. Current record flooding in the iron ore mining region of Kimberley, Australia that is described as a once on a century event can also only add to tightening iron ore supply and price inflation. 

Energy
The energy market has become extremely complex, with costs varying from country to country, i.e., parties orchestrating variations on capped rates and durations of time that such support will last or will change. Each steel manufacturer will also be deploying different methods of buying. Some buy spot each day, others buy on fixed long term contracts and some operate blended schemes that can be a mix of spot, fixed and hedged. All that can be said is that contract prices generally trend in the same direction. Spot prices have been significantly more volatile with three massive peaks and troughs over the last four months but whichever view you take, prices are significantly higher than pre-covid times. Nevertheless, the current softening in energy prices will be helping steel manufacturers to offset some of the rising raw material costs. However, the conflict between Russia /Ukraine shows no signs of abating and with many intensive energy consuming manufacturers running at a slower pace to reflect poor economic conditions, spot energy prices are perhaps a little misleading. The warmer than normal weather in the EU will also be dampening consumption. Hence, any cold spells or upturn in industrial output would undoubtedly transform into much higher gas and electricity prices. Moreover, it is highly likely following the spring that energy support packages will recede leaving steel manufacturers far greater exposed to higher costs. 

Inflation / Bank Borrowing Rates
For the first time in over a decade higher bank charges have become an important phenomenon with ever increasing costs as we progress into 2023. These are even more punitive when combined with higher steel prices. It is a cost that can be easily overlooked given the pace of change and as a trading business, the cycle on collecting sales cash from the opening of a letter of credit at the time of raising a steel purchase order can easily be six months. Thus, with typical bank interest at 2% above BOE rates, the financing costs can easily add £25 per tonne to transaction costs. Nobody in the supply chain is immune to such an expense that simply has to be recognised. With UK inflation still at a historical elevated level the MPC are likely to push through another rate rise in February and latest market expectations are for UK base rates to peak at 4.25% by the middle of the year. Everyone in the steel industry has to recognise this cost. 

Currency
The US$ / GBP exchange rate ended 2022 nearly 11% lower, its worst year since the Brexit vote in 2016. This added considerable expense to both imported steel prices and raw material for UK steel manufacturers. Even when reflecting on the last four-week period, the GBP exchange rate has weakened against both the Euro and the US$ by a combined average of circa 2% which is adding circa £15-£18 per tonne to import supply. With such a poor economic outlook for the UK and the fact that the country is stagnating, it is difficult to have any confidence in the UK’s overall performance in the short to mid-term so there appears to be no respite from a weak GBP other than it creating better export opportunities for UK steel mills where Safeguard restraints can be avoided.

UK Safeguards
With trade flows slowing down Safeguards are expected to become less of an obstacle but there are a few anomalies here in the UK due to the loss of domestic manufacture. The biggest impact remains the loss of Liberty Merchant Bar and even though we are only in the first week of the new year the Safeguard quota on merchant bar for Turkish imports is already at the critical stage – 558 tonnes remaining available against an opening quota of 12,294 tonnes.  The problems on merchant bar are likely to persist so this is one to watch out for as a potential 25% duty trap, especially on container supply where bonding is sometimes more difficult to organise. Even in a situation where bonding is applied this still causes disruption to supply as deliveries can be delayed by up to ten weeks to allow duty free customs clearance at the opening of a new quota.

Border Force Strikes
At the end of last week, it was reported that disruption at airports could be extended to Dover and other ports within weeks. Officials at the Public and Commercial Services (PCS) union have discussed extending industrial action by Home Office workers to Britain’s major ports. With the Government refusing to meet a 10 per cent pay rise and no cuts to redundancy terms offer, negotiations have reached a stalemate. It is understood that the PCS have a six-month mandate for action, so all that needs to happen at Dover and elsewhere is that they must give the employer two weeks’ notice. The PCS leader Mark Serwotka has previously warned that December’s action was only the “opening shots” of the dispute – threatening a “huge escalation” of action during January 2023. 

General Inflationary Pressures
General overheads are increasing at a rate of knots. New plant and machinery purchases seem to far exceed general inflation but fully understandable given the escalation in all commodities that translate into component costs. Factory and warehousing costs are also increasing whether it be the impact of higher commercial mortgages or landlord higher rental expectations. The truck and trailers that are a vital part of our operational infrastructure are also at extortionate prices and availability remains tight with extremely lengthy lead times on new build. The employment pool also remains constrained, and all employers will be under pressure to deliver salary increase expectations to meet today’s cost of living. As a basket of costs these are substantial and will all have to be funded by higher steel prices throughout the supply chain. 

All Steels’ Conclusion
With demand being so subdued the environment for rapid price escalation just doesn’t look like a possibility but all the inflationary pressures can’t be ignored and with most steelmakers in a breakeven situation at best, prices have to move up by probably a measure of £50-£75 per tonne just to achieve a status quo. At All Steels we are of the belief that steel producers will not take steel prices down into loss making territory as the option of cutting capacity seems to be the new defence. Within the last six months it is estimated the EU steelmakers have taken out circa 20 million tonnes of steel capacity and if more needs to be taken out we are sure that this will be exercised. In such a volatile world, forecasts are becoming increasingly more difficult to calculate but it’s safe to say the conclusions reached here are based on the reality of the factual data reported.