13 August 2022 Update Report

It was the outbreak of war in Ukraine commencing at the end of February 2022 which catalysed huge steel price inflation.  (Ukraine’s immediate closure of its huge steel plants combined with swift, tough steel sanctions being applied on Russia by many of the world’s leading countries naturally created immediate steel shortages).

However, there were many countries that left the doors open to Russian steel supplies, and in Russia’s desperation to keep steel export volumes progressing they crashed prices to irresistibly low levels to attract buyers.  Turkey was a typical example that seized the opportunity to buy cheap Russian semis / hot roll coil and after 3 months such re-rolled product that effectively became Turkish origin supply crashed into the EU at low prices.  The turnaround in this Russian base raw material to hit the EU was surprisingly quick and EU Governments have so far failed to fathom out how to block such supplies although the natural EU and UK Safeguards are starting to prevent a huge deluge of such supplies.  With so many of the Turkish manufacturers turning off their own steel manufacturing in favour of Russian semis / hot rolled coil, the world’s largest scrap buyer (Turkey) massively switched down its purchases of scrap and this action virtually halved the price of scrap at the start of the summer months. 

The charts below clearly illustrate Turkey’s level of support for Russian purchases and the consequential downturn in scrap prices.  (Turkey is used here as an example but the same transition took place in many other countries i.e., Egypt, India, UAE, Vietnam, China, etc).

Product	Jan-Jun 2022 (tonnes)
Billet	732,147
Slab	1,057,232
Hot Rolled Coil	437,814
Scrap	407,588

All products 3,837,265 tonnes

For interest during the whole of 2021 Turkey imported 860,905 tonnes of slab from Russia so imports of this product are running at a circa 250% increase here. 



The volume of Russian imports of all steel products accelerated dramatically in June which coincides with when we saw the downward price pressure start to materialise in the UK.

As many Turkish producers switched to using Russian semis, rather than making their own steel, scrap prices tumbled basically reflecting the reduction in purchases.  (Evidenced in the chart below). 



The Changing Market
Over the course of the current month many of the dynamics that influence steel prices have changed particularly for the UK.  Hence, All Steels’ view is that steel prices will push up during September and availability issues may once again return on certain long products for the numerous reasons expressed below:

Scrap
As Russian base raw material faces more scrutiny in the EU, Turkish producers appear to be making a switch back to more domestic crude steel production and increased buying activity has lifted the price by circa $50 per tonne over the last 7 days.  This change is also starting to push up EU prices so higher raw material costs will become apparent for all EAF steel producers.

Energy
The rising cost of energy has been topical for some time, but the tightening of Russian gas supply is intensifying, and this is now occurring at a period of running into the autumn / winter months when consumption increases.  

Last week the UK natural gas futures broke above the 400 GHp/Thm mark underpinned by prospects of further supply disruption at a time of entering an increase in demand.

Constant heatwaves and consequential record droughts across Europe currently threaten to stop energy shipments along the River Rhine in Germany exacerbating concerns in what is already a tight market.  Russia’s Gazprom continues to cite issues with turbines in the Nord Stream main pipeline constraining supplies to just 20% of normal capacity.

At present the gas pipe channels linking the UK to the EU have been working to full capacity.  The UK has also been using its existing excess regasification capacity to improve more LNG and reselling this as natural gas to the EU.

As winter approaches higher gas prices are a certainty with little prospect of peace for the Russia/Ukraine conflict.  According to Trading Economics’ global macro models their analysts expect that UK Natural Gas will trade at 424.41 GHp/Thm by the end of this quarter and rise to 622.02 GHp/Thm in 12 months’ time! 

Trading Economics Graphical Forecast – UK Natural Gas


Unsurprisingly electricity prices are following the same upward trend, and this is evident from current data provided by Ofgem UK Government data as graphically shown below. 



UK Safeguards
On structural sections new quota rules came into effect from the 1st July which removed some developing nations’ exclusion rights.  Under Quota 058029 the tonnage set for the period 1st July 2022 to 30th September 2022 was 16,716 tonnes.  With Turkey, India and some other ROW suppliers now grouped together the quota on this product category turned critical at the start of August and it is already believed that tonnage bonded in UK ports awaiting clearance on the 1st October will likely result in the Q4 quota being exhausted on the first day of the new period. 

A similar picture exists on merchant bar where excessive supply exhausted the Q3 quota very early and again bonded quantities will likely exhaust the Q4 quota on the very first day of the period. 

Duties on the likes of Turkish and Indian origin products will have high risk exposure to attracting duties.

Port Congestion
The issues associated with port space remain a problem and with more material having to be bonded for lengthy periods to avoid duties the problems will arguably only intensify. 

The other big news this week is that 1,900 dock workers will walk out on strike at the UK’s biggest container port (Felixstowe) between the 21st to the 28th August 2022.  This will result in circa 45,000 containers not being processed and will create backlogs running into the year end with huge demurrage penalties likely to be experienced by importers. With the dockers having already rejected pay settlements above 7% this dispute could be a long-drawn-out affair with even more disruption to follow.  With Felixstowe handing circa 40% of all UK container movements the disruption here will be massive. Whilst such constraints appear in all ports the costs are continually rising and warehousing costs in many ports have increased 8-fold over the past 12 months.

Liberty UK
The outage at many of the Liberty UK steel plants remains an issue and Liberty Merchant Bar PLC has now been out of production for nearly 6 months with no immediate signs of a restart.  Surprisingly, the absence of such a major supplier of merchant bar to the UK market has not really been missed but with excessive Turkish merchant bar imports now likely to trigger duties going forward the product will undoubtedly see an uplift in market prices.

Currency
The devaluation of the £ sterling against the US$ has been significant during Q2/early Q3 due to high recessionary concerns in the UK.  This has been noticeable on All Steels’ new US$ based steel purchases adding circa 12% to our sterling purchase costs on Q4 supplies.

With the media widely reporting economic gloom for the UK and with fiscal intent in the US to keep pushing up interest base rates above those applied in the UK the £ is likely to remain weak for some time. 

Conclusion
We have not included details on all the steelmaking commodities in this report but coking coal spot prices as an example have increased from $188 to $238.50 per tonne over the last fortnight according to Simpson Spence Young.  General inflationary measures and the ever-increasing costs of finance can also not be ignored by steel producers.

Hence, All Steels’ considered belief is that all the fundamentals will put significant pressure on the mills to increase prices shortly.  Moreover, these pressures are occurring at a time when stocks in the supply chain are believed to be moving to very low levels as we approach September so mills will certainly react very quickly on price in added response to increased steel buying activity!