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War Supply Shock Sends European Sheet Prices Into The Sky

Europe | Steel Sheet Products Monitor March 2022

War in Ukraine has caused European sheet prices to spike m/m. The loss of exports from both Russia and Ukraine has caused a significant supply shock as Europe is one of the most exposed regions to loss of supply due to the war. Accordingly, buyers across the continent are some of the keenest in the world to secure options from other areas, causing prices in the region to rocket higher.

Our latest assessed HR coil prices are at €1,073 /t in Italy and at €1,143 /t in Germany. These are both up by around €140 /t w/w – let’s just that again: prices are almost €150 /t in one week. But if we’re honest, when we saw the data arrive for this week, we were actually a little bit surprised that the increase was not even larger. There is a high degree of uncertainty in the market right now about where spot prices really are. ArcelorMittal has come out with an initial price increase announcement, but many buyers are waiting to hear from their suppliers about the next price ideas.

The mechanism by which supply is unavailable from Russia and Ukraine varies: in Severstal’s case it is a result of sanctions against the company’s majority owner, but even without these it is more or less impossible to finance, insure, or ship anything from Russia. Companies are also “self-sanctioning” because of ESG concerns or an unacceptably high risk that future purchases will not complete. In the case of Ukraine, availability is restricted in the first instance because assets have been idled, but with Ukrainian ports out of operation shipping, anything would be so difficult.

The scale of the supply shock is material. Imports of HR coil from Russia and Ukraine supplied 8% of EU27 apparent consumption in 2021. The two countries supplied 29% of all EU HR coil imports. These shares are about half the size for CR coil, and a little less than half for HDG, so it is clear that the impact falls primarily on less value-added products. Nevertheless, that size of supply flow is not easy to find elsewhere overnight but given the speed at which access to new Russian and Ukrainian production has stopped, “overnight” is more or less the timescale we are dealing with. 

In fact, that is not where the supply problems end. Because Russia and Ukraine are major suppliers of multiple products through the steel value chain, as well as oil and gas in Russia’s case, there are numerous examples of product shortages. One of the more acute is in slab. The EU imported 93% of its slab from Russia and Ukraine in 2021. There is no obvious way to re-source this in the short term. Much of it is re-rolled into plate rather than sheet, but higher slab costs will impact all its consumers, And higher slab costs are a certainty.

Outlook: Prices Are Going To Go A Lot Higher Before They Turn

Buyers in need of products can do several things. Firstly, they can look for alternate sources. Demand on domestic mills will go up and EU mills will try and increase supply: ArcelorMittal has already restarted its idled Sestao asset in Spain, for example. Deman for imports from origins other than Russia and Ukraine will also go up. Big exports like CHina, India, Japan, Brazil and Turkey will all see more orders from Europe. So will “non-traditional” sources. In turn, they will all push their prices up because they will still have their usual export orders as well.

Secondly, buyers can reduce their needs. in the short term, they can draw down inventories, which are high in Europe so this is likely to be a real option; though of course, they will also need to keep an eye on where they will buy replacement steel for inventories that they consume. Real demand may also be destroyed. That could be because some projects get delayed as the cost of steel becomes unacceptably high. It could be because we also see interruptions to European manufacturing because fo the war. For example, several fo the European auto companies are pausing production at their factories because they cannot get some components (e.g wiring harnesses) that are made in Ukraine.

At some stage supply flows will re-organise and demand may adjust. Before that happens, we are going to see sheet prices go a lot higher.

Credit: Peter Upton – Upton Steel

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