EU steel industry cost explosion starts to bite

Edited by the Engineeringtalk editorial team Dec 24, 2003

The scale of the increase in production costs that European steel mills are currently facing is almost unprecedented, according to the latest European Steel Review.

The scale of the increase in production costs that European steel mills are currently facing is almost unprecedented.

The last time the industry faced pressures on a similar scale was probably the energy crisis years of the 1970s - and this heralded a period of stagnation in steel demand across most western industrial countries and ultimately led to massive closures of uncompetitive steel-making capacity.

All kinds of records have been broken in the input side of the steel industry in the last few weeks.

Ferrous scrap bundles have changed hands in the USA for over $200 per long ton for the first time.

Merchant pig iron producers in Brazil are sold out until April and some have no availability till July.

One has to go back many years to look for the last instance of iron ore prices rising by double-digit percentages for two years running.

Talks to settle 2004 iron ore prices have only just begun but major mills appear to have already accepted that another substantial rise will be forced upon them, because of the tightening in supply and continued strong demand.

Coal and coke are also going up in price, while some steel makers are facing substantial energy cost increases too.

On top of all this has come the remarkable skyrocketing in ocean freight markets.

The extraordinary surge has seen them triple in some cases since the start of the year.

China's huge demand for raw materials and steel has severely strained the available supply of vessels.

This means that, for some steel makers, the cost of the ore itself is actually lower than the cost per tonne of transporting it from, say, Brazil to Rotterdam.

For European mills the large majority of these inputs are priced in US dollars.

The weakness of the US currency against the Euro - down by about 30% over the last 20 months - has substantially mitigated the increase in price of the raw materials and other inputs.

However, things can swiftly change in the currency markets.

One EU integrated steel company, which has a large downstream steel processing business, has already complained of the difficulty in passing on higher steel prices to its customers.

If the dollar were to gain strength then this problem would be multiplied.

A sustained US economic recovery could see it bounce back strongly against all the European currencies in 2004.

At least steel companies can hedge against a stronger dollar by taking a risk reducing position on the foreign exchange markets.

They can hedge energy and freight too.

But no such facility exists to manage the risk of higher prices for scrap, iron ore or pig iron - nor indeed the risk of lower prices for steel products.

Perhaps this is one of the reasons Corus recently made a strong plea for the introduction of steel futures trading.

So some mills are talking about introducing "temporary" surcharges in an attempt to pass on to customers the exceptional cost increases they are facing.

Apart from scrap, the carbon steel industry has rarely employed them.

There are good reasons for this.

One problem is that they could magnify the unwelcome ups and downs of the stock cycle.

Another is that they might hinder steel makers' attempts to raise selling values.

It would be difficult to tell customers of the need to raise basis prices to cover higher costs if these are already being covered by a surcharge.