Full Impact of Russian Invasion on Steel Prices yet to be Felt - March Steel Director's Briefing
Prices throughout Europe, including the UK have surged upwards since Russia invaded Ukraine in late February. However, the full impact of the invasion and its consequences for the steel market are yet to be felt.
Prior to the invasion, many people, including myself, were optimistic about market conditions, the availability of coil stock and the outlook for automotive demand.
The Russian offensive into Ukraine has changed everything and created significant uncertainty. The speed and largely unified imposition of western sanctions against Russia has sent already high energy costs soaring further and disrupted supply chains.
The EU moved quickly to ban Russian Iron and Steel imports, along with steel imports from Belarus. The impact of these sanctions on the wider European steel supply chain should not be underestimated - Russia alone accounts for 21 per cent of the EU’s hot rolled coil and sheet imports.
Add to this the fact that Ukrainian steelmakers are either not operating, or are severely restricted in their ability to deliver finished product due to the damage inflicted on their domestic infrastructure, and you have significant gaps starting to emerge in the European supply chain.
Very quickly, European mills removed existing price offers from the table and reassessed their pricing position. Prices have subsequently surged. For example, hot rolled and cold reduced coil prices have increased by 30-40 per cent in just a few weeks. Furthermore, there are rumours that European mills intend to ask for surcharges to be added due to the increased cost of production, thus undermining previously agreed prices. However, we have not seen evidence of this yet.
Fortunately, at Cooper and Jackson, we were able to conclude our own Q2 price negotiations before the invasion. Unfortunately, buyers that may have been holding off in the expectation that prices would weaken, will now be forced to pay the higher price to secure stock.
Even then, they are faced with a dilemma because validity periods for offers are very short, just 24 hours in many instances. Delay your decision, and prices could have moved upwards again. There is no suggestion yet that buyers will struggle to secure material for Q3 but signs are starting to emerge.
We are now seeing offers for Hot Rolled that are in excess of Cold Reduced prices, driven by the drop in exports out of Russia and Ukraine. This is a particular problem for steel producers that depend upon slab or hot rolled coil for feedstock, and means prices for these products are likely to rise further as re-rollers compete to source material. This will in turn impact the longer leg products such as cold reduced and galvanised products.
Options to source from non-European mills to fill the supply gap created by the Russian Invasion are limited and complicated by tariff quotas.
India, on the face of it, is in a good position to supply the UK and EU markets but tariffs limit the extent to which this can be done, and, there is currently no cost benefit to such imports, as Indian mills are also having to manage increased raw material, energy and freight costs.
It’s a similar story for China with the added complication that there appears to be less appetite for exports than has traditionally been the case. It’s also worth noting that they are currently battling another wave of covid. The Government’s zero-covid strategy means that millions of people are living under lockdown restrictions in cities such as Shangai and Xi'an. This will inevitably disrupt industrial output, including steel.
The geopolitical situation also has the potential to impact buyer attitudes towards countries such as India and China. As it stands, this is not really a factor, but it’s not difficult to imagine this changing quickly if China decides to supply weapons to Russia or India’s benevolence towards the conflict manifests itself in a more pro-Russian way.
At the time of writing, I would argue that the full impact of the conflict is yet to be felt. You can, as things stand, source material if you need it, albeit at an inflated price. However, the fact the hot rolled prices are now in excess of cold reduced prices is the biggest indicator that things are about to change.
The inflated cost and restricted availability of hot rolled will, over the coming weeks and months, make their way through the supply chain, until the impact is felt across downstream products such as Cold Reduced and Hot Dipped Galvanised. By the summer this will become acute.
The recovery in Automotive demand is another area of concern. Having shown signs of an improvement in demand with the easing of semiconductor shortages we can expect the situation to deteriorate once again with shortages re-emerging. Add to this the increasing cost of raw materials and the outlook looks far less optimistic.
What impact will restricted supply and soaring prices have on buyer activity? What impact will the cost of living squeeze have on the economy? How will manufacturing output be impacted?
These are questions that will be of significant concern to all of us but are as yet unanswered. The full impact of the Russian invasion of Ukraine has yet to be felt.