Energy costs no longer a factor in price negotiations

22nd November 2022

Elevated energy costs, a consequence of Russia’s invasion of Ukraine, provided the catalyst for rising European steel prices earlier this year. The threat of further increases in gas and electricity prices maintained upward pressure, into the summer period. Faced with reduced demand, however, European sales values fell and continue on a downward trend. 

In a scenario of falling prices amid elevated costs, speculation concerning the mills’ breakeven point is inevitable. Energy is currently a significant element in this calculation. Individual mill production costs, however, are subject to a variety of continually changing contributary factors. 

EAF steelmaking plants are large consumers of electricity. High fuel tariffs have an immediate and direct impact on costs. In contrast, BOF production provides useful by-products, which partially offset increased energy rates. Offgases are utilised in reheat furnaces. ArcelorMittal recently cited this type of energy cost reduction as the reason for continuing to run its blast furnaces in Bremen, albeit at low output levels. 

Within any manufacturing route, efficiency plays a role. In addition, producers in some parts of Europe enjoy government support and cheaper electricity. Others will still enjoy fixed tariffs, depending on the length of their energy supply contract. The latter have not yet been exposed to the full effect of fuel hikes. 

From the outside, therefore, it is impracticable to arrive at a precise breakeven level, whatever the manufacturing process, although reasonable estimates can be made. Profit margins are squeezed, and many producers will be losing money, at least on some spot deals, at current market prices. 

Typically, flat products come from the blast furnace route and long products from EAF mills, but there are exceptions. There are no exceptions, however, to the fact that selling prices are determined by the market, not by the process. For example, sections produced by a BOF steelmaker, such as UK’s British Steel, have to stay competitive in a market that is mainly EAF-based. 

Customers might show interest in steel production routes. Competitive prices, however, are the key to obtaining their business. Inflated energy costs persist but are no longer the main factor in steel price negotiations. 

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