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European energy crisis prompts widespread steel output cuts; nickel, chrome markets watch and wait

    5 Sept 2022

    Soaring energy costs have triggered temporary production cuts at several steel mills across Europe, including those in the stainless sector, with speculation about possible further cuts spreading among nickel and chrome market participants.

    The impact of rising energy costs has been cited as the reason for the cuts, with the effects already apparent in Spain, France, Germany and Italy.

    For example, Spanish steelmaker Acerinox announced on Tuesday August 30 a 15-day closure at its Los Barrios stainless steel plant in Spain from September 1. It then informed workers on August 31 that it will suspend production at its Algeciras stainless plant for 15 days from September 11.

    On September 1 and 2, ArcelorMittal also announced production cuts, specifically to carbon and galvanised steel, at locations in Spain, Germany and France.

    Italian stainless producer Cogne Acciai Speciali recently halted production, also citing energy costs, although news reports in Italy suggest the company will restart operations from September 6.

    Exacerbating fears that the global energy crisis will cause irreparable damage to European industry was Russian state-controlled gas company Gazprom’s decision on Friday to close indefinitely the Nord Stream 1 pipeline from Russia to Germany, causing gas prices to spike on Monday.

    In the UK, gas for delivery in October gained more than 35% at one stage in today’s trading from 410p per therm on Friday afternoon – it was still up by almost 10% at 1745 London time at around 450p ($5.17) per therm.

    The next-month contract peaked in August at a five-month high of 650p per therm.

    As well, the benchmark Brent crude oil price rose by 3% to near to $100 per barrel after oil cartel Opec – of which Russia is a member – agreed on Monday to cut output by 100,000 barrels per day next month.

    Rumors spreading, other concerns mounting

    Some European steel market participants have expressed concern about the latest developments, saying rumors of more output cuts are widespread. Still, further reductions had not been confirmed at the time of writing.

    For example, sources recently told Fastmarkets that there could be production cuts in Turkey following a 50% jump in the cost of electricity for industrial use there.

    Other concerns have also been weighing on the market, with one stainless producer source citing the presence of cheaper steel from outside Europe.

    “[There are] huge and cheap imports of stainless steel, which are putting enormous pressure on European stainless steel producers that are facing much higher energy costs, although the latter are not the same everywhere in Europe, which is bringing competitive advantage to [those with lower costs],” the stainless producer source in Europe said on Monday.

    “The situation is extremely difficult and moving very fast. We are trying to adapt as smoothly as possible for our people and partners,” he added.

    Weak demand and high stock levels in the stainless flat steel market are significant challenges, a stainless and carbon steel trader told Fastmarkets.

    “We see fewer import offers [for stainless flat steel] due to the low European price. The market and demand are weak at the moment, and in the short term, that’s not expected to change. Stock levels are high due to low demand. Restocking might happen in one month’s time,” the trader said on Monday.

    “Due to [production cuts] and a lack of imports, most probably, [steel] mills will attempt to raise prices. I think for some mills, producing stainless has become lossmaking. [But] stocks are high so they will most probably not succeed immediately,” he added.

    Reaction in chrome markets

    Further upstream, sources in the chrome market have also reported difficulties because of rising energy costs, noting the impact on their customers.

    “The current energy prices have pushed a number of our customers to shut down or reduce production,” a ferro-chrome distributor in Europe said.

    “But at the same time, it is impacting ferro-alloys producers. Eventually, we have to see how the [supply/demand] balance works out. Regarding prices, the production costs of ferro-chrome are now much higher than what they were three months ago, so we need to see how that impacts the market,” he added.

    If stainless steel production cuts are largely driven by energy prices rather than a lack of demand, the likelihood is that alloy prices will decline in the near term but rise shortly afterwards, a ferro-chrome producer in Europe suggested.

    “Plants have cut ferro-chrome production and more cuts are planned. This will lead to a shortage of [ferro-chrome],” the producer told Fastmarkets.

    “Price increases [could] follow on the spot market due to a shortage of material and uncertainty of [future] availability. Plants producing ferro-chrome in Europe might stay cold for an uncertain period,” he said.

    There has been no major reaction in ferro-chrome prices in Europe and the US to the news of steel production cuts.

    For example, Fastmarkets’ weekly assessment of the price of ferro-chrome high carbon 6-8.5% C, basis 65-70% Cr, max 1.5% Si, delivered Europe held steady at $2.48-2.55 per lb on August 30, while ferro-chrome high carbon 6-8% C, basis 60-65% Cr, max 2% Si, in-warehouse Pittsburgh edged down by 15 cents at the low end on September 1 to $3.30-3.65 per lb.

    Nickel market relatively unfazed for now

    Although sources have been expecting periodic steel production cuts for some time, the reports of closures alongside the rumors of further suspensions had yet to unsettle nickel markets as of Monday.

    “There has definitely been a reduction with a few mills taking some time out but this has more to do with electricity prices than demand,” one nickel producer said.

    At the same time, participants were reluctant to look too far ahead.

    “For September, demand remains OK; we are still seeing consumer orders [for nickel] but it is a very uncertain market at the moment – people cannot commit past October,” a trader in Europe said.

    Others in the market were calmer.

    “I am hearing some rumors but I’m not too concerned; we have been expecting this for some time now,” a distributor noted.

    The LME three-month nickel price was under pressure towards the end of last week, trading below the psychological barrier of $21,000 per tonne on September 1 and 2 but trading in relatively stable fashion. Sentiment then appeared to have shifted – the benchmark contract closed at $21,458 per tonne on September 5, an increase of 4.5% from the 5pm close on Friday.

    Future market trajectory remains unclear given the demand headwinds that are battling supply constraints globally.