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How Is Europe’s Pressure to Cut Russian Gas Affecting Steel Markets?

Steel prices and gas are the main topics of discussion today. It seems that steel traders in China are looking for more buyers abroad for their finished steel products. Meanwhile, Russia is considering cutting off gas supplies to the EU. Gas prices have a big impact on steel prices.

China: Lockdowns at Home, Low Demand Abroad

The news comes on the heels of reports detailing declining consumption in Europe and ongoing COVID-19 quarantines across China. Indeed, China’s latest anti-Coronavirus measures resulted in a 2.9% annual decline in industrial production for April. At the same time, reports show retail sales fell 11.1%. Steel quotations from Taiwan and South Korea were at €860 ($910) per metric ton cfr Europe, compared to €1,080 ($1,140) cfr Europe from South and East Asia. As one trader told MetalMiner, “Energy costs affect people a lot. There are more defaults on energy bills.” “The whole world wants to sell to Europe,” he added. However, with inflation reaching record highs and the war in Ukraine accelerating, the market is still immature for picking.

Another trader pointed out that the summer holidays in the Northern Hemisphere (normally in June, July and August) will also mean lower construction activity and lower demand. This is sure to put more downward pressure on the steel.

Russia: War, Sanctions and the Ruble

Uncertainty over whether Russia will be able to cut gas supplies to the EU due to European Commission sanctions has created volatility in these hydrocarbon prices. Steelmakers can rely on natural gas for iron production in blast furnaces as well as for steel production in electric arc furnaces.

In 2021, the European Union imported 155 billion cubic meters of natural gas from Russia. This accounted for about 45% of total imports and about 40% of total gas consumption.

Another possible contributing factor to the continued volatility is the possibility of buyers refusal to pay for Russian gas in rubles. In late March, Russian President Vladimir Putin issued an order demanding that “enemy countries” pay their gas supplies in their own currency by opening an account at Gazprombank. Indeed, Russia has already cut off gas supplies to Poland and Bulgaria after they refused to comply with the demand. This immediately raised concerns about what could happen if other countries did the same.

Related: Poland Says Norway Should Share ‘Giant’ Oil and Gas Profits

The European Commission, the executive body of the European Union, has since softened its stance towards buyers of Russian gas opening accounts at Gazprombank. They even said that buyers can make their payments in dollars or euros. But the organization said nothing about operators opening a second account for ruble-based payments, which many reportedly did.

The comparative price of the Dutch TTF for the hydrocarbon commodity was €95.50 ($100) per megawatt hour on May 17, up 2.84% from €92.86 ($97.93) for the day. The price hit a high of €227.20 ($239.68) in March.

Steel Prices and Gas Still Intertwined

On April 29, the European Statistical Office reported that the monthly inflation outlook for the 19 states that adopted the euro was 7.5% year-on-year. The agency also noted that energy is most likely to have the highest annual rate in this outlook, at 38%.

Of course, the EU has been trying to reduce the country’s dependence on Russian oil and gas since its invasion of Ukraine in February. So far, its efforts include increasing renewable energy products, reducing energy consumption and diversifying sources.

However, many industry observers find it difficult to believe that Europe can achieve this goal. “How will Europe give up on Russian gas?” asked one analyst. “I don’t see how they’re going to get out of this.”

A second source noted that it would be possible to reduce dependency on Russian gas by sourcing it from North Africa. Of course, this will require the construction of new infrastructure such as pipelines and terminals. He also said that while other countries are trying to diversify their gas supply, other countries such as Germany have not. “It was comfortable for the Germans,” he said of the country’s gas transmission infrastructure.

An option for some steel mills may be to use gas produced from coke ovens to assist in firing the blast furnaces. However, results will be inconsistent as not every steel plant is so equipped.

by AG Metal Miner

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