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War returns to Europe. How will it affect the regional market of metallurgical raw materials?

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MEPS analysts assessed the consequences for the European raw materials market and energy costs from Russia's invasion of Ukraine.

War returns to Europe. How will it affect the regional market of metallurgical raw materials?

Steel semi-finished product

Slab

Russia and Ukraine are major exporters of steel slabs, and they are the main raw material for a number of plate manufacturers in Western Europe. The Russian steelmaker supplies its Belgian and Danish subsidiaries, while the Ukrainian plant supplies the needs of its British subsidiary.

Italy, the region's largest importer of steel plates, purchases about 2.5 million tons of material per year. Three-quarters of this volume comes from Ukraine and almost a fifth from Russia. In addition, Germany annually imports about 500,000 tons from Russia.

Given Europe's high dependence on Black Sea slabs, it is not surprising that hot-rolled plate became the finished steel product most affected by the start of the war. Slab prices have risen by more than 50 percent in recent weeks.

Steel semi-finished products are not subject to the European Commission's embargo on imports from Russia. However, paying for raw materials from the country is impractical due to sanctions prohibiting Russian banks from using SWIFT, the global financial messaging system.

World supplies of slabs were already in short supply before the start of the military attack on Ukraine. Prices have been rising steadily since the beginning of this year. The upward momentum is expected to continue as more buyers compete to buy materials from fewer suppliers.

Brazil is the main alternative to Russian and Ukrainian factories, but manufacturers in the South American country are largely committed to their customers in the United States. Other overseas sources of slabs include Indonesia, India, Saudi Arabia, Iran and Turkey. However, any additional volumes available from suppliers in these countries will most likely not be sufficient to meet the requirements of European re-rollers.

Preparation

Besides the slab, billet is the main product imported from Russia and Ukraine. Reduced availability will negatively affect Italian re-rollers who receive material from the first country and those in Bulgaria who purchase material from the second country.

Raw materials for steelmaking

The Russian-Ukrainian war directly and indirectly affected the supply and prices of various metallurgical raw materials.

Black scrap and cast iron

The value of Turkish imported scrap has increased by about $150 per tonne (plus 30%) since the start of the conflict on February 24th. Steel producers in Turkey have registered an increase in orders from both local and foreign customers, in the absence of plants in the CIS. This, combined with a reduction in the supply of imported steel semi-finished products, has led to an increase in demand for ferrous scrap.

Despite the onset of spring, collection rates for old material in Europe are declining due to high transport costs and other logistical problems. Meanwhile, the limited output of automobiles and manufacturing companies limits the production of basic scrap.

In addition, the lack of pig iron from the CIS increases the demand for new grades of material. An increase in the amount of basic scrap can be used in furnaces to compensate for the decrease in the availability of pig iron.

As with steel slabs, Brazil is the main alternative source of pig iron supply, but the country's shipments are mainly directed to the United States.

Iron ore and coal

As for other raw materials, European mills previously imported iron ore pellets and PCI coal from the CIS countries.

Recent increases in iron ore prices have been significantly less pronounced than those of most other commodities. Global deliveries meet existing requirements. In China, government announcements to crack down on speculation, rising Covid cases and a weak housing sector have capped demand. However, iron ore prices may receive support from China's spring pickup in steel production, expectations of increased Chinese stimulus measures, and global scrap shortages.

The availability of metallurgical coal is low, exacerbated by flooding in Australia. Buyers in Europe may try to switch their purchases to suppliers in America, albeit at a premium. Consequently, coal prices are expected to be maintained at record highs in the short term.

Energy

Energy prices were rising even before the start of the war. They are likely to remain volatile, but will rise in 2022 amid the aftermath of the military conflict. This will have an inflationary effect on the production costs of European steelmakers.

Oil

In 2021, Brent crude oil prices averaged around $70 per barrel. In January and February of this year, prices rose steadily, and in the first week of March they rose to almost $130 per barrel due to an expected shortage of supply in Western

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