Tuesday, December 06, 2022

Insight – UK steel makers scorched by hot electricity prices

Steel boss James Brand has raised his voice over the metal roaring in the foundry furnace as he described how the hefty cost has prompted him to raise his prices by up to 70%.

Yet he says that despite this huge growth, his customers in sectors including oil and gas, auto and construction are placing new orders at a record-breaking gallop. Their order book has increased from the usual 4-6 weeks to 6 months.

Those customers anticipate further increases in prices at a time when the cost of pig iron and scrap metal is going through the roof, Ukraine has been fueled by the war, and the vast amounts of energy needed to melt the two inputs into cast iron. Has never been more expensive.

Amidst the heat, dust and hustle and bustle of the United Cast Bar (UCB) factory, the brand said, “With raw materials and costs rising, customers are thinking, ‘If I don’t buy now, in two months it will be even more expensive’ ” In a part of northern England that once fueled the Industrial Revolution.

“People are placing further orders to try and fix more and more costs.”

Once struggling to raise prices, UCB is now reviewing them every month and gradually flagging them, adding additional costs that will seep into global production lines, further driving inflation and a consumer cost- life crisis.

Yet the brand said that despite the price hike, the pressure on the business still remained. Without giving full financial details, he said UCB’s gross margin declined by around 6%.

Similar problems are being felt by steelmakers and other industrial companies across Europe. They are caused by a sharp jump in electricity prices, supply shortfalls, as well as the ongoing COVID disruption and Russia’s invasion of Ukraine – two countries that are both major producers of pig iron.

However, the situation in the UK is particularly dire. The steel industry there faces electricity prices that are higher than those faced by peers in Germany and France due to environmental policies in Germany and France, reliance on gas, as well as electricity transmission and carbon permit costs in Europe. 50-60% more than the prices.

This has spelled trouble for companies like UCB, which consumes power for its two 8-ton electric-induction furnaces to melt scrap and pig iron that reaches more than 1,400 degrees Celsius, causing Before that the molten metal is poured into a receiver to be poured into the desired one. Shaped and cooled, ready to go within Europe, America, Australia, New Zealand or the UK.

Every year that process requires 24 gigawatt hours of electricity and up to 22 gigawatt hours of gas, making the company among the intensive power users in the country.

Typically, UCB’s energy bill would be around £250,000 ($326,000) a month, Brand said. It hit 450,000 pounds in March.

From the site in Chesterfield, a town in the orbit of the northern English city of Sheffield, historically famous for its steel, Brand, the fourth generation of his family to work in the metals and steel industry, said, “That’s a heavy bill. ”

“It’s even worse this time.”

When will the customer pay?

The scale of the surge in electricity prices facing UK manufacturers, which produces about a tenth of economic output, is being compounded by rising raw material costs.

Such costs increased by more than 19% in the 12 months to March, the biggest annual increase on record since records began in 1997 and far higher than the long-term average of about 2%.

Steve Elliott, head of Britain’s Chemical Industries Association, another energy-intensive sector trade group, said his companies had to closely manage demand for electricity and gas.

As a fundamental sector that produces essential commodities for many other sectors, chemical, glass and steel producers are able to cope with the likes as long as they can pass on price hikes to customers, he said. said.

“It’s just that businesses are becoming less able to do this. As each month goes by, demand softens as the cost of living drops sharply.”

This was echoed by the brand, who said their pig iron bill had dropped from 400 euros ($435) a tonne in 2020 to 650 euros at the end of 2021. Now they are being quoted 1,000 euros or more.

They worry that eventually their prices will drop to a point where customers can no longer afford them, leading to a drop in demand and – in the rollercoaster ride for businesses that a pandemic and war has created – a new bottom. Spiral towards.

When asked if it can continue operating in the current environment, the brand says it can, as long as customers continue to accept the increase. “It gets tighter and the margin shrinks (but) we’re still alive,” he said.

The ability of UK companies to actually pass on their rising costs to customers is something policymakers are watching closely as they try to gauge how persistent the recent jump in consumer price inflation might be.

Shortages of workers, cargo ships and resources have decimated the global economy, driving up the cost of everything from food and furniture to fuel and flights.

“It will be really important to see if demand slows down. The Bank of England is very focused on that,” said Morgan Stanley economist Bruna Scarica.

“For BoE to feel comfortable that inflation will fall to 2%, they need to reduce pricing power and this will happen when demand slows down.”

‘Businesses will fail’

Across Europe, rising costs have forced energy-intensive businesses to either cut or shut down production depending on the cost of electricity at the time, sometimes from hour to hour.

Even ArcelorMittal, the world’s largest steel maker, has been operating its electric arc furnaces in various European sites in stop-start mode for months to avoid extreme power prices, giving its business a huge financial impact. There will be a blow.

Germany’s Thyssenkrupp has cut working hours for its 1,300 steel workers due to flagging demand from its biggest market, the auto sector, which has been battered by supply-chain disruptions and chip shortages.

Germany’s small steel maker Lech-Stahlwerke has also halted production at a plant in Bavaria. “In some cases, energy prices are 10 times higher than last year,” Thomas Friedrich, a member of the management of Lech-Stahlwerke, told Reuters TV.

Frank Askow, policy director on energy at trade body UK Steel, said some British steelmakers had temporarily halted production in response to rising prices, but declined to give details.

Brand said UCB had hedged 75% of its energy costs as of September, mitigating the risk of future price volatility, and had other hedges for the next two years.

But growth and instability hurt.

The British government has acknowledged that industrial firms in the country face higher energy costs than some of the continent’s peers. It said in a new energy strategy this month that it would extend compensation plans for intensive users for another three years, a move hailed by the industry as a move that will help bridge the disparity in electricity prices.

Analysts, industry sources and politicians said today’s British manufacturers have carved out an important position in global supply chains by providing high-value products, and should avoid short-term turmoil.

Darren Jones, the head of Britain’s parliamentary select committee on business and energy, welcomed the latest government intervention but told Reuters he was concerned about the long-term impact of such a harsh environment.

“The energy crisis we face next year means businesses will fail and jobs will be lost, plus production will be hit, if we don’t see more support,” he said.

($1 = 0.7660 pounds; $1 = 0.9217 euros) (Additional reporting by Susannah Twidel; Editing by Pravin Char)

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