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British Steel 'can't absorb' high energy costs; UK says supply not an issue

Highlights

UK steel mills seen at cost disadvantage to German mills

UK production 'uneconomic' at peak times

UK steelmaker British Steel said Sept. 21 the "huge extra costs" of the UK's current spiraling energy bills "can't simply be absorbed" and are putting the UK steel industry at an increasing disadvantage compared to some of its European counterparts.

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The steelmaker was not saying that it needed to raise its product prices as a result, it clarified.

British Steel, owned by China's Jingye Group, is maintaining production at normal levels of around 3 million mt/year in the UK and Europe but "these colossal, unprecedented rises make it impossible to profitably make steel at certain times of the day. With winter approaching, when demand will rise, prices could get significantly worse," it said in an email to S&P Global Platts.

In April power prices "were trading at GBP 50/MWh ($68.30/MWh) but we're now being quoted prices of up to GBP 2,500/MWh... representing one of the biggest challenges to the business... these can't simply be absorbed or ignored," British Steel said.

Gas and power wholesale prices have risen strongly across Europe this summer due to low storage stocks, competition with Asia for LNG cargoes, and Russian supply concerns.

The UK has come under particular pressure due to its high dependence on gas for power generation as well as for domestic heat and cooking. The UK's day-ahead gas price was assessed by Platts Sept. 17 at GBP 66.00/MWh ($90.23/MWh), up 83% since Aug. 1.

Urging new measures

British Steel and UK Steel, a trade body that groups together the nation's steelmakers, are urging government to address the competitiveness gap between UK and European steelmakers. "The UK government and [energy regulator] Ofgem must act now to help create a level playing field," British Steel said.

Sources close to Liberty Steel Group indicated Liberty's operations in the UK have not been so heavily impacted by high energy prices because these operations have been "intermittent for some time" following the collapse of their main financier, Greensill Capital, in March.

Tata Steel Europe declined to comment.

UK business secretary Kwasi Kwarteng has made it clear "we are monitoring this situation extremely closely and are confident that security of supply is not a cause for concern for the [steel] industry," the UK Department of Business and Industrial Strategy said in a Sept. 21 email to Platts.

"We are determined to secure a competitive future for the UK steel industry and in recent years have provided it with extensive support, including over GBP 600 million to help with the costs of energy and to protect jobs," the department's statement said.

The UK produces some 7 million mt of crude steel a year, around 70% of the country's annual requirement.

UK Steel director general Gareth Stace noted that "even in a global market where steel prices are strong, it is now uneconomical to make steel at certain times in the UK."

UK steel prices jumped to multi-year highs in late June as demand recovered swiftly from a COVID-19-related slump in 2020, before falling back slightly. Hot-rolled coil DDP West Midlands import prices stood at GBP 905/mt Sept. 17, up 88.5% on year.

Electricity costs can represent up to 20% of the costs of converting basic raw materials into steel.

"For the most electro-intensive producers, power can even represent a greater proportion of operating costs than labor," UK Steel said in an emailed statement, urging the government to implement German/French style network cost reductions; increase the level of renewable levy exemptions; provide 100% compensation for the Carbon Price Support's indirect costs; and link the market price of carbon allowances in the UK's Emissions Trading Scheme (ETS) to that of the European Union's ETS and compensation for indirect costs.

For an electric arc furnace steel producer, power prices at GBP 200/MWh will add around GBP 100 to the costs of producing one metric ton of steel, around 10% of current steel prices, according to UK Steel. "Such high costs wipe out margins [and] producing steel during the peak hours when prices are over GBP 1,500/MWh would double the cost of steel, making it uneconomical to continue producing," it said.

"Indicative analysis suggests that the disparity in electricity prices faced by German and UK steel companies have doubled over the past eight months.... UK steel producers face prices over GBP 35/MWh higher than their German competitors."

Salzgitter

German steelmaker Salzgitter indicated the high energy prices are well controlled at the company.

"The sites in Salzgitter and Mulheim are 100% self-sufficient by gas capture generation. For other parts of the group we are securing partial quantities several years in advance so that price increases come in with a time lag though they can become a disadvantage in terms of international competitiveness," the company said in a statement sent to Platts. "At our most power intensive site in Peine where we melt scrap via EAF, current drain and power price peak – that is coupled with the spot and intraday market – are automatically regulated via load control so that effects are limited."