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Ukrainian steelmakers suffer as natural gas prices boom, but Russian metals companies unscathed

Highlights

Ukraine company says natural gas a bigger factor now than scrap

Electricity costs much lower for companies in Russia

Russian natural gas prices closely regulated

Ukrainian metal companies have started to feel the effects of rising natural gas prices on their production costs, but their Russian peers are relatively shielded because of state regulation of the natural gas market and because of the sheer number of gas providers, according to several industry sources.

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European and Turkish steel mills have raised concerns this month over elevated electricity and gas costs, with Spanish and Italian power prices at all-time highs. The rising costs have now become an issue in Ukraine, too.

A spokeswoman for Ukrainian steel pipe producer Interpipe told S&P Global Platts that steel scrap has traditionally been the main cost item in the company's production value, but recently, natural gas has started to have a bigger effect than high scrap prices. Interpipe uses natural gas mainly in rotary furnaces and heat-treating lines.

Gas prices in Ukraine began to climb in April this year, and in August and September they soared to record levels, she said, adding that the increase was affecting all its products, forcing the company to pass those costs on to consumers.

In 2012-13, Interpipe commissioned a 1.3 million mt/year electric arc furnace-based (EAF) steelmaking and billet casting complex at Inetrpipe Steel in Dnepropetrovsk, central Ukraine, which replaced outdated and energy-intensive open-hearth production, decreasing the company's gas consumption by over 80%.

A source close to ArcelorMittal Kryviy Rih also confirmed that gas prices were becoming an issue for the steelmaker but ruled out production stoppages.

Russian companies' advantage

Russian mining and metals companies feel more or less immune to the natural gas price upswing sweeping across Europe and other natural gas import-dependent regions.

In Q2 2021, spending on energy accounted for 6% of Severstal's cost of steel sales and for 7.6% in MMK's. This is about half the 10%-20% share electricity has in production costs at European mills.

"Energy cost price inflation owed to record high natural gas prices is more or less a local problem," said Moscow-based Sergey Nedelin, an analyst at Metals and Mining Intelligence. "We are seeing it flare most in the EU space as a result of certain changes owed to the Union's environmental agenda."

Natural gas' share in Europe

Metals companies do not consume a lot of natural gas, but they are very power-intensive, and an increasing share of electric power in Europe is now gas-fired, he said. Nedelin added that the share of thermal coal in the EU's electricity generation dropped to 15% last year from 25% in 2015, while natural gas rose to 20%, up from 15%, over the same period.

Combined with the shift away from thermal coal for climate reasons and the low number of gas suppliers, the rising use of natural gas is feeding European gas and electricity price increases.

Once linked to oil, bulk natural gas prices in Europe are now tied to spot gas prices, and their current elevated levels are supported by solid demand in Asia, according to Anton Shamayeu of Russian billet, bar and wire rod producer Abinsk Electrometallurgical Plant. AEMZ is a large consumer of electricity, being a1.5 million mt/year electric arc furnace-based (EAF) steel producer, which also owns the 1.2 million mt/year Balakovo EAF mill.

Russia's regulated prices

Russia's energy mix has not seen a major shift away from coal. Also, compared with the EU, where the Third Energy Package stipulates gas and electricity to be a free market, the country regulates gas prices more closely. Russian industries, including the mining and metal sector, are more or less protected from energy prices going out of hand. Gazprom simply cannot hike gas price for individuals and industries, as gas tariffs are approved by the state and are fixed for a year ahead, according to Nedelin.

There are many natural gas fields around the country, and quite a few oil companies produce gas as a byproduct. The sheer number of gas suppliers make it quite a competitive market, Shamayeu said.

"In Norilsk -- the home to our major production sites -- we have captive gas and electricity sources," Nornickel's spokeswoman said. "We have own gas fields there and own hydropower station."