Metal Movers: How the Iran Conflict is Impacting Steel Markets

[Music] Hello everyone and welcome to our Metal Movers Podcast. My name is Laura Stianova and I'm editor for Steel and Ferris Products at Argus Media. Today's episode of the podcast is going to focus on the conflict in the Middle East and its impact on the steel market. And I'm joined by my colleagues who are closely following the fallout from the conflict. Our senior reporters Carlos de Cass and LF A U-Buglou and our associate editor Brendan Kilberg Motten. It has now been over one month since the conflict started and we've seen a number of disruptions across markets and commodities. And naturally oil and gas markets have experienced a lot of turmoil in March which has a ripple effect on other products including steel. From the closure of the straight of hermos through higher energy prices, higher freight rates, insurance premiums, the steel market has been directly and indirectly impacted by the conflict. And most notably last Friday we also saw strikes on Iranian steel plants. And threats of retaliation by Iran to target steel producers in the Gulf which of course intensified the direct impact of the war on the steel market. Now LF let's start with you. Can you walk us through the timeline of the conflict and what have been the direct on the ground implications of the war in Iran and in the Gulf on regional production? Hi Laura, thank you for having me in this episode. So right after the conflict began at the end of February, the effective closure of the straight of hermos very quickly turned into a feed slow crisis for GCC meals. The closure immediately caught off inflow of metallic semi-finished and finished steel along with iron ore and HBR imports. On the long side, billets availability, tight and almost immediately, on route cargos couldn't reach the Gulf and that fed straight into cancelled orders and production cuts. We heard some rebar producers in Gulfs keeping April shipments entirely because they could not secure billet for rebar output. And market participants estimate April rebar allocations were caught by around 30 to 35 percent and some rewrellers opted not to sell April at all. And for a flash, this situation is even more acute because the Gulf region relies heavily on halt-rolled coil imports. Asian flash steel cargos heading to the Gulf for stuck at Indian ports literally anchored offshore waiting for clarity on safe passage. And that forced one major UAE re roller to shut this galvanizing line because all of his HRC feedstock was imported and none of it could enter through hermos. And many producers across the region have now announced output cuts, but one of the most significant disruption came from Bahrain, where the full-obs group of which owns Bahrain steel and salt declared a force measure. And Bahrain steel supplies around 12 million tons per year of iron ore pellets, which are essential for the RIN and EIF operations across Bahrain and Saudi Arabia, and salt produces medium and heavy beams and other structural sections that are crucial for construction industry. And meantime in Iran, two major steel sites were head, whose eston steel suffered damage to storage silos while Mubarakis steel, which produced more than 7.5 million tons of slab in the latest Iranian year, sustained hits to substations, allyl lines, and parts of his DRI and power units. Full-obs, he had been stuck earlier, resulting in casualties and a full operational halt. And I heard last night that Mubarakis hit again, which only depends on certain Iranians' slab availability going into April. Okay, so the impact is on steel, on iron ore pellet. So yeah, it extends across the whole ferrous chain. And as you mentioned, the Gulf area is a large steel producing hub, and yeah, Iran is especially important for semi-finished steel. Can you give us an estimate of the amount of steel exports that are impacted per month from Iran and also from the other GCC countries? In its typical year, Iran exports just over half a million tons of billet and slab per month, and that's based on world's steel's 2020 equivalent. Iran's total steel exports are around 10.5 million tons a year, and semi-finished products make up the core of its seaborn trade. If you look at individual producers, Mubarakis steel produced about 7.5 million tons of slab in Iranian year that ended on 29th of March last year, and it exported roughly 1.2 million tons, around 100,000 tons a month, whose the stone steel produced close to 3.8 million tons of billets, blue and slab this year, and exported about 1.4 million tons, which also works out to a little over 100,000 tons a month. And Hormuz Gun Steel accounts for almost 40% of slab sales on the Iran-American Tile Exchange is another major supplier into exports markets. All of that has now come to an halt. The Hormuz Closure Stop Shipping, but in the past week production itself has been disrupted as well. Whose eston storage silos were hit, Mubarakis sustained damage to substations, yellow lines, and parts of its DRI and power unit, and allegedly it was hit again last night. And Fulaud at the end remains short following an earliest strike in casualties, and on top of that, the attacks on the salt parts gas field have triggered rolling power and gas shortages across Iran, so even meals that were not directly hit are facing massive production constraints. And according to an encore from the reports we have received last night, traders are expecting temporary export curves starting from the 4th of April for traders, and from 14th of April for meals, which means even material still technically available, it cannot leave the country. So effectively, the market has lost the entire Iranian semi-finished export flow, roughly half a million to 600,000 tons a month of billets and slap. Yeah, very impactful in terms of semi-finished volumes. Undoubtedly, the most impacted steel trade flow. On slap, let's focus on that, Carlo. What impacts have we already seen from the reduced supply from Iran, and how are you seeing other slap suppliers react? Yeah, so thank you for the question. First of all, I think it's important to understand where Iranian slap was going before the outbreak of the war. Iran was exporting about 150,000 tons to 200,000 tons per month of slap earlier this year before the war broke out, and 70% was going to the Southeast Asia. These numbers were already on the low side, as we know, and civil unrest this past December, and the previous 12-12-day war with Israel had already played a role in reducing slap exports from the country. Despite the 150,000 to 200,000 tons not being a significant volume, Iran's absence is undoubtedly weighing on the slap market, and what I have observed is that it's reshaping trade flows, which is further exposing the mismatch between global slap demand and supply. An example of this is suppliers in Southeast Asia, and they have had to adapt to Iran's absence by redirecting more volumes to their own domestic market, and this has created a domino effect of sorts, which has put international buyers, and we can cite Europeans in this case under significant pressure. And by the way, even before the war in the Middle East, the slap market was already quite tight, with Seaborn demand clearly outweighing supply, and we have some mills asking for July, August shipments, operating with extended lead times, with absolutely no rush to sell. So the war exacerbated already existing problems and and shifted trade flows leading to price increases on on on slap. I think we can also speak about energy costs and freight rates, which have already been mentioned, on energy we know very well that Asian steel mills rely on gas and energy, which comes from the Gulf states. So they too have suffered the cost crunch. Freight, well, with insurance premiums, rocketing, this is forever boosted offers on a CFR basis. For example, Tianjin to Genoa, Freight went from about $40 to nearly $80 after the outbreak of the war. So all of these factors have led to Seaborn slap market to rise so much so that in some cases, HRC is cheaper than slab. Imagine that. So our HRC FOB Tianjin Assessment today settled at around $485 FOB, while the last Chinese slab offers I've heard from the market were between 500 to 510 FOB. Thanks and yeah, we've seen not just China, but Indonesia and other significant slab suppliers increase offers to try to capitalize on the lack of Iranian supply. But how how have these increased slab prices and other costs related to the war filtered into the finished lots prices. Yeah, so higher slab prices are putting re-rollers in difficulty and are eating into their margins. Interestingly, I have heard that on heavy plates, on the plate side in Europe, some re-rollers are looking to extend their maintenance this summer due to rising production costs and shortages of slab. To add to that, Europeans are also facing a squeeze in supply from Russia due to high quota utilization. It is expected that Russian suppliers will skip some shipment months to the EU this summer. On top of this, the future of Russian slab supply remains uncertain as the EU is currently discussing a melt-in-pore clause which would outlaw substrate from Russian Belarus. But anyways, that's a topic for another time. Higher slab prices have translated into higher flat prices. Let's use the X-works heavy plate assessment in Italy as an example, which is up by 40 euros since the start of the conflict or our northwest plates assessment, which has increased by 50 years since the start of the war. This has completely stalled the man on the heavy plates side after a small period of panic purchasing. Consumers understand the position of suppliers but have clearly been spooked by the substantial price increase that we have seen. We see a similar phenomenon in Turkey on the H.R.C. side. I will just close by adding that a lack of viable imports, to risks associated with the conflict in the Middle East has also helped support finished prices. This is both valid for heavy plates in Europe and H.R.C. in Turkey. With the caveat though, that in Europe you also have to consider CBAM and end up coming safeguards which are stifling import trade. You touched upon buyers being spooked by increasing prices and that's a very important thing to note that while the conflict has a direct impact on supply, indirectly the increase in prices as we've seen during COVID, as we've seen with the war in Ukraine, can also have an adverse effect on demand. It's an important thing to keep in mind and track. But undoubtedly, the impact on the flat market is already quite pronounced. What about on long-site brand? I mean, Iranian billet is a very important feedstock for re-rollers globally and which regions have been hit the hardest by this lack of billet and what suppliers are benefiting from increased billet demand? Yeah, so as we've already mentioned Iran is a major steel producing country, major exporter of semi-finished steel around maybe the fourth or fifth largest in the world. Major destinations for Iranian billet are countries in the Gulf such as Iran and Kuwait as well as Turkey, Indonesia and immediately after the war broke out, Chinese suppliers took advantage of the absence of Iranian supply and sold replacement cargoes to Southeast Asia. We saw prices go up pretty quick. The August CFR, ACN Billet Assessment is up by $25 since the outbreak of the war at 4.18 now. Freight rates for steel for billet have increased at least $10 to $15, but on most routes that doesn't include the hefty insurance premiums that we've seen for shipments into the Gulf recently. So, yeah, the high freight rates along with the absence of Iranian supply is pushing up CFR prices. While, of course, globally, the strain on energy supply is pushing up prices for everything and certainly for steel. Turkey buys Iranian billet, particularly mills in the country's south, but they also rely heavily on Asian billet as a means of offsetting the cost of their major feedstock, which is scrap. And so, with freight rates jumping right after the war broke out, this paused trade for a while. This, of course, pushed scrap prices higher as mills scrambled for feedstock. So, our CFR Turkey assessment for scrap is at just under $400 per tonne, $397.50 as of yesterday, having stood at around $375 for the whole of January and February. So, there's a real jumping costs. This has obviously been reflected in the finished products market as I'll touch on in a bit. But buyers returned for Asian billet last week, Turkish buyers, as well as GCC buyers. Chinese and Indian, Indonesian cargoes were sold to Turkey and to Iran, and most notably to the AE, which of course, when they've all trans-set via the Strait of Horners, and it seems that some buyers there might be taking a bet on the war being over or on at least being able to take material into the Gulf. So, since on billet, the Chinese has been able to capitalise on the lack of Iranian supply, and you also touched upon electricity and gas costs. So let's talk about those producers that are not necessarily getting crushed by the actual lack of Iranian steel supply, but instead by energy costs and I guess specifically the EIFs. How are they reacting to the increase in energy prices? Yes, well, in particular in the EU, where access to Russian gas supply is restricted, fuel and energy prices have gone up very sharply. And this of course has a very strong effect, as you say, on the long steel market, which is mostly supplied by electric arc furnaces. Argus's TTF Front Month Index has been above 50 euros since the war started, at one point peaking above 60 euros, having hovered just above 30 in February. Mills have of course reacted by raising prices. Our weekly, Italy rebar assessment is up almost 70 euros at 6.30X works and is likely to have gained another 10 this week. The German market we assessed monthly, but traded prices are by roughly 40 euros. Trade is all very short. Mills are not willing to allocate too much to the market because it is likely that energy costs will be higher over the coming weeks. So they're not willing to sell more than or much more than two weeks ahead. Buyers also on the other side aren't willing to take too much material at these higher prices, as there's a certain possibility that the war could end in the near future. Messaging from the White Houses, I've seen very unclear on that. Gas and oil prices have been very quick to respond when there's a hint that the war might end sooner. They fall a bit. Buyers don't want to commit to much at higher levels. Yeah, I mean, to recap what we're seeing in the steel market is a mix of shorter and longer term impacts with, as you mentioned, Brendan, energy prices, but also freight costs, logistics, transit issues likely to ease very quickly once or when the war ends. I mean, we've seen today Trump saying that it will be another two to three weeks, but who knows if that's going to be the reality. But what's particularly more impactful longer term is of course the strikes last week on the plants in Iran, and these could create a potentially longer term and structural issue for supply, depending on the actual severity and of course the further escalation of the conflict. I think this is all we will have time for today, but thank you very much to our listeners and to our guests. And if you would like to read our content in full, it's available under the Argus Global Steel Report. So contact us for subscriptions and we look forward to seeing you in our next podcast episode.