Lower European iron and steel output hits demand for pellets, raw materials

Weaker iron and steel production in the EU have led to reduced demand for raw materials in the fourth quarter of 2022 and early 2023, particularly for high-grade iron ore and pellets, while coking coal demand was supported by strong energy prices through 2022 and trade restrictions on Russian coal, according to an analysis by S&P Global Commodity Insights Jan. 9.

A contraction in hot metal, or pig iron, production rates at major integrated steel works in the EU, the UK, the Balkans and Turkey has cut into demand for iron ore pellets and pulverized coal injection, or PCI, rates, according to market sources.

Merchant met coke demand has weakened as inventories of blast furnace coke increased, industry sources said.

An EU trade ban on Russian PCI and other coals effective in August 2022 and earlier restrictions led to stronger demand for alternative coals for PCI use. The ban may support coke rates early this year as the volumes and qualities of Russian PCI and anthracite are hard to replace from other origins. Higher thermal coal and energy prices in 2022 raisedcoking coal prices and took away some of the met coal supply.

Several blast furnace units in Europe have been idled since September 2022, which cut demand for raw materials. Buyers also found it difficult to justify paying up for pellets to maximize iron production amid lower demand for steel and weaker steel margins. Pellets took the brunt of weaker iron ore demand in some cases, while buyers said they switched to using more lump and sinter in the burden, and some even took on lower quality pellets at prices and terms enabling trade.

Pellet premiums have fallen for Q1 based on early settlements, with the Platts Atlantic blast furnace pellet premium assessed at $46/dry mt for January, down from $61/dmt in December 2022. Weaker lump premiums and a confluence of emissions and productivity targets have pushed buyers to demand lower premiums to take on preferred pellet grades in cargoes for Q4 2022 and Q1.

A buyer said weaker EU steel output and demand would push pricing discussions much more in favor of pellet customers. If any steel user drops the use of even a small volume of pellets for production-related or other reasons, suppliers will bid against each other which may quickly push prices down to secure sales, the buyer added.

By November 2022, daily EU pig iron rates had fallen sharply from higher levels earlier in the year and in 2021, according to the latest World Steel Association data. The Brussels-based industry group is expected to report December and full-year 2022 pig iron and crude steel data in late January. The EU's pig iron production in 2022 may end up declining by close to 8 million mt from 2021.

The EU's pig iron productionrebounded marginally to average 169,203 mt/day in November, from 167,118 mt/day in October and just below 202,000 mt/day in June, according to calculations by S&P Global.

The lower regional production in the EU contrasted with talk in markets of potentially more severe contractions in output in Q4 2022 and potentially beyond, when factoring in outright capacities of various blast furnaces idled through the EU.

Eurofer said in October 2022 that the steel market outlook had worsened both for H2 2022 and 2023, with steel demand receding more strongly than earlier expected, falling by 3.5% for 2022 and 1.9% in 2023.

Plants idled and put into maintenance now include ArcelorMittal, US Steel and SSAB furnaces in France, Spain, Slovakia and Finland. Some groups may have boosted utilization or seen support to improve operating rates at some sites, while pig iron rates were already trending weaker before the spate of temporary shutdowns in H2 2022.

Tata Steel Europe

Tata Steel's operations in the Netherlands and the UK showed relatively resilient output over this period, producing 2.25 million mt of crude steel over October-December, down from 2.4 million mt over July-September, the group said in a Jan. 6 note.

Steel producers with onsite coke ovens have been encouraged to keep units active during the downturn in steel demand considering the value of the coke byproducts for internal and external sales and the costs of energy supplied to the site. The high cost of using natural gas to keep idled coke ovens warm to prevent damage and to substitute coke oven gas meant that coal use would be prioritized. Coal miners and suppliers of grades such as high-volatile coals rich in gas have seen stable demand into new 2023 contracts.

Polish coal miner and merchant coke producer JSW SA said EU steel production declines were a challenge for coke demand, and with high gas prices steel mills were expected to run captive coking plants at full capacity, leading to an excess and surplus of coke in Europe, in comments to investors Nov. 29, 2022.

Crude steel production through integrated blast furnace works, including electric arc furnaces in the EU, was stronger in the first-half of 2022 compared with trends for pig iron, according to Worldsteel data.

Weaker EAF rates were seen over some periods amid higher energy costs and good availability, while ArcelorMittal suspended the region's only commercial direct reduction iron (DRI) plant in the middle of 2022 due to high gas prices.

Interest in maximizing ferrous scrap for steel production led some producers to use more scrap in processes, including substituting a portion of iron ore in the blast furnace. This allowed emissions savings to be passed onto carbon-accounted flat steel products. Companies such as ThyssenKrupp, Tata Steel, Voestalpine and Kobe Steel are offering dedicated ranges of carbon-accounted certified steel by adapting raw materials and reducing the proportion of iron ore, pig iron and coal-based fuels in use.