Day: 7 October 2023

Germany is the largest economy in the EU, accounting for 25% of the trading bloc’s gross domestic product (GDP), and the fourth largest economy in the world by GDP – but in 2023 its economy has begun to contract.

“Germany’s most prominent [business] indicator, the Ifo index, dropped for the fifth month in a row [in September because] the August number was revised upwards. The Ifo index came in at 85.7, from 85.8 in August – one of the weakest Ifo index readings of the past five years,” ING global’s head of macro Carsten Brzeski told Fastmarkets.

Germany’s manufacturing purchasing managers index (PMI) was 39.1 in August, its second lowest reading since May 2020, with factory orders down the most, falling 11.7% from June to July, exceeding market expectations of a 4% drop.

Industrial production in July was down by 2.1% year on year and more than 7% below the pre-pandemic level.

“Germany is looking like the sick man of Europe,” a German trader said.

And because of its dominance in the trading bloc, a contracting German economy also threatens to affect other EU economies.

“The Italian zinc, lead and aluminium market is not good,” a trader based in Italy said. “We’re doing better than Germany or Poland, but a struggling Germany will drag us down too.”

One key problem is that high energy costs in Germany are stifling manufacturing activity.

“Ever since [Russia’s invasion of] Ukraine, we’ve been hit hard by high energy costs and I don’t see that situation being resolved soon,” a third trader said.

The situation has been exacerbated by the closure of Germany’s last operational nuclear plant. with the remaining reactors, Isar II, Emsland and Neckarwestheim II all shut down in 2023.

“We’re now having to buy nuclear energy from France, which makes no sense to me,” the third trader added.

Spot electricity prices in Germany have begun to rise now summer has ended, with the day-ahead auction price reaching a high of €379.59 per megawatt hour (MWh) on September 25 up from €127.89 per MWh on August 25.

Contracting construction, manufacturing demand
The European zinc premium has been in steady decline throughout 2023, falling by almost 40% amid contractions in the European steel galvanizing and zinc-alloy sectors, with Germany leading the way.

Galvanized steel, which accounts for up to 40% of total zinc consumption, has performed poorly across Europe, and particularly in Germany and Poland, due to the weakness in the construction sector.

“In Germany, our galvanizing sector has declined by 25-30% since the start of the year,” the German trader said.

Fastmarkets assessed the zinc special high grade minimum 99.995% ingot premium, duty paid fca Rotterdam at $280-320 per tonne on October 3, down from $500-530 per tonne since January 3.

The zinc alloys market, which had shown signs of resilience earlier in the year, is now also in decline.

“The alloys sector is not doing well right now. From my perspective, things have gotten worse now summer is over – nobody’s buying,” a zinc alloys producer source told Fastmarkets.

And the London Metal Exchange three-month zinc price closed at $2,493 per tonne at the end of trading on October 4, down 20% since the start of the year.

A zinc price of $2,500 per tonne has become a psychological price point, with zinc miners warning of further cuts to production if the three-month price remains at this level.

Germany’s largest zinc smelter, the Glencore facility at Nordenham, has been on care and maintenance since November 1, 2022 and while there was talk in June that production would resume this summer, market participants told Fastmarkets the smelter is currently only producing continuous galvanizing zinc alloys and is running at a reduced capacity.

At the time of the suspension, Glencore said operations at Nordenham would remain on care and maintenance “until the macro-economic environment improves.” Referring to the smelter, the a second German trader said: “I just can’t see it coming back online this year; it would only put downward pressure on the market.”

The poor performance of the construction sector and the weaker macroeconomic environment have also weighed on aluminium billet premiums in the region.

Fastmarkets assessed the aluminium 6063 extrusion billet premium, ddp North Germany (Ruhr region) at $420-460 per tonne on September 29, down 34% since the start of the year and down 55% compared with the end of September in 2022.

The HCOB Germany Construction PMI index reported its sharpest drop since early 2020 in September, crushing hopes of a recovery after a slight uptick in July.

Automotive industry hit
Demand for aluminium has also been affected by a major contraction of Germany’s automotive industry, which is a key consumer of the light metal.

According to the German Association of the Automotive Industry (VDA), automotive production in Germany dropped by 30.6% to 266,800 vehicles in August 2023 from 384,738 vehicles in June, after showing strength at the beginning of the year. with more than 438,500 vehicles produced in March.

On September 26, local media outlets in Germany reported that car manufacturer Volkswagen would be reducing the production of electric vehicles (EVs) at two German facilities until mid-October due to declining European demand and waning EV subsidies from the central government.

“Once a poster child and envy of its peers, [Germany] now faces the prospect that its economy may not be able to catch up with other European countries,” Fastmarkets analyst Andy Farida said.

“The lack of structural capital expenditure and investment means that Germany [may have] become complacent,” he added.

Weaker manufacturing output in Germany and across Europe has also weighed on the tin market.

Fastmarkets assessed the tin 99.9% ingot premium, in-whs Rotterdam at $750-850 per tonne on October 3, down from $900-1,1000 per tonne since January 10.

The market is stagnating due to an abundance of material on the exchange and weak demand, with the wide contango in the nearby spreads disincentivizing trade.

The LME cash/three-month tin spread was recently in a $305-per-tonne contango.

Some market participants said they were unwilling to sell tin at a premium below $900 per tonne.

“With the contango so wide, most traders are content to wait and hold any material they’ve got until premiums rise again,” a tin trader said.

But other market participants doubted that this would happen anytime soon.

“I don’t know what the [other traders think they] are waiting for,” a second tin trader said, “because there’s no demand for tin.”

European low-lead tin losing competitive edge
The low-lead tin market has been experiencing the same conditions seen in the tin ingot market. Producers of tin-plated steel, which is the main consumer of low-lead tin, have struggled throughout the year, due to poor demand and competition from overseas.

Fastmarkets assessed the tin 99.9% low lead ingot premium, in-whs Rotterdam at $750-850 per tonne on October 3, down from $1,200-1,300 per tonne on January 10.

All market participants now regard low-lead tin and tin ingot premiums to be at parity, whereas, historically, low-lead tin would normally attract a higher premium.

“There’s no market for low-lead tin at the moment,” a third tin trader said.

And a producer of tin-plated steel said: “We can’t compete with Asia and we’re losing business [because] our production costs are now much higher than our Asian competitors.”

Rising inflation rates across Europe have recently slowed down, with Germany’s consumer price inflation dropping to 4.5% year on year in September 2023, from the previous month’s 6.1% and slightly below market expectation of a 4.6% inflation rate.

“This the lowest level of inflation since the start of the war in Ukraine,” Brzeski said. “But market confidence continues to weaken and inflation is still nowhere near the level that would bring relief or comfort to the central bank.”

Published by: Carrie Bone, Josh Fulton, Laura Roberts

fastmarkets.com

Green steel demand driven by big end-users; lack of regulation slows transition
Buying for green steel in the spot market across Europe was rather low, with small and medium-sized distributors and steel service centers not willing to pay high premiums at the moment.

“For example, in Norway the awareness of green steel is quite high but the willingness to pay [for it] is really low,” Helge Runer, chief executive officer of Norsk Stal, said during the panel discussion at the event.

Sources pointed out that for steel service centers, steel products represent nearly 100% of cost, and paying any premium is a challenge, while for automotive the price of steel is relatively low, it’s “a fraction of their costs.”

Market participants agreed that major producers in the automotive and construction industries were ready to book green steel and pay premiums, focusing on the value of green steel rather than cost.

“Green steel is very clearly on the agenda of big automotive companies; it’s been adopted in their supply chain, but it’s a hell of a job,” a producer source said.

“Familiarizing supply chains with [low carbon emission] steel takes time,” Jaap Jan Aardenburg, distribution marketing manager and business consultant for Tata Steel in Europe, said.

Fastmarkets’ weekly assessment of the green steel domestic, flat-rolled, differential to HRC index, exw Northern Europe was unchanged at €100-250 ($105-264) per tonne on Thursday.

Despite quite a high level of premium, steelmakers who were able to supply fossil free or green steel to the market were reluctant to cut it.

“Steel prices will be trending higher due to CBAM [the Carbon Border Adjustment Mechanism] phasing in; Besides, European steelmakers invest billions of euros [in decarbonizing their operations] and need to see the return of those investments,” a distributor from Denmark said.

Additionally, green steel was expected to remain short in supply in the next several years, before all electric-arc furnace (EAF) capacities come online and while buying interest was expected to grow.

“Buyers will see the need to go green, via banks, which will prioritize financing deals using green steel, and via regulations obliging buyers to use green steel in projects,” a mill source in Europe said.

The lack of common standards and even the very definition for “green steel” were factors slowing the green steel uptake in the market, sources said.

“There is lack of awareness [of green steel] from buyers in some regions; sometimes we get ridiculous requests, it is clear they have no idea of what they need,” a mill source in the Nordics region said.

“We need a support from the European Commission — we don’t even have the right wording in place, and lack understanding among us [on what exactly the green steel is],” another market source said.

Some sources disagreed, pointing out that putting out strict regulations would jeopardize the market.

“Having an overregulated market was inefficient. Guidelines could be more relatable,” a mill in Europe said.

Will new capacities lead to oversupply in the European steel market?
Most European blast furnace-based steelmakers have been investing in green steel projects in the past years, cutting emissions to comply with strict EU regulations.

Under the European Green Deal, the European Commission proposed a new EU target to reduce greenhouse gas emissions by at least 55% by 2030, compared with the levels emitted in 1990. The target for 2050 is net zero emissions.

Some market sources were concerned that bringing new capacities would negatively affect the already-oversupplied steel market in Europe, but steelmakers had different view on it.

“Interest for fossil free steel will be bigger than supply, so in the short-term there definitely will be room for new capacities,” Jan Meier, managing director and sales director for SSAB Europe, said,

“We are heading towards a post-industrial society, with less steel needed in the upcoming years. [The steel] industry is clever enough not to create overcapacity,” Aardenburg said.

“Steel production in Europe would be no more than 120 million tonnes [per year] by 2030,” another source told Fastmarkets on the sidelines of the event.

In 2022, crude steel production across Europe amounted to 136.3 million tonnes, down from 152.6 million tonnes in the previous year. The decline was due to massive output cuts implemented by Europen mills in the third and fourth quarters of 2022, facing deteriorating demand and falling steel prices.

CBAM likely to stimulate buyers to book more EU-origin steel
The transitional phase of CBAM began on October 1, 2023, with the first CBAM declarations to be submitted to European Commission institutions by the end of January 2024.

Sources suggested that the complexity of CBAM, along with the high and unpredictable costs of carbon permits, would significantly limit the number of overseas steel buyers.

“That’s not even clear how many CBAM certificates exactly will be needed for each importer to covered the purchased goods,” a market source said.

“Smaller distributors, steel service centers simply wouldn’t be able to afford importing steel. So they will need to switch to the domestic suppliers entirely, and purchase import steel at big companies who are able to hedge risks,” a second trading source in Europe said.

Another source that spoke to Fastmarkets on the sidelines of the event expressed concerns that CBAM would lead to an “oligopoly for imports,” with only a few large market participants potentially able to provide all the necessary documentation and purchase CBAM certificates to cover emissions.

“It is very likely that smaller buyers would have no other option but to buy European steel,” the same source said. “European distributors need to rely on imports to diversify supply sources in order to secure an uninterrupted supply of steel products for their customers. Nobody should buy 100% [of steel] from imports and nobody should buy 100% domestic material.”

Published by: Julia Bolotova

fastmarkets.com

Fastmarkets explores the lingering concerns now that the transition period has begun.

CBAM declarations and certificates
The CBAM transitional period began on October 1. Buyers of imported goods will now have to submit CBAM declarations for the fourth quarter of 2023 by January 31, 2024.

The CBAM declaration should contain the following: total quantity of each type of goods imported in the previous calendar year, total embedded emissions associated with the imported goods, total number of CBAM certificates to be transferred for surrender and copies of verification reports issued by the accredited verifier.

CBAM certificates must be submitted by buyers of imported steel by May 31, 2024, and the number of those certificates should correspond to the level of declared emissions.

The number of CBAM certificates at the end of the each quarter should be equal to at least 80% of the embedded emissions of imported goods since the beginning of the year.

The price of the certificates will be calculated by the European Commission on a weekly basis, based on the average price of the closing EU Emission Trading System (ETS) carbon dioxide (CO2) allowances for the each week.

Steel market participants expressed concerns over unpredictability of carbon emissions costs, and lack of clarity on how many certificates will be needed for each importer to cover the purchased goods.

“In theory we could sell unused [CBAM] certificates afterwards, but the price for carbon allowances under EU ETS is highly volatile, and the fact that the buyer doesn’t know exactly how many certificates will be needed makes importing even more risky and will push costs up,” a trading source said.

“Smaller distributors, steel service centers, simply wouldn’t be able to afford importing steel. So they will need to switch to domestic suppliers and maybe purchase imported steel [from] big companies who are able to hedge risks,” a second trading source in Europe said.

Buyers to rely on emissions declarations or use default values
Another concern for steel importers is the inability to check the accuracy of CO2 emissions information for purchased goods provided by sellers.

“In the transitional period, that’s quite obvious, that the quality of the information that’s going to be reported in CBAM throughout the first three to five reporting periods is going to be abysmal and might have nothing in common with the actual emissions,” Daniel Maryjosz, manager at PwC, said during a presentation at EUROMETAL‘s Nordics meeting.

During the transitional phase of CBAM (until December 31 2025), the Commission is likely to overlook some inaccuracies, and some simplifications are likely be applied. From the start of the final implementation period (January 1, 2026), European buyers will have two main options to verify the CO2 emissions content in purchased goods.

The first option is for information in each CBAM declaration to be audited by an entity called a “verifier.” To achieve that, new entities will need to be set up, Fastmarkets understands.

“The new branch of entities is going to be launched once the transitional period ends. New entities are going to verify every single CBAM declaration that’s going to be submitted,” Maryjosz said.

Non-EU producers will be able to register their installations (steelmaking capacities in case of steel goods) with the CBAM authority, that’s going to be set up at the Commission level. Once that installation is audited, verified and accredited by the Commission’s authority, the supplier will not have to do it again.

“Basically, the CBAM declarant that purchased goods [from a] verified producer will not have to verify the [CO2 emissions] from that specific installation again,” Maryjosz said.

The second option is if the supplier is unable to provide information on the CO2 emissions in goods sold into the EU. Buyers will be forced to use the default CO2 values the Commission reports. Those values will likely not be clear at the point of purchasing imported goods, which poses a major risk for the European buyers.

Another potential problem with the default CO2 values is that they could be defined at much higher levels than the actual emission values from the specific countries, according to sources familiar with the matter.

“For instance, 1 tonne of blast furnace-produced steel from China has 2-2.1 tonnes of CO2 emissions. However, if the supplier is not able to provide any report or documentation supporting this information, the Commission is going to use the default values set at 3 tonnes of CO2 per 1 tonne of steel,” Maryjosz said.

That means that instead of purchasing two carbon certificates the buyer would need to purchase three certificates to cover the emissions.

It will be possible to use in CBAM declarations the information on the carbon emissions that are provided by institutions in non-EU countries, should they have any.

For example, if the steel supplier to the EU pays carbon tax in their home country, than this information can be taken from the reporting authority in that country. It would only be possible to do so without any supporting documentations until the end of 2024.

From 2025, the Commission is expected to set up a more or less unified process to get the information on carbon emissions from non-EU suppliers, or will settle those emissions using default values.

Risk of outsourcing high-value added goods outside the EU
For steel products, the EU already has a number of trade restrictions, including anti-dumping measures for certain products, safeguard measures, and now the CBAM.

And while steel imported into the EU to produce finished goods is subject to CBAM regulations, those same products – such as cars and white goods – can be imported directly without falling under the scope of CBAM.

Steel market participants are therefore worried about the leakage of high-value added production outside the over-regulated European market.

“Instead of bringing the steel coil from Asia and processing it in the EU, we buy the ready tailor-made steel structure without quota, without the anti-dumping and CBAM. That means that all this added value for Europe is gone,” Fernando Espada, president of EUROMETAL, said.

The CBAM was initially designed to offset the additional costs the EU mills have to bear because of the fact the they need to buy CO2 allowances and prevent the carbon leakage, while products built with CBAM-covered good were not really taken into account.

That issue is not currently being addressed by the Commission.

Published by: Julia Bolotova

fastmarkets.com