Steel industry changes based on regional market developments such as carbon emissions market regulations and import safeguards may increasingly complicate pricing of coking coal and steel raw materials under global benchmarks and premiums.
Steel industry market participants are closely viewing the EU’s Carbon Border Adjustment Mechanism announced on July 14. Turkey has announced a formal green plan as a roadmap to cut emissions, which could help its industries limit the burden of competing with EU industry sectors under the CBAM. Commonwealth of Independent States producers — many which have mines and are vertically integrated – are mulling over how CBAM may impact strategic operations, investments and sales structure.
The effect of carbon prices on existing steel business models may see various implications in acceptable pricing mechanisms for coking coal, said the CEO of trader Xcoal Energy & Resources at the Platts Singapore Coking Coal Conference on July 15.
“How will we price coal, when there’s going to be a mix of sales revenues for our customers subject to CBAM,” Xcoal CEO Ernie Thrasher said in a keynote at the webcast conference. “The result of that may be that a ‘one size fits all’ pricing mechanism needs to evolve into almost custom orientated negotiations, discussions with customers.”
New pricing agreements may adapt pricing terms to allow the customer to make a profit, but also for mining companies to recover sufficient capital to have sustaining capex to provide returns to their investors and shareholders, Thrasher said.
Xcoal supply coals globally, and has customers in the EU, as well as steel exporting countries outside the region, and is a major US coking coal exporter to Asia.
The EU is planning to introduce the CBAM in 2023 and for the mechanism to be fully in place in 2026. The system will be based on trading in certificates, using emissions data.
Steel and aluminum will be included in CBAM, affecting steel from countries such as the UK, Ukraine, Russia, Turkey, Egypt, India and China.
While coking coal, iron ore and metallics will not be included in CBAM, the effect of benchmarking emissions could lead to impact on trade flow and pricing for steel.
Already, iron ore contract pellet premiums negotiations have seen more protracted quarterly pricing negotiations, with blast furnace pellet settlements reported by miner Vale said to no longer act as a global reference.
Europe’s large pellet market largely negotiates based on different terms to the rest of the world, and takes into account steel and freight market conditions, and substitution available in sinter and lump.
A buyer said July 19 Q3 pellet settlements in Europe have largely yet to conclude, with offers unlikely achievable, after Vale reported global settlements for Q3 blast furnace and DR-grade pellets in early June at higher levels from Q2.
Vale has limited BF pellet availability for Q3, with some buyers unable to secure tons, according to market source.
With Europe’s steel industry preparing for CBAM costs and unable to fully realize production volumes to capture high spot prices after the COVID-19 pandemic, regional factors may limit a quick take up of higher pellet premiums. With necessary investments to lower emissions, European demand for DR-grade pellet may grow by 2025, complicating long-term planning.
— Hector Forster
