Govt’s energy price cap to improve competitiveness ‘for time being’: UK Steel

UK Steel, the trade association for the nation’s steel industry, welcomed the UK government’s Sept. 21 announcement of a six-month electricity price cap for industry as an aid to the sector’s international competitiveness, but warned policymakers need to remain “agile” to preserve the benefits in what is currently a softening market.

“UK Steel expects this will put UK steelmakers on par with steelmakers in France and Germany for the time being,” Frank Aaskov, the association’s energy policy manager, said in an interview with S&P Global Commodity Insights.

“The government must remain agile, so we don’t get left behind,” Aaskov said, noting that the German government recently slashed renewables tariffs for all users and introduced support programs for energy-intensive industries.

A longer-term energy market reform is still necessary to prevent a recurrence of the recent energy price-squeeze in this electricity-intensive sector, UK Steel said in a statement.

The government of new UK Prime Minister Liz Truss has announced it is capping industrial electricity prices at GBP211/MWh ($239.3/MWh) and gas prices at GBP75/MWh for six months.

The discounts will be applied to energy usage in Great Britain, initially between Oct. 1, 2022 and March 31, 2023, the Department for Business, Energy & Industrial Strategy said in a statement. A similar scheme will be established in Northern Ireland, providing a comparable level of support, it said. The scheme is not designed for those favored to profit from it, the BEIS statement said.

According to UK Steel, the price cap stands at four to five times the level of the historical average, but notes that the critical issue for the steel industry is competitive electricity and gas prices, in line with European and global competitors.

Cheaper energy prices also aid the sector’s decarbonization drive, it said.

The government will compensate suppliers for the reduction in wholesale gas and electricity unit prices that they are passing onto non-domestic customers. Wholesale costs in England, Scotland and Wales for this winter are currently expected to be around GBP600/MWh for electricity and GBP180/MWh for gas, it said.

The UK’s crude steelmakers are Tata Steel UK (a subsidiary of India’s Tata group); British Steel (acquired by China’s Jingye Group in 2020); Liberty Steel, owned by Sanjeev Gupta’s GFG Alliance; Spanish Celsa Steel, Finnish Outokumpu; and UK Ministry of Defence-owned Sheffield Forgemasters. Numerous rolling and distribution facilities will also qualify for the cheaper energy prices. The sector produces 7.2 million mt/year crude steel; equivalent to around 70% of the UK’s annual steel products requirement of some 10.5 million mt.

Key steelworks are located in areas of the UK included in the government’s “levelling up program,” aimed to improve employment and living standards outside the more prosperous south-east. The government has in recent times noted it considers the UK steel industry “strategic” and has introduced its own trade protection and import safeguard measures since the UK left the European Union.

While the main steelmakers are owned by international groups which also have assets in Europe, it is vital the UK steel sector competes with its European counterparts, UK Steel notes.

“Prior to today’s intervention, UK Steel analysis showed that UK steel producers faced significantly higher electricity prices than their European competitors, with the price disparity skyrocketing since energy prices increased,” the association stated.

The price cap announcement “today demonstrates that this new Government understands the sheer scale of the issue and the need to deliver a significant solution swiftly,” stated UK Steel’s director general Gareth Stace. “Setting a price cap for electricity at GBP211/MWh for six months gives foundation sectors, such as steel, the chance to get through the winter by giving us a competitive business landscape.”

However, “It is essential that Government is now ‘fleet of foot’ if the situation develops further to ensure that British business is competitive within Europe and across the World,” Stace added. “The Government must now move to rapidly reform the energy market to ensure longer-term competitive price beyond the current price cap.”

The UK steel industry’s electricity use is equivalent to 800,000 homes, and gas use is comparable to 400,000 homes, the association said.

Financing challenges remain

Douglas Grant, CEO at UK-based Manx Financial Group, described the government’s emergency intervention on energy costs as good news for UK business, showing it is taking seriously warnings from a variety of organizations. “We do however believe that more needs to be done,“ Grant said in a note. “Our research recently revealed that 22% of UK SMEs that needed external finance and/or capital over the last couple of years were unable to access it. More than a quarter have had to stop or pause an area of their business because of a lack of finance.”

“SMEs continue to struggle with accessing finance and that worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most,” the financial services group CEO said.

Platts assessed hot rolled steel coil ex-works Ruhr at Eur740/mt ($739.7/mt) ex-works Ruhr Sept. 20 amid minimal trading activity, virtually half of its March 18 peak price of Eur1,460/mt following Russia’s Feb. 24 invasion of Ukraine, according to S&P Global data.

— Diana Kinch