Power and Chips Darken the Outlook for Europe’s Steelmakers

(Bloomberg) -- European steelmakers are starting to see some dark clouds on the horizon after their best first half in a decade.

A combination of surging power prices and snarled supply chains is conspiring to clip the industry’s wings just after it enjoyed some of its highest quarterly profits in years. The rally in steel stocks that has endured since March 2020 already looks to be faltering.

The industry is incredibly energy intensive, and two of its key inputs -- coal and power -- have soared in cost this month. That makes it a major loser from the ongoing crisis on the continent, to the extent that some mills are already curtailing production.

Others  -- including Europe’s heavyweight ArcelorMittal SA -- have tried adding surcharges to products made with power-intensive furnaces. The trouble is, benchmark steel prices were already in decline before the power crisis came along, which makes passing on higher costs trickier.

“The European steel producers are in a perfect storm at the moment,” said Grant Sporre, commodities and metals analyst at Bloomberg Intelligence. “Chip shortages and energy costs are staring to have a big impact on demand and steel prices across all grades are likely to come under pressure.”

On the demand side, supply chain problems are already hurting the manufacturing and construction sectors. The chip shortage is also hammering demand from automakers, who in 2020 accounted for 16% of total steel consumption in Europe, according to lobby group Eurofer.

“We are starting to see the automotive supply chain saying ‘we don’t need anymore steel,’” said Matthew Watkins, principle analyst at consultancy CRU Group. “It’s quite an important factor that until now hadn’t shown up in reduced steel purchases.”

That translates into less pricing power for mills, who just months ago held all the cards when negotiating with buyers. Analysts already saw European steel prices slipping over the next year, so reduced demand may increase the speed of the fall.

Still, the situation is hardly catastrophic for steelmakers, who have known far worse times. Profits this year are still expected to be fat -- for some companies close to double anything they’ve seen since the financial crisis. 

“We are still well within record margin territory,” said Christian Georges, senior analyst at Societe Generale SA. “There are some headwinds on volume and higher energy costs, but it is not as if valuations are stressed.”

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