The post-Covid drive for sustainability has reinforced the dynamic of higher steel prices amid costs and other obstacles to decarbonisation. China’s rumoured steel output cuts should meanwhile materialise in the second half of the year, providing a boost to global steel margins. So said participants at last week’s Kallanish Europe Steel Markets 2023 conference in Amsterdam.

Steven Vercammen, senior expert at McKinsey & Company, spoke of a “new normal” of sustained higher prices and greater volatility, which was referenced by participants repeatedly throughout the event.

The challenges to fulfilling decarbonisation ambitions fall under three categories. One is investment, which involves potential bottlenecks at equipment contractors amid a surge in new direct reduced iron capacity additions. The supply chain area will also pose problems, as producers will be fighting among each other to secure high-quality DR pellet and limited scrap supply. Technology will meanwhile pose the final challenge, with treatment of lower-quality ore being necessary, as well as upgrading of scrap, Vercammen observed.

Carbon capture utilisation and storage (CCUS) will need to play a role for the EU to achieve its emissions targets, the consultant added.

Derek Langston, global head of dry research at Braemar Shipping, meanwhile pointed out that shipping will enter the EU Emissions Trading System from 2024, potentially significantly increasing the cost of voyages. ETS will cover 100% of intra-EU voyage emissions, plus 50% of inbound and outbound voyage emissions. Coverage will be scaled up from 40% next year to 100% from 2026.

China is meanwhile returning to the environmental focus it had before Covid, opined Kallanish Consulting Services consultant Ian Roper. Chinese steel production cuts have been rumoured for months – these are likely to happen in H2 but the form they will take remains a question mark.

China’s post-Covid rebound has not come back as expected but “things are not that bad,” Roper observed. The housing market has bottomed, while infrastructure is catching up after Covid delays. Manufacturing may be down – post-zero-Covid policy, there is naturally more spending on leisure and tourism – but this will shift back towards the end of the year, he forecasted.

Roper expects global steel margins to be much better in H2 because of substantial Chinese production cuts. So far this year, Chinese mills have increased production on market rebound expectations, and have had to export the surplus as this rebound failed to materialise. This will nevertheless reverse in H2. This also means China will import less iron ore, however, which is bad news for iron ore prices.

The iron ore market is oversupplied for the first time since the early 2000s, “so we’ll need some of those marginal higher-cost suppliers to switch off – we may need 80 million tonnes of seaborne supply to go out of the market”, Roper opined. Iron ore prices could fall to the $70s by year-end, but if Chinese blast furnace mills opt for purchases of higher grades to improve productivity, this will push up the cost curve, meaning iron ore prices could bottom in the mid $80s.