Italian flat steel producers face higher costs

Local government interventions will contribute to higher costs for Italian coil producers in October-November.

The municipality of Taranto in July ordered ArcelorMittal Italia to shut blast furnace 2 in Taranto, following an accident in 2015 under the previous operator. The furnace has a production target of 1.5mn t/yr — the whole Taranto facility is running at less than 5mn t/yr — so some say the closure will remove a third of Arcelor's Italian crude steel output.

The blast furnace is expected to shut on 10 October, and the company would either have to reduce its finished product output or source slab on the merchant market, or from other group facilities. While producing less will reduce economies of scale and push costs significantly higher, finding competitively priced slab would also probably prove difficult, with Brazil about to resume sales to the US and demand from Italian plate mills holding firm.

ArcelorMittal had already slowed the ramp-up at Taranto and said it would cut production at European facilities in response to higher iron ore costs since January and slowing steel demand.

Meanwhile, pig iron production at fellow Italian producer Arvedi's Trieste plant is understood to be shutting down in November by order of the municipality of Trieste. The company did not respond to repeated requests for comment, but market participants expect it to have to turn to the merchant pig iron market. The furnaces in Trieste, only one of which is operational, each have a production capacity of 450,000 t/yr.

At the same time, Italian market participants are concerned that increased imports in the fourth quarter will erode mill pricing power.

Data from European steel association Eurofer released this week showed rising EU imports of HRC in July. The bloc imported 606,819t, up by 48pc on June. Italy's receipts were the highest, at 296,466t, driven by rising Russian and South Korean deliveries.

Although competitive pricing from Italian and other European producers will probably keep imports low in August-September, a drop in import prices in the past month could see deliveries from non-EU countries grow in the fourth quarter.

Some estimate that at current spot pricing, European blast furnaces are losing as much as $100/t. The Argus Italian HRC index was at €438/t ex-works today, down from a high of €474.50/t on 11 June.