The prices of the most important input materials—iron ore and coal—for the production of steel in blast furnaces remained volatile even in the business year 2017/18, but the spreads were a lot smaller than in previous years.
The price of iron ore, which is key to the production of pig iron, gradually fell during the first quarter of the business year 2017/18 and lost about one third of its value by the end of June 2017 relative to the start of the business year, with a low for the entire past business year of about USD 55 per ton of fine ore (CFR China) toward the end of the first quarter. Subsequently, the base price of iron ore fluctuated between roughly USD 60 per ton and just under USD 80 per ton. The development of steel production in China played a central role yet again, because China is responsible for about one half of crude steel production worldwide. Both the fairly low quality of the iron ore mined in China and the rising number of resulting mine closings in recent times continue to intensify the Chinese steel industry’s dependence on international ore suppliers. Demand in China for high-grade core material such as iron ore pellets (compressed ore) and lump ores is rising sharply for two reasons: to reduce harmful emissions and to boost productivity. As a result, in the past two years this has led to a substantial structural increase in the surcharges for iron ore pellets and lump ores relative to fine ores.
When processed into blast furnace coke, coking coal is the second most important raw material besides iron ore for the pig iron production process and serves as both a source of energy and a reducing agent in order to release the oxygen from the ore-bearing rock. In the business year 2016/17, mine closings in China ordered by authorities as well as a reduction in the annual number of work days in Chinese coal mines triggered a virtual explosion in the price of coking coal. A massive temporary supply shortage arose at the same time due to weather-related logistical problems that affected the transportation of domestic coal from Northern China to other parts of the country. The price fluctuated substantially yet again at the start of the past business year, this time due to a cyclone that paralyzed the railway connections from the important mining areas in Queensland, Australia, to the shipping ports. Subsequently, the price of coking coal remained highly volatile throughout the entire business year 2017/18, fluctuating between a per ton price of USD 140 and USD 250. The year 2017 also saw a turning point in the structural pricing of coking coal in that Japanese steel companies and Australian raw materials suppliers replaced the “benchmark system” (where a major contract largely dictates the general contract price) that had been in place for decades with an index-based pricing system. Besides coking coal for the in-house production of coke, voestalpine also sources blast furnace coke externally, albeit in much smaller quantities. Naturally, the purchase price of coke was more or less as volatile as that of its base product coal. At its peak, the price of one ton of coke (FOB China) on the spot market was USD 380, in contrast to a low in 2017/18 of about USD 250 per ton.
While iron ore is the base material and scrap solely a supplementary material in blast furnace-based steel production, scrap is the primary raw material in the electric arc furnace technology the High Performance Metals Division uses to manufacture special steel. In the past, the pricing curves of iron ore and scrap developed largely in sync with each other, albeit at different levels, but in the business year 2017/18 they began to diverge substantially from each other in that the price of scrap increased much more sharply than that of iron ore—even when accounting for higher surcharges on special grade ores such as lump ores or iron ore pellets. The price of high-value scrap (type E3, Germany) went from about EUR 260 per ton at the start of the business year to more than EUR 300 per ton 12 months later.
The prices of numerous alloy elements used in steel processing soared during the business year 2017/18. Alloys are an important basic element in the production of special steel and thus are an important cost factor for the Group in general and for the High Performance Metals Division in particular. The prices of vanadium, wolfram, and molybdenum rose sharply in 2017/18, while the prices of chromium and manganese trended laterally. As regards nickel, the alloy with the highest value ratio in the alloy portfolio of the division, dramatic changes on the supply side were but one factor that triggered the considerable increase in its price. Although the Indonesian government loosened the prohibition on the export of nickel ores that had been enacted in 2014, the Philippines ordered numerous nickel mines to close for environmental reasons. While a ton of nickel cost less than USD 10,000 on the London Metal Exchange at the start of the business year 2017/18, the price continued to climb over the year to more than USD 13,000 at its close. At some 20%, the increase in the price of zinc (the element utilized mainly in the Steel Division) during the past 12 months is just slightly lower than that of nickel.