January 3, 2023

The EU’s proposed carbon tax on steel imports will make it more costly for Indian steelmakers to meet India’s lofty production goals, according to JSW Steel. The proposed tariff, which would be paid by the seller, is an attempt to combat carbon emissions from steel production in China, India, and other major producers. Approximately 45% of India’s steel is produced via high-polluting blast furnaces because JSW and other similar Indian producers have little access to adequate scrap supplies. Thus, to sell into Europe, the producer will either pay the carbon tax or adopt other, less-polluting production methods. Currently, India produces about 120 million mt of steel per year, with an annual capacity of 154 million mt. However, the Indian government wants domestic producers to double their production capacity to 300 million mt by 2030. In 2021, the EU imported a record 3.54 million mt of steel from India. This is approximately 11.6% of the EU’s total steel imports that year.

If the EU’s imports of Indian steel drop significantly due to this change in policy, then steel buyers and sellers in the EU could be forced to change their policies with other trading partners. This could ultimately have an impact on American steel prices, specifically CME HRC prices. For example, the EU buys little steel from the US; however, the US was the second-largest importer of EU steel in 2021. That year, approximately 12.4%, or 2.226 million mt, of US steel imports came from the EU. If European producers significantly reduce exports, then American end-users could be forced to look elsewhere for steel, thus driving up HRC prices and import premiums here in the US. (Sources: Bloomberg, World Steel, Eurofer) 

This could be a good time for steel end-users to hedge future needs into 2023 by buying CME HRC swaps. Using swaps converts a variable cost into a fixed cost, thereby ‘locking in’ a price for the hedged steel. Since CME HRC swaps are thinly traded, we suggest using limit orders to establish a specific steel price. Such positions are standard for consumer hedging; however, they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (1/3/2023)

Note: Clients with AEGIS Platform access can see this and other research, plus hedge portfolio reporting and tools here. 

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