What’s the impact of gas and electricity increases? A journey through the steel supply chain

The soaring prices of electricity and gas are affecting the entire metalworking and metal processing supply chain, from the steel mills to those who make finished products, through to plants and machine manufacturers, and anything in between; though to a varying degree: some companies are particularly energy-intensive than others, some are feeling the effects directly or indirectly, while for others the effects have not been felt (just yet). I’m going to start with those upstream in the supply chain and work my way downstream, taking a look at the health state of an industry that is made up of large fishes and small fishes, structured or family-run businesses, resilience champions and distressed companies.

I will do this by comparing information gathered from some recent conferences and public events, as well as through the voice of companies featured on expometals.net. More specifically, I will focus on what is happening in Italy and Germany.



For example, energy was a key point of discussion at the recent Italian Spring Makers Convention in Milan, which gathered eminent personalities, including Antonio Gozzi, President of Federacciai (Italian association of iron and steel companies) and of the Duferco Group: "As a producer of long beams and rolled products, I compete with European players who pay much less for energy than I do in Italy. In Spain, costs are four times lower. The real problem in the European industry is the competitive asymmetry."   Giuseppe Pasini, President of the Feralpi group, also recently stated, "The current cost of energy no longer allows us to be competitive abroad, and I am not referring to the steel industry exclusively."   Both put the blame on Europe: the lack of a common policy, they say, is jeopardizing the survival of entire industries.   For Italian steel-making companies, the impact of gas and electricity on budgets rose from 17% at the end of 2021 to 39% today. What is going on in Germany in the meantime? According to the steel federation WV Stahl, the additional costs of electricity and gas for German steel companies, calculated over the entire year, are currently about 10 billion euros more compared to the previous year - which is almost a quarter of the turnover the industry has averaged in recent years.   How does this affect steel forming? Let’s ask Andrea Beri, CEO of Steelgroup, a brand consisting of four bar, strand, and wire manufacturing companies. In an interview on the Italian talk show Porta a Porta aired on September 13, Mr. Beri openly talked about the struggles that companies like his have to face right now: the 165,000 euros in gas and electricity bills paid in November 2019 doubled in 2021, and are estimated to increase by 7 times in November 2022; the forecast is for a whopping 1,100,000 euros.   "It’s total chaos," confirms Pietro Spina, Sales Director at ITA Spa, part of Steelgroup, "not only is the price of gas and electricity not the same for all companies in the EU, but conditions can also vary within the same country between those whose contracts are expiring, those who managed to lock in prices months ago or obtain better terms, and so on. We are continuing to work on limiting expenses and rescheduling production, but we – like everyone else – are especially concerned about the repercussions this is going to have on the real economy and consumption. Automotive is already almost at a standstill, construction is slowing down because of rising raw material costs. It's even harder than in the Covid times, and maybe even worse than the 2008 crisis, which was speculative/financial, because never before have we experienced such issues on commodities, including gas and energy."

Markus Giese, CEO of the German wire drawing company Drahtwerk Wagener, confirms that the situation is troublesome also in his country: "We are working with high carbon wire rods to produce wires for technical springs and steel wire ropes. It is in the nature of our business that we need a massive amount of energy for our processes. This refers to electrical power as well as natural gas. The cost of energy has already been a major factor in our calculations in the past. With the sky-rocking price levels that we are facing today, it is almost impossible to run the company without a loss." The order book also reveals a bleak outlook: “Since May, we have seen a lack of demand in all the sectors that we are supplying, namely automotive, furniture, household appliances, machinery, construction, and agriculture. There are far too many problems stacking at the same time: war, Covid crisis, disrupted supply chains, energy prices, weakness of the euro, drop in private consumption; the difficulties are similar in all important markets in the world." According to Mr. Giese's forecast, even in light of the carbon neutrality challenge the industry will be facing in the immediate future, "energy prices will remain on a very high level." And he also adds: “And yes, I have serious concerns about the competitiveness of our business in general, but particularly on the international markets. Looking at the end of the year and the beginning of 2023, I have no positive outlook. The only thing we can do is to stay close to our suppliers and customers and look for solutions to handle the challenges we face every day."



And what about those who manufacture plants and machinery, how do they fit into this scenario? During the Italian Spring Makers Convention held in Milan, Lucia Frigerio, head of MFL Group, spoke about a "dire situation"; according to her, there is a need to return to manufacturing clusters: her group, known for producing wire, cable and rope machinery, has laid the foundation for an open innovation project in collaboration with the Politecnico di Milano University and some companies in the metal processing industry. The aim is to share experiences, research, and common themes along a vertical supply chain.

To get an idea of how machinery manufacturers are faring, I also had a conversation with Eng. Brocato, Sales & Marketing Director of Engitec Technologies, which designs and installs worldwide turnkey plants and machinery for the foundry industry, both for ferrous and non-ferrous metals: “I see a slowdown in the activities of the European industry, and more vibrancy in the two Americas (take Mexico as an example) and in the Eastern countries of the world, above all India. The big groups are still operating and making investments, but in my opinion, the next normal will see a return to the regionalization of many markets, especially of low-margin products. Just think of freight prices, which are 5 times higher compared to the previous period. In my opinion, wherever possible, we will see the implementation of smaller "regional" plants to serve shorter distances."

During the before-mentioned conference, Federico Visentin, at the helm of Mevis - springs and metal component manufacturer - and President of Federmeccanica, a federation that brings together 16,000 Italian companies in the metalworking industry, talked about what is going to be "a devastating second half of the year for our balance sheets. The real problem for our companies is to transfer the increases downstream."

"We are facing the abyss," here are the exact words that Christian Vietmeyer, General Director of WSM, the German Steel and Metalworking Association, issued in a statement on Sept. 8: "The industrial crisis is tangible. Companies are cutting production, and every day we are losing added value that will not return." Relieving news for German manufacturers came on Sept. 29, when the German federal government announced a record-sized (200 billion euros) package of measures to contain the energy price crisis. Chancellor Scholz called this extraordinary plan that Germany launched on its own initiative, without any coordination from Europe, Abwehrschirm, that is defense shield.



Paul-Bernd Vogtland, President of the German spring manufacturers association and the European Spring Federation, spoke instead on Oct. 1st in Milan about challenges that require "European thinking". Vogtland admitted the "danger of deindustrialization" and the risk of "an exodus of important European industries" caused by the overlapping of all these crises: energy, raw materials, war, pandemic, and so on.

We move on in our excursus to those who manufacture finished products, for example, springs. "We spring manufacturers find ourselves in a precarious crossfire between the steel and wire manufacturers (the prices for spring wire are still high) on the one hand, and our customers (who are increasingly demanding and reluctant to accept constant price adjustments) on the other," declared Francesco Silvestri, President of ANCCEM, the Italian Association of Spring Manufacturers and head chief of ISB Srl. In his speech in Milan, he also mentioned an emerging topic in the public debate: the buzzword is deglobalization; Following the unbridled internationalization that has led to the distortions and degenerations of recent years, it may be appropriate to rethink the growth drivers - which could mean tapping into energy and resources located in our continent, rather than elsewhere.

"It is true, we spring producers are not very energy-intensive companies," declares Angelo Cortesi, founder and administrator of Co.El, and also former President of ANCCEM, "However, on our budgets, the increased bills weigh heavily because we don't have advantageous contracts as steel works. Not to mention that if my treatment provider shuts down some equipment to optimize costs, this also affects me, causing delays in deliveries. Between June and July, the order book has thinned; September went well, but I forecast a drop in October of at least 20-25%. From what I have heard, other spring makers are also lamenting the same situation. If we don’t find a way out, this fall, there may be a shortage of raw materials as well." There is a fear, once again, to lose competitiveness. "What kind of Europe are we building? What kind of economy?" wonders Cortesi, along with several of our interlocutors, who rail against finance, speculation, and the opportunism of the few who are profiting from this situation, in particular, "a finance out of control, and a submissive politics, incapable of reacting even when the economic and social conditions have become dangerously unsustainable."

Let's take a look at the words of screw manufacturer Dell'Era Ermanno e Figlio: "The soaring energy prices affect us both directly and indirectly. For example, we are experiencing increases from those who do surface and heat treatments," says Paolo Dell'Era. "I've heard that some companies are using in-house regasification plants to convert the liquid gas" he adds. And how is demand doing? "You can see some stagnation, the demand is not absorbing the production anymore: automotive is in a limbo of its own, and the industry is suffering a setback. The concern is real."

Even WSM, a German organization that includes, among others, the Screw Manufacturers Association, had warned of an "increasingly severe industrial crisis", a production that is "losing more and more momentum," and an "order volume that is thinning enormously." According to Director Vietmeyer, net of the extraordinary measures announced by his Government, "business expectations for the upcoming months have fallen to the level registered during the pandemic."

The latest news from European institutions indicates that the EU is getting closer to adopting a gas price cap, a measure not agreed upon by all member countries.

However, voices are rising louder and louder calling for - national or super-national - action in support of the European industry. Before it’s too late.


Daniela Di Maggio
Chief Editor
[email protected]