Japan: Steelmakers face higher input costs on surging freights, fuel prices even as raw materials remain stable

• Freights currently 40% higher than before Middle East conflict
  
  
• Strong African bauxite flows to China tighten bulk carrier supply
  
  

Japan Metal Daily: The three major Japanese blast furnace (BF)-based steelmakers (Nippon Steel Corporation, JFE Steel Corporation, and Kobe Steel Ltd.) have been forced to increase steel prices in an attempt to pass on higher delivered costs of raw materials, driven by soaring shipping costs and marine fuel prices.

This is despite spot prices (FOB levels) of iron ore and coking coal remaining largely stable compared to before the escalation of the conflict in the Middle East. While iron ore (Fe 61% fines) was currently at around $90/tonne (t), premium hard coking coal prices were just over $230/t.

The divergence highlights how logistics and energy costs, rather than commodity prices, are driving cost inflation for producers.

Bunker fuel surge adds to cost pressures

Prices of Singapore bunker fuel, a global benchmark for bunker oil, currently stand at around $750/t, approximately 40% higher than before the conflict. Under typical arrangements for dedicated vessels, blast furnace operators bear additional fuel costs once bunker prices exceed agreed thresholds. With bunker prices consistently above these levels since late February, the increase is feeding directly into steelmakers' procurement costs and eroding margins.

Freights stay elevated on strong bulk demand

Freights for Capesize vessels transporting iron ore (on the Australia-China route) were at around $13,000/day. Although rates have fluctuated since late February, when US and Israeli attacks on Iran began, they remain about 40% higher than before the conflict. In addition to the impact of the escalating tensions in the Middle East, robust cargo volumes bound for China -- primarily African bauxite -- are keeping the spot market at elevated levels.

Steelmakers primarily use dedicated vessels for importing steel raw materials to avoid the impact of freight fluctuations. However, with brisk cargo activity on bulk carriers transporting steel raw materials,high freights are being passed on to some spot charters and contracts of affreightment (COAs, long-term agreements where a shipowner agrees to transport a specific quantity of cargo for a charterer over multiple voyages within a set period).

As bauxite is shipped on bulk carriers, this is also pushing up freight costs for iron ore and coal cargoes, creating spillover effects across the dry bulk segment.

Outlook

Although the blockade of the Strait of Hormuz has not directly impacted Japanese steel raw material shipments, there are no signs that the cost increases driven by high crude oil prices will subside. Going forward, blast furnace steelmakers will have no choice but to pass on the portion of cost increases that they cannot absorb.

Note: This article has been written in accordance with a content exchange agreement between BigMint and Japan Metal Daily.