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| US and Iran MOU |
A temporary Memorandum of Understanding (MOU) signed between the U.S. and Iran will mitigate global energy and fuel inflation. The landmark U.S.-Iran peace agreement steel industry linkage measures immediately began to address logistical risks that have stifled manufacturing profitability. The two countries suspended hostilities on June 17 and will continue negotiations over the next 60 days for a final binding agreement. In particular, Iran guaranteed the safe passage of the Strait of Hormuz, stabilizing the global energy supply chain that facilitates the movement of millions of barrels of oil and gas daily. As a result, international oil prices have turned downward, raising expectations for a reduction in both raw material logistics and steel manufacturing costs.
Easing the burden of inland transportation costs in Western countries due to falling fuel costs
The stabilization of oil prices is expected to provide direct cost savings to participants in the North American and European steel markets. Meanwhile, the U.S. steel industry has suffered from a surge in inland transportation costs, coupled with a severe shortage of drivers and high oil prices. Cargo costs in the U.S. rose 7.5% year-on-year in May, adding to the burden on buyers, according to the Cass Freight Index. However, the U.S.-Iran peace agreement has increased the likelihood of such downward stabilization of logistics costs due to the stabilization of the steel industry supply chain. On the other hand, Europe is also experiencing logistical difficulties due to Germany's lack of rail network maintenance and transportation personnel, so attention is focusing on whether the liberation of the sea route will create a global logistics chain effect.
Change in global trade barriers and enhance export opportunities for Asian steelmakers
The easing of tensions in the Middle East could significantly boost Asian steelmakers' competitiveness in exports to the U.S. and to Europe. That's because long-term downward adjustments in sea fares will make Asian materials more attractive to Western buyers again. At the same time, the U.S. continues to increase steel imports due to a shortage of domestic supplies, despite high tariff barriers under Section 232 of the Trade Expansion Act. However, an immediate delay in the drop in marine insurance premiums and the risk of potential tolls in Iran still serve as obstacles to slowing the pace of easing transport costs. Europe also faces the verification of its carbon border adjustment system (CBAM) and clarification of its quota system, which could lead to some liquidity in the future.
ScrapInsight Commentary
The signing of this memorandum of understanding will significantly reduce the short-term cost burden on electric and furnace steelmakers, who consume a lot of energy, by inducing oil prices to fall. However, due to the risk of offshore mines remaining in the Strait of Hormuz and high-rate ship insurance premiums, the effect of falling logistics costs is expected to be modest with a lag. It will be a positive milestone in securing the stability of raw material prices by promoting the movement of scrap traffic within the global circular economy system in the mid to long term.
