The rise in geopolitical tensions in the Persian Gulf and disruptions in liquefied natural gas (LNG) supply, especially ahead of the cold season, have created uncertainties regarding energy supply. This situation, particularly given Iran's steel industry's dependence on natural gas, has raised concerns about rising production costs and potential energy supply limitations.
Current Gas Market Situation and Pressure on Steel Industries
According to recent analyses, disruptions in the Strait of Hormuz since February 28 and military attacks on regional energy facilities in March have significantly increased pressure on the LNG supply chain. For instance, Israel's attack on the South Pars field and Iran's response to the Ras Laffan facilities in Qatar are among the events that have impacted the energy market. In this context, LNG exports from the Persian Gulf have decreased by 80 percent compared to last year, which, if continued, could affect the balance of gas supply and demand in global markets.
Current analyses show that the price of gas in Europe is currently around 90 euros, while during the peak of the energy crisis in 2022, this price exceeded 300 euros. Additionally, gas reserves in Europe reached 74.6 percent by late October, while this figure was over 90 percent last year. Therefore, the lower price compared to the peak of the previous crisis does not necessarily mean that concerns about gas supply have been alleviated.
Impact on the Steel Industry and Proposed Solutions
Natural gas is one of the main inputs for sponge iron production in Iran. In the direct reduction process, gas not only provides energy but also plays a key role in converting pellets into sponge iron. Changes in gas rates can directly affect the cost of production. According to estimates, the gas rate for reduction units has increased by about 66 percent from spring to September 2023, and the share of gas in the cost of sponge iron production has also significantly increased.
In this regard, experts have examined three main solutions to reduce pressure on the steel industry: first, eliminating or reducing the weight of European hubs in the gas pricing formula; second, revising gas price coefficients and separating consumer groups; and third, ensuring a minimum gas supply for operational units during the cold season. These measures could help maintain production capacity and control costs.
The series of developments in the global gas market and the trend of increasing gas rates for reduction units indicate that Iran's steel industry may face two simultaneous pressures: rising energy costs and potential reduced access to gas in winter. This situation could lead to reduced production, downsizing of operations, and even the shutdown of some units.
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