Nov 05 2022
Current global steel market dynamics should have presented the Venezuelan hot-briquetted iron industry with a golden opportunity.
That is, if only Venezuela's HBI industry was in a position to take advantage of such a scenario. Global metals supply has been dented by Russia's war with Ukraine, the use of direct-reduced iron and HBI combined with hydrogen are emerging as a key route for steel decarbonization and research has shown HBI utilization in blast furnaces lessens the rate of coke usage while enhancing quality and stretching hot metal production.
With a reported installed capacity of 6.9 million mt/year, the Venezuelan HBI sector certainly should be a hot topic. However, the story is quite the opposite.
Venezuela's five HBI producers – Orinoco Iron, Venprecar, BriqVen, Comsigua and Ferrominera – have been operating at less than 10% of their installed capacities after being restarted in September 2021 following a nearly year-long hiatus. Any supply they can offer has been focused mainly on the domestic market or used to repay debts to former trading partners, sources said.
Venezuela's production of HBI, iron ore and steel have been hampered for years in the wake of US sanctions imposed on the country's oil sector in 2019. The sanctions disrupted raw material supply and natural gas and energy production. The government struggled as financing dwindled and an economic crisis engulfed the nation.
With the sanctionsin effect, shipping companies stopped sending vessels to Venezuela and removed all remaining ships from the country by Sept. 4, 2019.
"No one was willing to take the risk of remaining in Venezuela and possibly suffering retaliation from the US," one source said.
Moreover, Venezuela'sdomestic issues were further spelling the end of its HBI export activity.
Venezuela was formerly the world's largest exporter of HBI, but in 2019 it exported less than 400,000 mt, sources estimated, compared with about 7 million mt roughly a decade before, in 2008. Venezuelan HBI had been exported to 36 destinations, with Mexico and European its most frequent destinations.
Apart from large HBI producers Russia and the US, suppliers in Malaysia, India, Iran and Libya usually export surplus material to regional markets.
With the start of the Russia Ukraine war in late February, buyers from Oman, India, Mexico, Poland, UK and Slovenia were checking Venezuela's ability to send 30,000 mt HBI cargoes, with traditional suppliers in Malaysia and the US booked for several months ahead.
"I spoke to Venezuelan companies, and they said the financial debt to China was very high, so all their HBI availability was booked for them, but a long time ago," one agent said.
The agent added that it's been over a year since regular trades have been reported involving Venezuelan HBI, with European traders refusing to entertain deal with corruption "and the demands for prepayments ranging from 80%-100% of the cargo value."
Since 2019, trade and pricing decisions related to HBI have been centralized with the Corporacion Venezolana de Guayana, or CVG, which is controlled directly by Venezuela's office of the president. A fixed-price mechanism was implemented by government authorities, in which a $260-$265/mt FOB range was considered for standard-quality cargoes with 88.3% Fe content.
However, given the lack of appropriate raw material, HBI Fe content has widely varied among producers and dropped constantly over the years.
Historically, HBI was usually negotiated at a discount to Turkish imported scrap, but it has lagged behind in recent years due to a dearth of negotiations.
S&P Global Commodity Insights clarifies Venezuelan HBI FOB assessment
Many market participants question whether there is hope for the Venezuelan HBI industry to return to its former global stature.
The premises on which it was established remain the same: Plentiful natural gas, large iron ore reserves, a well-situated river, the Orinoco, with access to the Atlantic Ocean and specialized labor.
"However, by the time the industry was nationalized, in May 2009, the sector gradually deteriorated amid poor management, coupled with government officials placed in positions without technical knowledge," a source familiar with the government's role in the industry's operations said.
The construction of a second 3 million mt/year pellet line by Venezuela's sole iron ore producer, Ferrominera Orinoco, headed by China's Metallurgical Group (MCC Group), did not take into consideration that DR-grade pellets production was the exclusive goal.
"HBI is made of DR-grade pellets exclusively," the source said. "But they built a blast furnace pellets facility."
The direct consequence, he added, was a 40% reduction in general HBI production. Plus, FMO's iron ore has high phosphorus content, which ultimately reduces HBI quality.
"It would be naturally sold at a discount to Metalloinvest/ArcelorMittal's Texas Corpus Christi material," another source said. Metalloinvest and AM are the largest producers in Russia and US, respectively.
Over the years, sources said experienced labor working at the facilities left Ciudad Guayana looking for better work and living conditions elsewhere. Venezuela's electricity grid also has deteriorated, supplying only one third of the industry needs.
Moreover, "Venezuela has gas supply from natural wells and associated petroleum gas," one of the market sources said, adding that HBI producers can only take the gas from oil wells because their production units are located far from natural gas wells.
"This means that if we pump oil, we have gas. If we do not pump oil, we do not have gas," he added.
However, state oil company PDVSA has seen output plummet after the imposition of sanctions and is unlikely to rebound for years and skittish foreign investors are not expected to infuse the much-needed cash into the nation's crumbling oil fields, upgraders, pipelines, refineries and ports.
The Orinoco, which gives access to the Atlantic Ocean hasn't been dredged for years – which means its draft is too low and logistics another issue for the sector.
"Vessels are unable to load full cargoes, causing a considerable hike in freight levels, as Handymax and Supramax vessels are forced to depart short-loaded, or top-off could be needed," one source said.
Ultimately, facilities have been slowly dismantled and sold as scrap metal for neighboring countries and most recently to Turkey. And a billion dollar revival plan by the government, announced several times in past years but without a detailed program, seems by far an impossible move.
"You can't look to Venezuela as a quick response to HBI supply; it would take decades to reestablish the industry there," one observer said.