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Europe steel spread to raw materials eases back in September

Friday, 01 October 2021

The European hot-rolled coil steel to raw materials price spread contracted by 4.3% in September, coming off the record high seen in August, as spot steel prices fell by more than input costs, while costs for producing pig iron and steel fell, according to analysis by S&P Global Platts.

Pig iron and steel input costs fell on weaker delivered iron ore and scrap prices in Northwest Europe.

The Northwest European HRC-steel raw materials spot spread fell to Eur761/mt ($898/mt) in September, from August’s record Eur795/mt, according to estimates by S&P Global Platts on Oct. 1. The spread remains close to the highest levels tracked since April 2016, when Platts started estimating the spreads.

In the third quarter, the European HRC spot spread averaged at a record Eur771/mt, up from Eur695/mt in Q2, on the back of higher steel prices.

Spreads fell, even with weaker delivered iron ore and scrap prices in Northwest Europe pushing down steel costs.

Price declines for HRC steel gathered pace in September since initially weakening in the summer on signs of weaker spot demand and uncertainty on orders for 2022. The drop follows HRC price spikes earlier this year as mills struggled to meet demand and orders.

Platts Northwest European HRC prices fell to average Eur1102.95/mt ex-works in September, 3.9% lower on the month, and down from a record high of Eur1172.64/mt ex-works in July.

On Sept. 30, the spot HRC price was assessed at Eur1050/mt ex-works, down from the daily high of Eur1190/mt ex-works on June 25.

Spot prices for commodity-grade HRC are not fully reflected in sales and deliveries by steelmakers due to earlier negotiated pricing terms.

Iron ore costs

Iron ore prices in China, used as a benchmark for global contracts, fell 25% month on month, averaging over September at $119.65/dmt CFR China for Platts IODEX 62% Fe fines.

Spot lump premiums in China fell to 5.88 cents/dmtu, or around $3.675/dmt in September, 77% lower than in August, and compared with record lump premiums averaging 68.33 cents in June.

Iron ore fines, pellets, lump and high-grade product prices, along with scrap costs delivered in Northwest Europe and basis Rotterdam port fell further in September, pushing down steelmaking costs.

Atlantic blast furnace contract pellet premiums moved up in Q3, with Platts assessments over the period averaging $76.66/dry mt over 62% Fe fines basis, up from $65.33/dmt in Q2, based on settlements reported against 62% Fe and 65% Fe fines indices.

Coking coal prices on a delivered net forward basis into Rotterdam rose 50% from August to average $376.66/mt CFR Rotterdam in September. Premium low-vol coking coal prices net forward to Rotterdam have almost tripled since April.

Regional northern European shredded scrap prices fell further, dropping below Eur400/mt to Eur397.50/mt delivered basis in September, 9.7% lower from August.

EU mills produced 9% less steel in August than in July, while pig iron rates were little changed for the same period, which typically sees an effect on operations due to seasonality.

The data from the World Steel Association follows a run of monthly increases in steel and pig iron output from Q2 2020. Data for September is not yet available.

China, US spreads

In China, the spread between HRC export prices and iron ore and coking coal costs fell to $412.50/mt in September, from $451.52/mt in August. China HRC spreads remain relatively strong, well above levels in Q1 2021 and through 2020, which were below $300/mt.

Coking coal imports prices to China and domestic coke costs increased last month, while iron ore prices fell, putting pressure on spreads.

Chinese HRC export and domestic prices were little changed in September over August, remaining at lower prices compared with Europe and US markets.

US HRC to Midwest shredded scrap spreads powered further to hit a fresh record high of $1,544.86/st in September, on high US flat steel prices and weaker US scrap last month. The US HRC spread averaged $1,469.57/st in August.

Platts Europe HRC to raw material price spreads are indicative operating margins that do not account for inland logistical costs, power, natural gas or other blast furnace and steel-making inputs such as ferroalloys, anodes and refractories. Costs to operate sintering and coke plants are not included.

An HRC-raw material spread of Eur250/mt is close to typical operating breakeven for commodity grade steel at regional blast furnace mills, operating facilities at higher capacity utilization, according to steel industry sources.

However reference break-even costs may be rising from pre-pandemic norms, as plant operating and maintenance schedules were disrupted over the pandemic, and due to volatility in production rates and higher logistics and energy costs in 2021. In 2019, the NW Europe HRC spread averaged Eur241/mt.

Breakeven levels in Europe are partly dependent on logistics costs and raw material configurations.

Platts European HRC spreads are based on commodity-grade flat steel specifications. Contract steel sales may have additional grade and specification-based premiums, and terms may lag spot indexes.

Producers with higher grade steel portfolios may be less exposed to commodity-grade steel margins against underlying steel raw materials costs.

-- Hector Forster

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