European hot-rolled coil (HRC) producers tell Argus that they will insist on rollovers for January-June 2024 contracts, in line with price levels for the second half of this year.
Mills suggest — somewhat tenuously, according to buyers — that spot prices and longer-term contract values need to diverge because of the impact of lower-priced and more cost-competitive imports on the former.
European mills have to pay carbon taxes, unlike third-country producers. Assuming a carbon cost of €80/t under the emissions trading scheme and the 20pc of allowances that mills need to purchase — although it varies by producer — the variable cost of carbon is about €32/t, although marginal costs are significantly higher. Domestic mills also cite their higher energy costs compared with producers in other regions and the capital required to invest in decarbonisation.
The further downstream in the process, the higher the energy cost as a proportion of sales price, they suggest. This is why imports represent more than a third of cold-rolled coil supply, according to domestic producers.
As a result, spot prices should not be a basis for half-yearly and annual contracts, mill sources suggest. If buyers want to pay spot prices, they can buy on this basis but without volume commitments, a steelmaking executive told Argus.
The contract talks come at a difficult time for producers. Argus' daily northwest EU HRC index is averaging €630/t so far this month, the lowest monthly average since last November. The €610.25/t daily index on 28 September was the lowest daily price since 30 November last year.
Demand is low from most purchasers, leading to an even steeper contraction in apparent buying. Automotive has been the strongest offtaking sector for coil producers, and demand here has been hit in recent months by supply chain disruption.
Half-yearly contracts between mills and service centres were settled at about €800/t for July-December, at a large premium to the underlying spot market in recent months. The premium for the contracts over Argus' northwest EU HRC month-to-date average is €169/t this month, up slightly from €166/t in August and €146/t in July.
Buyers will point to this disparity as necessitating lower contract levels.
On the CME Group's north European HRC contract, the first quarter is trading at a significant premium to the front months. October traded at €600/t on the contract today, where January and February each traded at €660/t. Mills have taken capacity off line in recent months in response to the low demand environment, similar to this time last year. As a result, sources believe prices could increase when service centres do restock.
