<article><p class="lead">Some European traders are starting to take short positions, both physically and on CME Group's North European hot-rolled coil (HRC) contract, in the belief that the market has peaked and will begin to slip.</p><p>One physical trader sold October at €1,012/t on CME yesterday, at a steep discount to current spot prices, in expectation of protracted softening. <i>Argus</i>' underlying northwest EU HRC index was at a record high of €1,206.50/t yesterday, with the month-to-date average at €1,149.42/t.</p><p>Liquidity is low, with only buyers in need committing to tonnages at present. This means that most transactions are for comparatively small amounts at very high prices. </p><p>Service centres also report buying hand-to-mouth to avoid building too much stock — from a position of not being able to buy enough in the last few months, they are now very concerned about having too much at what they perceive as the top of the market. </p><p>Import penetration is weighing on the Italian market, causing a large disconnect between prices in the more spot-driven south compared with the contract-heavy north. The NW EU HRC index stood at a record €82.75/t premium to the Italian index yesterday, with the latter at €1,123.75/t ex-works. Such a spread is not sustainable, as Italian sellers can move tonnes to the north, although railcar, wagon and driver availability has made this a little tougher of late. Freight costs from Italy to Germany are €40-50/t at present, sources estimate.</p><p>One of the supportive factors for the north has been the strong Italian market until recently, as mills looked to keep tonnes for their domestic buyers. But this has started to reverse with the huge price spread — a German service centre inquired about 1,500t with an Italian mill this week, and for the first time since January-March was told it could have all of the tonnage, albeit at very high prices.</p><p>Import offers to the north are also competitive. Asian HRC has been booked below €1,000/t fca Antwerp in the last week, at a huge discount to official mill offers. Offers to Italy are also below €1,000/t, although mills without duty or quota issues are trying to obtain a premium. Egyptian offers have been around €1,050/t cif of late. </p><p>Bellwether Chinese prices have fallen sharply in the past six weeks, with Beijing looking to cool overheated commodity prices to aid manufacturers. <i>Argus</i>' benchmark fob China HRC index fell from $1,031/t fob on 12 May to $894/t today, a $137/t drop. </p><p>European automotive steel demand has slowed dramatically given the semiconductor-driven shortages. Carmakers surveyed by <i>Argus</i> suggest that they are directing all of the conductors they can get into higher-value vehicles, which often contain more aluminium than steel. Real automotive demand only had to fall a few basis points in 2019 for domestic European producers to cut prices sharply in a battle for volume, despite limited import penetration after the first quarter. </p><p>Should automotive demand remain subdued, there is a chance that the supply chain will destock to an extent. But service centres and mills that have not been able to sell in the automotive market have been able to direct tonnes into the general industrial segment at high prices.</p><p>The potential reopening of the US market for Europeans is one bull-flag for mills to wave. The US market has been even hotter than Europe, and the premium for US HRC is almost $420/t compared with the north. Should the 25pc Section 232 tariffs disappear, there would be a stateside export valve for European mills, at least for a period.</p><p class="bylines">By Colin Richardson</p></article>
