European hot-rolled coil (HRC) contractual talks for the second half of this year are likely to be just as protracted as those for the first six months, and exceptionally difficult for mills.
Northwest European producers managed to lock in prices of around €430-450/t for January-June on HRC, despite the rapid fall in spot prices over last year — the market reached a low of €412.25/t ex-works in mid-November, according to Argus' benchmark daily index.
Spot prices firmed over December and the first couple of months of this year, reaching €484.75/t ex-works on 27 February. Some mills even reneged on contractual volumes with other mills over the first half, given the increases.
But since Covid-19 ravaged demand from mid-March, prices have retreated rapidly. Argus' NW EU HRC index reached a new low of €398.50/t on June 4, down €86/t from its late February peak. Over the same period feedstock costs have firmed, destroying margins. Analysis by investment bank Jefferies suggest European carbon steel margins will contract to minus $6/t in the second quarter of this year. German steelmakers ThyssenKrupp Steel Europe and Salzgitter will be hardest hit, with earnings before interest, tax, depreciation and amortisation of minus $161/t and minus $15/t, respectively.
Buyers will have less ability to take pain on behalf of mills, given every facet of the supply chain has seen demand diminish, especially in the contract-heavy automotive sector. Buyers will be seeking to pay spot prices for contracts, not more — such levels will not be palatable for most producers given how close they are to breakeven. Mills are signalling for increases, with the hope of securing rollovers.
Contractual volumes too will be clearly diminished — original equipment manufacturers suggest they will be buying 30-40pc of their normal volumes going forward, while mills believe deliveries will be 60-70pc of normal overall.
Undoubtedly, it will be a difficult July-December for mills, even if they slash production further to support prices, which some see as their only option.
Floating base
One solution for contract talks on the mill side is to sell against the monthly average of an index for the second six months of the year, letting the base price float — mills choosing to sell below the forward curve are essentially leaving value on the table, something they can ill afford at present. Big buyers can buy below index most of the time, but can secure greater volume further forward than typically normal by basing their procurement off an index.
Using an index monthly average also allows suppliers and buyers to focus on the premium value-added products, rather than punting on market direction and taking costly time to arrive at a fixed price that will ultimately go against one counterparty.
It also allows them to hedge their market risk, for example using the CME Group N.European HRC contract, the only current exchange-listed hedgeable instrument for north European buyers and sellers. The London Metal Exchange will launch a similar north European HRC contract, probably later this year.
The most contract-focused mills could suffer the hardest going into H2. Those with spot exposure are clearly struggling now — alongside contract heavy mills — as there is little demand or liquidity, so they have to compete on price to win any available business. Heavily automotive-linked mills are also competing in the spot market and will suffer a large drop in volume over the second half of the year, potentially weighing further on spot prices.
There is currently talk that some mills will announce €20/t increases to try and inject momentum into the market ahead of the contract talks. They can peddle reduced import penetration as one driver of increases, with a dumping investigation under way on Turkey, a potential review of Severstal's duty being pushed for, and the HRC safeguard now quarterly. Costs have firmed too, putting most mills in the red. The last trade on the CME contract was at €440/t for the fourth quarter of this year, suggesting the paper market, at least, is buying into upside from current spot levels.
