EU HRC: Battleground Italy

The continuing fragility of the hot-rolled coil (HRC) market was evident today, as Italy became a battleground for European tonnage and mills cut prices for commodity-grade exports.

Argus' headline daily northwest Europe HRC index slipped by €0.75/t to €476.75/t ex-works and the discount for Italian material widened to €11/t from €7.25/t.

The Italian upswing is losing momentum as more European and third-country sellers fight for orders. German sales into Italy were concluded at €480/t on a delivered basis, while a Serbian mill is offering at a similar level on a cif basis. Some Italian mills lowered offers to reflect a drop in scrap costs, with sales concluded at €465-470/t ex-works, and buyers are pushing for further discounts on sluggish demand.

A leading mill still has availability for delivery at the end of July and beginning of August.

A leading northwest European mill sold into Turkey at $490-500/t cfr as it tries to avoid idling on weak domestic demand. Some market participants suggest it already has output restrictions in place, but a spokesperson denied this.

Most offers into north Africa have been around $520/t cfr for prime European commodity-grade material, but bids are expected to fall as a result of the lower prices on the table for delivery into Turkey.

Domestically in the north, most mills seem pretty firm in their offers, with a view to rolling over contractual agreements for the second half of the year. As a result, some traders suggest there is more interest in importing at around a targeted €470-480/t cfr, although term buyers that have not yet settled are still seeking big reductions.

On the spot market, a mill at Visegrad, Hungary, was offering into another country in the region at €500/t delivered, equating to €470-480/t ex-works. Central and eastern Europe seems to have reacted to output cuts faster than most northern markets, with ArcelorMittal and US Steel Kosice reducing production. The French market is also reportedly on the rise after service centres in Italy and Iberia paid more for replacement coil and upped their outsell prices.

On the over-the-counter swaps market, there was a bid-offer spread of €477-485/t for August, September and the fourth quarter — a slight discount to spot — suggesting financial market participants are unconvinced about the increases being targeted by mills.

Most July offers from northern sellers were at around €490/t ex-works, with one large mill practically off the market, and the third-quarter quote was €510/t ex-works and above. In the physical market, fourth-quarter prices are expected to rise as production cuts announced by ArcelorMittal and followed by others start to bite and the market picks up after summer — July and August are usually particularly slow months.

The backwardation is a little surprising. Typically a weak spot market would lead to firmer forward pricing, or a contango structure. On the US HRC forward curve, for example, September is trading at $575/st and October at $590/st, with the prompt month at $562/st.