Viewpoint: EU steel coil mills should slash production

There is a growing belief that EU28 hot-rolled coil (HRC) producers, having experienced a torrid year, should drastically slash capacity in the next few months to stop the weak market bleeding too far into 2020.

Shutdowns are already under way, particularly downstream, but so far they have not been sufficient to stop prices falling.

Some buyers are even calling for output cuts of up to 40pc, which would savage mill economies of scale and make for a dire few months. But right now everyone is losing money; service centres are seeing outsell prices to producers fall and their stock value quickly depreciate. Should current spot prices be the basis for next year's contract negotiations, and buyers refuse to move to shorter terms, negative mill margins will continue and they could face another grim year like 2015.

And with December approaching, buyers are reticent to purchase, almost regardless of price. Trading firms have offered HRC into Antwerp for as low as €410/t cfr, €38/t below Argus' domestic northwest Europe index, and are still not enticing buyers. One firm said he would have to pay buyers to take coil in this market.

Some domestic mills are not dismissing bids substantially below index levels for heavy cargoes, which would represent a massive loss per tonne. The quick regression in domestic prices of late, following a drop in import offers, has heightened buyers' nervousness. People would rather buy small lots than commit to big volumes, even at more attractive prices.

In this environment, it could make sense for mills with the requisite financial strength to steepen their losses for a few months, with a view to increasing prices and tightening the market further down the line. Of course, there is a risk that imports will fill the gap left by domestic mills, but there are safeguards in place that limit the amount any one country can sell into the bloc.