Pricing mechanisms evolving in European HRC market

Pricing mechanisms are evolving in the European hot-rolled coil (HRC) market, with contractual agreements for 2020 looking increasingly likely to be based on shorter terms.

In the automotive industry, tier-one car manufacturers and original equipment manufacturers want current HRC spot prices to be the basis for their long-term contracts headed into 2020. This would mean producers acquiescing to €410-420/t ex-works northwest Europe for commodity grade HRC, which would be disastrous for mills and make for a difficult year.

Mills suggest they can accommodate a €50-60/t decline in annual contracts, and slightly lower for six-month deals. Half-yearly deals were signed at €510-€520/t for the second half of 2019, and one northern steelmaker said it expects to close at around €440/t for January-June 2020. This is €26.50/t above Argus' northwest index of €413.50/t yesterday. Another hopes to keep the six month contract decline to €40-50/t.

The increased volatility in the European HRC market this year — Argus's daily northwest Europe HRC index has dropped almost €120/t since 15 November 2018 — is making the contractual talks incredibly difficult.

Some mills are actually trying to shorten terms from yearly to half-yearly and half-yearly to quarterly, to avoid locking in lossmaking prices. They are proposing index-linkage for deals that move to a quarterly basis, something some steelmakers have been fiercely against.

Service centres supplying the automotive sector do not want to drop below half-yearly terms, reflecting the nature of their agreements with customers. But they are realising something needs to give, and their customers are also looking at shorter-terms — for 2019 tier-one car manufacturer and original equipment manufacturer locked in prices at high levels only to see the spot market tank dramatically. Service centres and their customers are also contemplating indexing, but their contractual talks have not long started. In previous years when the market was strengthening on the back of Chinese supply-side reform, customers actually tried to increase terms to insulate themselves from a rising spot market.

The service centres are sandwiched between customers that want low spot prices to be reflected in contracts, and mills that cannot afford such declines. Shorter-terms as low as monthly are possible for industrial customers, who are less contract-focused and more familiar with the increasing volatility afflicting the EU coil market.

And one large mill looking to transition away from an index that is already used in some of its deals for compliance reasons. This would be a bold move, especially in southern Europe where the index is prevalent — index-linking is much less common in northwest Europe.

In the south, mills are looking to lessen their dependence on longer-term contracts, as they expect spot prices to rise in the coming months.

By Colin Richardson