ArcelorMittal hikes 2021 HRC contract offers

Europe's largest steelmaker ArcelorMittal is targeting €550/t for quarterly, half-year and yearly hot-rolled coil contracts with northwest European service centres next year.

This is an increase of more than €100/t compared with 2020 contracts. July-December contracts this year were settled around €410-440/t depending on mill, at a rollover to the first-half, market participants said.

Mills and service centres will start contract negotiations in the next few weeks.

Steelmakers' are pushing for higher levels given the very low settlements reached for 2020, and as a result of strong spot market momentum in the past few months. Spot supply has been very tight because of reduced production and brisk apparent demand levels, although activity has reduced substantially this month compared with August and September. The combination of lower output and higher demand has sent lead times into January and February for most northwest European producers, with some even quoting March arrival.

When mills negotiated accords for this year in late 2019, they did so against a much weaker spot market backdrop, as a softer automotive sector caused excess tonnes to be filtered into the spot market, dampening prices. Some northern mills are as much as 70pc exposed to the automotive industry, and the market always struggles to cope with reduced demand from the integral market without cannibalising spot prices.

Argus' daily benchmark northwest EU HRC index reached a low of €412.25/t ex-works on 15 November 2019. The price recovered to a high of €484.75/t ex-works on 27 February, before Covid-19 roiled supply chains in March.

The index then reached a low of €384.50/t on 25 June, and closed at €493.50/t yesterday, an increase of €109/t, somewhat justifying the dramatically higher asking price from ArcelorMittal. But buyers are unlikely to acquiesce to such prices, and will cite the fact that spot market lows were not fully factored into contractual pricing. At the same time, spot market upside has not been fully realised by the mills this year, given they are locked into lower-priced contracts for a substantial amount of tonnage — contract volumes that have been reduced by the pandemic.

Mills can clearly point to higher raw material costs. On 15 November last year, the raw materials basket cost of blast furnace producers was $260.65/t, compared with just below $306/t yesterday. Over the same period the spread for spot HRC has moved to $274/t from $196/t, aided by the rapid increases seen in the past few months.

Given the intense volatility in the market this year, the talks will likely be terse and protracted, and could lead to changes in the pricing mechanism used to decide contracts. One solution would be index-linking against a monthly average, letting the base price float but ensuring prices follow the market in a timely fashion. Swaps and futures contracts could be used to lock in fixed prices for buyers — the CME Group already has a North European HRC contract, and the London Metal Exchange will launch one next year. On the CME open interest reaches out to August-September, which have both traded at €465/t, at a steep discount to ArcelorMittal's physical offer. The curve is only mildly backwardated, with the first quarter trading in the low €470s/t.

With ArcelorMittal increasing its offer to such an extent, there is an expectation in the physical market that it will also push for spot price increases, taking its offer to €550/t in the northwest and €530/t in Italy.

By Colin Richardson