EU HRC: Spot falls pressuring contracts

European hot-rolled coil (HRC) buyers and sellers are in the midst of lengthy and tough contract negotiations for the second half of the year.

Weak spot prices, higher raw material costs and sellers' belief in a firmer market have widened the gap between buyers' and sellers' expectations to as much as €70-75/t.

Some buyers still hope to achieve discounts of €50-60/t compared with first-half settlements, while mills are targeting rollovers and even small increases, although most view any rise as unlikely.

The headline Argus daily northwest Europe HRC index edged up by €0.75/t to €478.25/t ex-works. The discount for Italian material stood at €6/t, compared with €5.50/t yesterday.

Decreasing EU import licences and production cuts — most, if not all, major producers are understood to be implementing output reductions over the summer — have boosted market sentiment from August, in anticipation of longer lead times.

But low mill order books and sufficient EU buyers' stocks are seeing sellers push base quality material to Italy, north Africa and Turkey, while focusing on higher-value added products in northern Europe. Export prices today were in a range of $530-550/t cfr/delivered equivalent for July-August product.

EU mills continue to offer third-quarter HRC at a premium to current prices, as they expect reduced supply from sellers and imports to lift the market.

Buyers maintain that third-country offers are not competitive compared with domestic European levels, with import offers this week at €485-490/t cfr south Europe for HRC from a seller in India. Another Indian seller was on the market at lower levels, but with certain order restrictions. Offers from Turkish producers stood at $550/t cfr and below for September shipment at the earliest, although upcoming elections in the country are pushing sellers to the sidelines. Cold-rolled coil offers were at €545-555/t cfr from India.

In the over-the-counter swaps market, the bid-offer spread for July was €480-488/t, a slight premium to the current spot, based on Argus' headline northwest EU HRC index.

Backwardation

In the over-the-counter swaps market, September and the fourth quarter both had a bid-offer spread of €477-485/t. The slight forward backwardation may be a touch surprising to some, given mill efforts to push up pricing and support their contractual negotiations, and the stark weakness in the physical market of late. Typically, a weak spot market would suggest a contango structure going forward, based on the anticipation of prices moving up.

If buyers anticipated prices rising to the offer levels being put forward by mills, they may be keener to turn to imports.

Some northwest European mills are offering €510/t ex-works for third-quarter supply, substantially above the September quote.