Real demand, output cuts to support HRC prices

A sharp drop in European crude steel production and shortage of CIS supply could intensify the uptrend in coil prices as apparent and real demand align this year after the destocking in 2019.

With multiple European mills increasing hot-rolled coil (HRC) offers in the last week or so, prices could rise, supported by strong import offers. Multiple announcements of increases by market leader ArcelorMittal failed last year, but there appears to be a more cohesive upwards push by the bloc's mills this time around. Brisker apparent demand as decoilers restock and longer lead times could also support prices.

EU crude steel production contracted by 4.2pc in January- November last year, and the downside intensified from October onwards, when it slumped by 8.7pc. Output then fell by 10.7pc in November, and is expected to have posted a double-digit decrease in December, given the shorter working month and downtime at Italian producer Arvedi.

The producer was among many that brought maintenance forward, or undertook production cuts amid weaker apparent demand.

But last year's problem was primarily one of apparent demand, and not real consumption. In its last market outlook, European steel association Eurofer said real consumption would slip by just 0.5pc over last year. Even if its forecast is off, which is possible after a very poor second half, the fall is small compared with the likely 5pc drop in production last year.

Even apparent demand is only forecast to be down by 3.1pc, less than the decrease in crude output. The decline in European car production last year led to a massive destocking in the coil supply chain, heightening the decline in apparent demand compared with genuine consumption, and left market participants more bearish than perhaps was warranted. Carmakers stocked up heavily in 2018, ahead of the rollout of a new testing regime, but some suppliers thought this was a new demand norm, rather than a blip, exacerbating the stock overhang of last year.

Interestingly, EU new passenger car registrations actually only dropped by just 0.3pc in January-November, despite the uncertainty caused by the push to move away from the diesel combustion engine.

The unexpected "ingredient" in the equation is CIS flat steel supply, or lack thereof. Even if there is a discrepancy between the perceived drop in steel consumption and the real decrease in output in Europe, imports distorted the real market picture in 2019, also in part because of continuous changes to the safeguard measures. HRC imports into the EU surged in the first quarter last year, after bookings of competitive material in the fourth quarter of 2018 arrived. The imposition of the European Commission's safeguard, and its revision later in the year caused much uncertainty about imports of certain products, particularly hot-dip galvanised in the coil suite.

Although moves in CIS HRC prices are no longer as directly relevant to the European market as they were pre-anti-dumping duties, they have an impact on domestic prices in Turkey, and as a result, export values.

With Russian producer MMK — which is historically one of the largest players in the spot market — due to begin a lengthy maintenance period and being out of the market for the time being, Turkish prices have surged over the past month amid tighter supply. This has contributed to an unsustainable gap between imports and local prices in Europe, which the EU mills are moving quickly to close.

MMK's maintenance is scheduled to start in March and will last for 110 days. This means spot market offers are likely to re-emerge in May-June. But the downtime will see capacity increase by 1mn t/yr to 5mn t/yr, which will surely exert pressure on Turkish prices, given the sheer volume of HRC Turkey buys from the CIS.

Although the supply shortage in the CIS is indirectly helping the uptrend in European prices and will continue doing so until May, it will likely no longer be a contributing factor over the summer, but the adjustment between apparent and real demand can help prevent a repetition of the HRC price slump observed in 2019.

By Lora Stoyanova