European steel margins may dip in Q2 on weak demand

Issued at 2020-04-08

European hot rolled coil steel margins may weaken further in the second quarter of 2020, due to low demand as the coronavirus pandemic disrupts global trade, according to S&P Global Platts estimates.

The Northwest European HRC steel to raw materials spread for Q2 may fall to Eur231/mt ($249) on relatively stronger raw material costs from around Eur253/mt in the first three months of the year, based on calculations using futures prices on April 3 for steel, iron ore and coking coal.

The NWE HRC-raw materials spread averaged Eur264/mt ($289/mt) in March, according to Platts data.

In 2019, the NWE HRC-raw materials spread averaged around Eur228/mt in the fourth quarter and Eur236/mt in the third quarter — levels considered below cash costs.

Breakeven operating costs — expected by industry sources to be closer to steel-to-raw materials spreads of Eur250/mt — are partly dependent on logistics costs and raw materials configurations.

Blast furnaces in Germany, France, Spain, Italy and other countries have been taken offline in the last few weeks to mirror steel demand more closely as automakers and other end-users in Europe idled plants and factory lines.

HRC futures prices on Friday indicated NWE HRC was available for hedging at lower levels than the March average, with expectations of further price weakness later this quarter.

This comes after European benchmark HRC ex-works Ruhr prices recovered in February and March.

Steel prices held up with the decrease in production, and steeper declines in iron ore and scrap prices may support steel margins closer to March levels.

Lower pig iron output in Europe may continue to pressure producers, however, with the EU contending with flat steel imports from Turkey, the Commonwealth of Independent States and Asia.

Germany’s pig iron output fell 9% year on year in first two months of 2020. In Q1 2019, production declined 3.5%, and Q1 2018 output weakened compared with 2017.
Iron ore

Global demand for iron ore may be sustained by China, where the steel industry relies mainly on iron ore imports and needs high-grade ores to manage air pollution and boost productivity.

China can switch to using a range of iron ore qualities, based on the value in use at the time, and availability of domestic and imported grades.

China is trying to support steel production as the economy absorbs an increase in inventories to 100 million mt — equivalent to well over a month of crude steel production.

Current finished and semi-finished steel stocks are more than double the typical inventory in China, as demand slowed in January and February at the peak of China’s coronavirus restrictions and during the Lunar New Year.

European steel indicative margins have remained low and below sustainable levels since Q2 2019. In 2018, the NWE HRC steel to raw materials spread averaged more than Eur344/mt.

Further declines in margins may limit incentives for shuttered European steel capacity to come back online, following idlings spurred by coronavirus measures.

Steel demand and markets-based targets for bringing plants back online may delay restarts, as the capability for restarting recovers after the coronavirus is contained.

Iron ore prices have fallen to the bottom of a recent trading range, with premium hard coking coal prices in early April falling below marginal cash costs.

Global seaborne iron ore and coking coal supplies typically improve in the second quarter and the remainder of the year, as Australia and Brazil move out of the rainy season, which cuts output in Q1.

Several US coking coal mines have already idled temporarily for safety reasons, and there is the potential for further disruption at global coal and iron ore mines on coronavirus-related restrictions to operations.