Are European galvanized steel prices set to explode?

Tight domestic supply, strong automotive demand and high raw material costs have already helped European strip steel prices balloon in Q4. But some market participants suspect the initiation of an anti-dumping investigation into Chinese hot-dipped galvanized sheet could see that market “explode.”

Strip steel prices generally are expected to remain firm for much of the first half of the year, with European mills switching their defense of higher offer prices from the burden of raw material costs, to the tightness in supply.

Numerous sources have said major domestic mills will use maintenance works to keep production down in the first half of the year before ramping up output in the July-December period to keep total 2017 output in line with 2016. But while buyers (and some mills sources) alike expect flat fundamental demand to result in lower steel prices in the second half of next year, the situation may be different for HDG and, in particular, the spot market.

Market supply of HDG in the European Union was 23.5 million metric tons in 2015, according to official statistics, with domestic producers accounting for 21 million mt. However, much of the domestic supply is tied up in contract business, particularly for the automotive sector.

A spokesperson for ArcelorMittal said the auto industry represents 63% of total HDG consumption – or 9.4 million mt out of a total of 14.9 million mt. The strengthening demand from the buoyant car industry is consuming an ever larger slice of the HDG pie with Eurofer expecting automotive output to rise a further 5.5% year-on-year in 2016 and 3.6% y-o-y in 2017.

Traders argue the demand for higher margin auto grades has left a gap in the spot market for importers to plug, primarily with Chinese material. They say the initiation of an anti-dumping investigation has already closed that option. Lengthy lead-times and the potential for retroactive duties make deals a gamble while, more fundamentally, Chinese offer prices are not currently attractive.

Anti-dumping duties imposed on Chinese and Russian cold-rolled coil have resulted in y-o-y declines in imports from the two countries of 94.5% and 77.6% respectively, while total non-EU CRC supply fell 21.9% y-o-y in the January-September period.

The impact of anti-dumping duties could be even greater in the HDG market as China’s share of non-EU supply is 61.1% in the first nine months of 2016 (up from 55.3% in the full year of 2015). This compares to CRC in 2015 when 54.8% of non-EU supply came from China and Russia.

The main issue is the lack of alternatives, with far fewer options for HDG than for CRC, where Brazil and particularly India have been more prominent. South Korea –the second largest supplier of HDG – is said to have received a “yellow card” from the trade authorities, and multiple sources confirm Korean mills are reluctant to increase their European allocation for fear of trade case reprisals.

The key question, therefore, is can the Europeans bring back the roughly 200,000 mt per month required to fill the void? And if not, what will happen to the spot price?

The capacity certainly seems to be there. According to the Platts SBB steel capacity book published in 2010, the European Union had some 41 million mt of capacity. While that level may not be reflective of the current situation, there has not been a 50% reduction.

ArcelorMittal plans to restart a 400,000 mt/y galvanizing line in Krakow, Poland having moved the idled plant from Estonia, while ThyssenKrupp is reopening its 400,000 mt/y line in Sagunto, Spain. However, the latter is already reportedly fully booked with auto contracts taking priority according to traders who sought allocation from the mill.

Even if the galvanizing capacity is there, the substrate may not. “If you consider ThysssenKrupp being overbooked, Tata will reduce volumes in the first half of the year and Salzgitter the same, Ilva will run at 50% capacity [during maintenance in January], then on the hot side you will already have a problem,” a German buyer said, noting there is already a shortage of HDG in the German and Benelux markets. “I think we will see a sky-high rocket for galv,” he concluded.

Another buyer said the fact that there is supply tightness already, long before the impact of diminishing Chinese imports hits the market, suggests the price can only go one way.

“It’s possible in time the EU will start up some latent capacity. But then why aren’t they doing this now with shortages and prices doubling from beginning of year? The bottom line is that tightness of supply allows mills to increase prices without being hindered – and they all have years of losses to make up,” a stockholder said.

A mill source said the supply and demand shift could see producers prioritize the spot market over longer term contract business. “If there isn’t enough HRC capacity in EU, and with no imports, galv spot price will skyrocket. What are European mills going to do? Keep supplying auto contracts? Drop them to maximize profits on the spot market? Renegotiate auto?”

Some speculate that hot coil will be redirected to serve the likely higher margin galv market, potentially leaving shortages in other areas. “If this continues some mills could decide to move CR over to the galv lines. [Currently] the only major shortage is in galv and many people are afraid CR will face the same problem because of the reduced capacity of the various mills,” a Benelux service center said.

Comparisons to the surge of 2008 may be unfounded, but it is clear many in the market expect a sustained spike in HDG prices.