Salzgitter's margins squeezed amid volatile steel raw material prices in 2019

London — German steelmaker Salzgitter said Monday it continues to hedge iron ore and coking coal prices amid volatility in raw materials prices last year, as a decline in steel demand squeezed margins and profits.

"The raw materials price trend on the international procurement markets was volatile with respect to the determinant raw materials such as iron ore, coking coal and scrap," the company said in its fourth-quarter earnings report.

Salzgitter, which operates blast furnaces and scrap-based electric arc furnaces, said it uses hedging "within a limited scope, mainly for iron ore as well as for coking coal."

Salzgitter said it assumed raw materials price volatility to be passed on to steel customers to the extent price swings could not constitute a threat to the company as a going concern.

Iron ore prices peaked in July last year after supply tightness brought on by Vale's dam disaster in January 2019 idled mines for safety checks. However, coking coal prices fell back in the second half of 2019 as demand outside China declined, tracking weaker pig iron production, Salzgitter said.

Salzgitter applies a system to monitor sales and procurement to identify risks between fixed-price procurement of raw materials and fixed-price products, and "defined volumes" of iron ore and coking coal are hedged to secure against price risks.

The company said the European steel industry continues to see a decline in steel order intake, "ongoing since mid-2018," due to weak demand from important customer groups, and its trading arms reported decreased steel selling prices in 2019.

"Massive overcapacities and the ensuing pressure on margins continue to prevail in the global steel markets," Salzgitter said.

The company's strip steel and plate businesses reported losses on an earnings before interest and taxes basis for 2019, contributing to a group net loss of Eur237.30 million ($265 million).

European HRC steel price spreads to major raw materials costs rebounded in February, marking the first increase over three quarters with lower margins in 2019, according to S&P Global Platts' estimates.

The Northwest Europe hot-rolled coil steel to raw materials spread averaged at below Eur229/mt in Q4 2019, and Eur236/mt in Q3 2019, and regional breakeven operating costs are expected to be close to Eur250/mt.

This is partly dependent on logistics costs and raw materials configurations, as well as sales contracts across steel grades. The Europe HRC spreads are based on commodity grade flat steel specifications.