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Feature: Brighter EU long steel demand outlook expected in 2020

London — Market sources are predicting a slightly brighter 2020 for European long producers, mainly driven by stronger apparent demand, following a challenging year on the back of the subdued end-user interest in 2019.

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Although market sources said they do not expect 2020 to be fundamentally different to the previous year, amid a persistently volatile price environment, they nevertheless expect better demand "as buyers should increase their stocks but also because buying is expected to continue to recover mainly in the construction sector, a key sector for long steel products."

Total EU construction output is forecast to increase by 3.5% in 2019 and by 1.2% in 2020, according to Eurofer, the European steel producers' association.

"The demand for long steel will remain strong in Q1, German requirements [for such materials] is still strong," one German scrap recycler told Platts.

In fact, construction backlogs in Germany are at historic highs as the construction sector in the country is currently facing levels of strained capacity amid unfilled vacancies in the sector, according to a research note by Oxford Economics from late 2019.

In particular, housing orders have seen a strong recovery over the years and are at the highest in almost 20 years, the data showed. This should support buying and demand in the Northwest European market for long steel products in the next quarters, market sources said.

"We are quite optimistic for Q1, as we had already sold volumes for February delivery in December," a rebar seller added.

The year has already started with long steel producers negotiating quarterly contracts, trying to push for price increases of Eur20/mt, in order to improve their margins after scrap prices went up since last November.

INPUT COST PRESSURES SUPPORT LONGS PRICES

Since November, scrap prices delivered to mills in southern and Northwest Europe have increased by around Eur35-40/mt -- in line with a recovery in Turkish scrap prices.

According to scrap dealers and mills, which are currently negotiating January scrap contacts, the anticipation is for prices to increase by roughly Eur5-10/mt in southern Europe and by around Eur15/mt in Northwest Europe, on the month, to prices for E40 of around Eur260-270/mt delivered to steelworks.

Long steel producers in northwest and south Europe saw their margins squeezed over the course of the year 2019, to levels not seen since mid-2017, as lower long steel prices were not fully passed on to raw materials prices -- supported by a rally in iron ore and some domestic supply tightness in scrap.

"I think the rest of January will be stable. Maybe will see some downside of Eur10/mt in February, but I see a strong demand for scrap," one Spanish recycler said, suggesting very limited -- if any -- downside for longs prices in Q1.

For some European producers, there may be additional reason to push for higher offers -- namely higher energy costs. Spain's steel market is reeling from the shock of a large expected increase in energy costs, after a disappointing outcome from the interruptibility auction for the first half of 2020.

The new minority Spanish government, following its inauguration this week, has pledged to push through reforms that will create a new mechanism for large energy consumers to obtain cheaper prices. This might come into force in the second half of the year.

Furthermore, the lack of rebar import pressure is likely to support domestic rebar prices over the first quarter of 2020. The EU import safeguard quota of almost 300,000 mt for Turkish-origin rebar over the July 2019-June 2020 period was exhausted in October 2019.

As of January 9, only 5,916 mt of the Russia-origin rebar quota remains, while only 8,596 mt remains of the Ukraine-origin rebar quota, with the last allocation made on January 3.

EU DOMESTIC REBAR MILLS RAISE OFFERS BUT BUYERS WAIT

This week, spot mill offers from Germany and the Benelux region were heard at Eur495-Eur500/mt delivered following the New Year holidays, while offers in France were heard slightly lower at Eur490/mt delivered.

Despite the largely positive outlook for 2020, stockholders and distributors have largely adopted a "wait-and-see" approach in the first weeks of the new year, with only deals for small volumes of 100-150 mt heard at Eur490/mt delivered Benelux, while a Benelux-based distributor cited a tradable value for 500 mt at Eur485-Eur495/mt delivered.

"There is some activity, and I am able to sell some small volumes, but we are waiting for the January scrap negotiations to conclude," a seller told Platts.

Platts assessed TSI Northwest Europe Rebar at Eur475/mt ex-works Friday, up Eur2.50/mt week on week.

"The problem is that customers in Germany are still well-covered as mills sold large volumes late last year at low prices so the mills might manage to sell one or two truckloads of rebar at the new offer levels of Eur495/mt," the Spanish mill source said.

Elsewhere, European rebar exporters will hope for reasonable demand in an increasingly competitive export environment in 2020, with cheaper Turkish and CIS-origin offers on the market.

Over 350,000 mt of EU rebar was exported to the US in January-October 2019, according to Eurofer, despite the 25% Section 232 duty, while 102,623 mt was exported to Canada in the same period.

EU rebar mills even exported 230,135 mt to Algeria in January-October 2019, a significant improvement on the 149,881 mt exported to the same destination in the whole of 2018. However, this still remains a significant decline from pre-2016, when over 2 million mt was regularly exported to Algeria each year.

Platts assessed Steel Rebar FOB southern Europe at Eur430-Eur435/mt Friday, unchanged over the week.