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Analysis: Europe's steel-raw materials spread slips in July after Q2 record

Highlights

NWE HRC spot prices average Eur1,172.64/mt in July

Met coal, scrap, iron ore pellet costs rise

Iron ore lump falls

The European hot-rolled coil steel to raw materials price spread edged lower in July as higher coking coal, iron ore pellet and scrap prices limited gains from record monthly HRC spot prices.

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The Northwest European HRC-steel raw materials spot spread moved down to Eur758/mt ($900/mt) in July from Eur761/mt in June, according to estimates by S&P Global Platts on Aug. 2.

In the second quarter, the European HRC spread averaged a new record high Eur695/mt, up 61% from Q1, on the back of higher steel prices.

A recovery in steel prices has led margins to strengthen in the past year, while spot prices have turned down from record levels. Platts Northwest European HRC prices averaged at a new high of Eur1,172.64/mt ex-works in July, while on July 30, the spot price was assessed at Eur1,165/mt ex-works, below the daily high of 1,190/mt ex-works assessed on June 25.

The rise in spot prices for commodity-grade HRC continue not to be fully reflected in sales and deliveries for steelmakers due to earlier negotiated terms, and flat steel prices remain stronger than long steel products.

ArcelorMittal, Europe's biggest steelmaker, said Q2 results did not reflect the full improvement in steel to raw materials spreads due to pricing lags in orders, which will result in a positive effect on Q3. The typical lower seasonal demand and pricing is "expected to be less pronounced then normal," the company said July 29.

"As a business, we have not seen the full impact of spot pricing," ArcelorMittal CEO Aditya Mittal told analysts July 29. "The contract lag effects will come in the second half."

Because of timing lags, realized prices are expected to continue to rise in all steel segments, while at the same time, costs are also rising, ArcelorMittal CFO Genuino Magalhaes Christino added.

Actual steel margins depend on realized steel sales volumes, with the mix of pricing and terms in sales and orders under contracts.

Even with higher raw materials costs, the fuller realization of higher steel prices should expand profitability in Q3, Christino said.

Iron ore pellets, scrap and coking coal costs delivered in Northwest Europe and basis Rotterdam port rose further in July after gains in June. Atlantic blast furnace contract pellet premiums moved up in Q3, assessed by Platts at $77.50/dry mt in July, from $65/dmt in June.

China, US spreads

In China, the spread between HRC export prices and iron ore and coking coal costs fell further to $384.35/mt FOB basis in July from $390.94/mt in June.

Chinese steel prices have seen smaller gains through the latest cycle, compared with prices in Europe and the US. China HRC prices made a recovery in July from June, while coking coal and coke costs remain high, and benchmark iron ore prices were little changed over July, at a high level.

US HRC to Midwest shredded scrap spreads rose further to a fresh record of $1,370.51/st in July from $1,232.16/st in June. Stronger US steel prices continue to build on spreads, with Midwest shredded scrap pricing little changed from June.

In Europe, spot HRC spreads remain close to record levels, and a fall in spot iron ore import prices in China at the end of July could support margins longer term. Platts HRC-raw materials spread of Eur761/mt for June was the highest since at least April 2016 -- when the spreads were first tracked by Platts.

European reference steel raw materials costs increased in July with iron ore and met coal costs, with scrap per ton of crude steel rising to Eur415/mt in July, exceeding Eur400/mt for the first time, according to Platts estimates.

EU mills ran at lower daily pig iron and steel rates in June than in May after a run of monthly increases from Q2 2020, according to World Steel Association data. The data may show signs of operational bottlenecks and limited raw materials for further expansions, at higher costs.

Iron ore prices in China, used as a benchmark for global contracts, fell 1.2% month on month to average at $211.99/dmt CFR China in July. Spot lump premiums in China fell to 58.14 cents/dmtu, or around $36.34/dmt in July, 15% lower than June's record premium.

Coking coal prices on a delivered net forward basis into Rotterdam rose 18% from June to average at $226.76/mt CFR Rotterdam in July. Premium low-vol coking coal prices netforward to Rotterdam had risen 75% since April.

Regional northern European shredded scrap prices rose 4.6% to Eur452.50/mt delivered basis in July, with gains in European scrap adding to costs.

Platts steel to raw material price spreads are indicative margins that do not account for inland logistic costs, power, natural gas or other blast furnace and steel-making inputs such as ferroalloys, anodes and refractories. Costs to operate sintering and coke plants are not included.

A HRC-raw material spread of Eur250/mt is said to be close to typical operating breakeven for commodity grade steel at regional blast furnace mills, operating facilities at higher capacity utilization. In 2019, the spread averaged Eur241/mt.

Breakeven levels in Europe are partly dependent on logistics costs and raw material configurations.

Platts European HRC spreads are based on commodity-grade flat steel specifications. Contract steel sales may have additional grade and specification-based premiums, and terms may lag spot indexes.

Producers with higher grade steel portfolios may be less exposed to commodity-grade steel margins against underlying steel raw materials costs.