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Analysis: Europe HRC steel spreads slump in November

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Analysis: Europe HRC steel spreads slump in November

Highlights

HRC spreads weaken on low steel prices

Higher scrap prices boost costs

London — European steel spreads with raw materials weakened in November, due to low HRC prices and higher regional ferrous scrap prices, according to an analysis by S&P Global Platts on Tuesday.

The Northwest European hot-rolled coil steel to raw materials spread averaged Eur240.17/mt ($264.19/mt) in November, from Eur247.28/mt in October, based on Platts calculations.

Regional North European shredded scrap prices rebounded sharply in November, lifting crude steel costs even as pig iron raw materials costs fell.

Weaker steel to raw materials spreads may push mills below operating break even, expected to be around Eur250/mt.

Additional logistics, energy, services and labor costs in the EU may be higher than several markets, such as the Commonwealth of Independent States region and China.

European HRC to raw materials spreads were largely flat in the third quarter from the low of the previous quarter, and much weaker than in Q1 2019 and from 2018 and 2017 levels.

Steel mills in the region such as SSAB have reported operating losses for their European steel business in the July-September period. Companies are cutting production, removing steel raw materials demand at the margin.

The regional Platts HRC spread averaged Eur235.75/mt in the third quarter, from Eur229/mt in Q2.

The spread hit a low of Eur206.76/mt in July, as high spot iron ore prices used in contracts factored into costs.

In China, steel to iron ore and coking coal spreads recovered strongly last month for both rebar and HRC, carried up by stronger steel prices and weaker import coking coal costs.

This is up from weaker China steel margins in June and July.

In November, Platts European HRC steel dropped to average Eur427.10/mt ex-works Ruhr, down from Eur434.87/mt in October, marking a fresh monthly low for 2019.

In November, benchmark iron ore prices fell around $5 from October to $84.68/dry mt CFR China.

Netback prices using spot Capesize rates saw iron ore FOB prices in the Atlantic more stable, due to weaker voyage rates to China.

The 62% Fe-65% Fe spread widened further in China's spot market over November from October. This led to higher premiums paid for higher-quality and direct charge material over benchmark sinter fines.

The reference premium low-vol coking coal index delivered to Europe fell in November to $147.62/mt CFR Rotterdam, from October's $163.55/mt average.

Platts steel to raw materials price spreads are indicative margins that do not account for inland logistics costs, power, natural gas or other blast furnace and steelmaking inputs such as ferroalloys, anodes and refractories.

The indicative crude steel mill margins are based on a combination of iron ore fines, lump and pellet prices weighted for use with feedback from steel mills on a typical burden mix.

The current iron ore burden referenced is 30% pellets, 32.5% high-grade fines and concentrates, 22.5% medium-grade fines and 15% lump.

Prevailing Platts Atlantic contract pellet premiums are used, with benchmark met coal pricing adjusted for range of quality in the coke blend and PCI consumption.

Use of shredded scrap to pig iron at a 15:85 ratio is taken into account, which is a higher rate of ferrous scrap usage than at some operations.

Flexibility in boosting scrap consumption rates may be limited based on some blast furnace and Basic Oxygen Furnace unit configurations.

-- Hector Forster, hector.forster@spglobal.com

-- Edited by Jonathan Fox, newsdesk@spglobal.com