Europe HRC spread narrows to a three-year low with margins in focus

The spread between European hot-rolled coil steel and raw material prices in September narrowed to the lowest in three years, as rebounding iron ore, coking coal and ferrous scrap costs hit a weak regional steel market and cut into operating margins.

HRC prices declined further in September, falling for a fifth consecutive month, according to an Oct. 2 analysis by S&P Global Commodity Insights.

The Northwest Europe HRC steel-to-raw material spot spread narrowed to average Eur305/mt ($326/mt) in September, from Eur350/mt in August, according to S&P Global estimates. A regional steel mill break-even level may be considered at spreads of around Eur250-Eur300/mt, depending on specific individual sites and cost structures.

In September, the euro weakened to average $1.07 from $1.09 in August, boosting costs for dollar-denominated raw material imports.

The Platts estimated Northwest Europe HRC spread averaged Eur345/mt in Q3, down from Eur470/mt in the second quarter and Eur421/mt in the first quarter.

Spreads have moved lower after a recovery in the first half due to weak steel demand and spot pricing.

Northwest Europe HRC spreads this year have been narrower than the Eur520/mt average in 2022 and Eur636/mt in 2021, during which several strong periods of steel pricing and demand coincided with tighter availability against orders and restocking.

The Northwest European HRC spread remained well below a peak of Eur858/mt seen in April 2022.

The EU steel industry’s pig iron production in August was 12.2% lower year on year, with output affected by stoppages at blast furnaces, according to analysis using World Steel Association data.

Austria, France, Poland, the Czech Republic and the Netherlands contributed to weaker year on year output in August, while Germany and Spain increased output.

S&P Global tracked inputs using major steel feedstock cost references, including a basket of iron ores with high-grade fines, lump and pellets typically consumed by regional blast furnaces in Germany, France and other regional EU markets.

HRC prices

Platts, part of S&P Global Commodity Insights, assessed HRC prices at an average of Eur638.33/mt ex-works Ruhr in September, down 0.75% from August, and at Eur625/mt ex-works Ruhr on Sept. 29.

Iron ore import prices in China — used in global contracts — in September strengthened on the month, averaging $120.79/dry mt CFR China for benchmark Platts IODEX 62% Fe fines.

Spreads between 62% Fe and 65% Fe fines narrowed over September to average $7.85/dmt, from $11.57/dmt in August.

Spot lump ore premiums in China rose in September to 17.81 cents/dmtu on average. The lump premium was equivalent to about $11.13/dmt for the 62.5% Fe grade, up 21% from August.

Platts assessed the Atlantic blast furnace contract pellet premium in September at $50/dmt, up $0.50/dmt from August, based on premiums applied to 62% Fe fines index terms. The assessed premium tracked further settlements for Q3 and pricing terms with spreads, according to S&P Global.

Coking coal prices on a delivered net forward basis into Rotterdam in September increased 19% to $319.24/mt CFR NW Europe, based on transactions at higher prices in Asia and tighter spot availability for October loading cargoes.

The majority of HRC produced in Europe is from integrated mills using iron ore and blast furnace production, rather than typically lower emissions-intensive electric arc furnaces. Italy’s Arvedi and ArcelorMittal’s Sestao plant in Spain produce flat steel via EAFs.

Regional northern European shredded scrap prices rebounded to Eur347.50/mt on a delivered basis in September.

S&P Global’s Europe HRC-to-raw-material price spreads are indicative operating margins that do not account for inland logistical costs, power, natural gas or other blast furnace and steelmaking inputs, such as ferroalloys, anodes and refractories. Costs to operate sintering and coke plants are not included.

Typical operating breakeven levels at regional blast furnace mills may see further pressure from higher energy, carbon permit and logistics costs.

Hector Forster