Europe HRC steel spread surges in March on offers, raw materials costs spike

The spread between European hot-rolled coil steel and raw materials prices rose 44% in March as higher offers and prices for steel more than covered a spike in coking coal, iron ore and ferrous scrap, according to analysis by S&P Global Commodity Insights.

The Northwest European HRC steel-raw materials spot spread rose to Eur773/mt ($850/mt) in March, from Eur538/mt in February. The record high was Eur795/mt in August 2021, according to S&P Global calculations.

The NWE HRC spread averaged around Eur614/mt in Q1, down from Eur645/mt in Q4 2021. The spread peaked in 2021 at an average Eur771/mt over Q3.

Regional steel prices recovered sharply in March on tighter available supplies following Russia’s invasion of Ukraine, a key steel, ferrous scrap and iron ore exporter, and as higher energy and raw materials costs continued to support steel producers’ offers.

European steelmakers strongly depend on ongoing supplies of PCI coal (pulverized coal injection material) and iron ore pellets from Russia and Ukraine, with alternatives pushing up costs and with the possibility of additional operating constraints.

Meanwhile, stronger-than-average HRC prices over the past year have supported available cash cost margins above typical steel industry levels, according to S&P Global data.

Seaborne coking coal prices hit new record highs in March, while iron ore prices increased further. Pellet and lump premiums, high-grade fines and concentrate prices and demand found support from relatively wide 62%-65% Fe fines spreads last month.

Higher raw materials costs further boosted the overall cost of pig iron produced in Europe, while higher European shredded scrap prices lifted steel making costs further.

S&P Global tracked costs using major steel feedstock cost references, including a basket of iron ores with high-grade fines, lump and pellets typically consumed by NWE blast furnaces.

HRC prices rise

Platts NWE HRC prices averaged a record high Eur1,290/mt ex-works Ruhr in March, up 34% from February. Platts NW Europe HRC was assessed at Eur1,390/mt ex-works Ruhr on March 31.

Spot prices for commodity-grade HRC are not fully reflected in sales and deliveries by steelmakers, due to earlier negotiated pricing terms and long-term contract pricing.

Iron ore import prices in China, used as a benchmark for global contracts, rose further in March as stimulus measures aided expectations for stronger forward demand. Prices in March averaged $150.84/dry mt CFR China for benchmark Platts IODEX 62% Fe fines, up 6.2% from February.

Spot lump ore premiums in China rose 18% month on month to 40.27 cents/dmtu in March, to the equivalent of around $25.17/dmt. Premiums more than doubled from December.

Platts Atlantic blast furnace contract pellet premiums in March increased to $67/dmt, up from $66.50/dmt in February, tracking contract premiums and pricing terms settled for Q1 volumes. Premiums rose from the Q4 average of $55.50/dmt.

Coking coal prices on a delivered net forward basis into Rotterdam in March rose 34% to $617.17/mt CFR Rotterdam, a fresh high for the price reference using Capesize vessel rates from Queensland.

Regional northern European shredded scrap prices increased to Eur525/mt in March, from Eur430/mt delivered basis in February.

China, US spreads

In China, the spread between HRC export prices and imported iron ore and coking coal costs rose to $359.65/mt in March, from $335.48/mt in February, on higher steel prices.

Steel prices continued to outpace higher iron ore and coking coal prices delivered into China.

China HRC spreads remained stronger than a year earlier, and higher than 2020 levels, which were below the $300/mt mark.

A recovery in US flat steel prices followed higher raw materials costs. US HRC to Midwest shredded scrap spreads recovered to $707.33/st in March, from a recent low of $678.41/st in February.

S&P Global’s Europe HRC to raw materials price spreads are indicative operating margins that do not account for inland logistical 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.

There may be further upward pressure on typical operating breakeven levels at regional blast furnace mills, due to higher energy, carbon permit, and logistical costs.

Before the pandemic, an HRC-raw materials spread of Eur250/mt was said to be close to operating breakeven for commodity grade steel, based on operating facilities at higher capacity utilization, according to steel industry sources.

However, with higher logistics, trade financing, operating, and facilities costs stemming from the sudden shutdown of furnaces and mills in 2020, industry costs have risen. In 2019, the Northwest European HRC spread averaged Eur241/mt.

Breakeven levels in Europe are partly dependent on the mix of logistical costs and raw material configurations.

S&P Global’s estimated 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.

— Hector Forster