European steel markets currently face prolonged higher coking coal, ferrous scrap and iron ore costs hitting margins, as steel profitability and demand recovered last year following the initial pandemic shutdowns in 2020. High steel prices in 2021 supported margins, peaking in August, while supply chain volatility elevated steelmaking costs.
Cost increases followed record high iron ore and coking coal prices at different phases through the year, while higher iron ore and coking coal costs have persisted. This is partly due to seasonally weaker supply and disruptions, including pandemic-related restrictions in supply basins such as the US Appalachians and Australia.
The Northwest European hot-rolled coil steel to raw materials price spread averaged just above Eur635/mt ($725/mt) in 2021, more than double the Eur253/mt average in 2020, according to S&P Global Platts calculations.
The difference in 2021 of Eur382/mt could contribute into profits, as indicative margins factor in typical and one-time running costs and weaker operational performance by European steel mills in 2020.
Steel to raw materials spreads have seen pressure, after January’s spike in global iron ore and coking coal costs. The Northwest Europe HRC-steel raw materials spot spread fell to Eur532/mt in January, from Eur591/mt in December.
Investment bank Jefferies analysts recently cited sustained high energy prices in Europe, coking coal prices greater than $400/mt and iron ore’s recent rebound to greater than $130/mt as contributing factors for mills seeking higher flat steel prices. EU carbon prices have risen further, boosting compliance costs.
Platts Northwest Europe HRC prices averaged Eur927.18/mt ex-works Ruhr in January, down 0.66% from December.
Steel spreads have fallen gradually from a record of over Eur795/mt in August as coking coal costs climbed on supply disruption and a turn up in global demand to restore met coke supplies.
The cost of pig iron’s main iron ore and coking coal raw materials inputs, climbed in 2021 to average at $398/mt on a CFR Rotterdam basis, up from $245/mt in 2020, based on Platts calculations using a basket of iron ore grades including pellets and representing a mix of solid fuels.
North European shredded scrap prices averaged at Eur396.25/mt delivered basis in 2021, up from Eur237/mt in 2020.
Platts tracked costs using major steel feedstock cost references, including a basket of iron ores with high-grade fines, lump and pellets typically consumed by Northwest European blast furnaces.
In Turkey, the outright spread between steel rebar export prices and imported HMS 80:20 scrap has strengthened to $219/mt in 2021, from $158/mt in 2020. However, the impact of scrap yields available and the greater loss on yield at higher scrap prices limited the additional margin available to mini mills melting scrap.
Platts 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 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 break-even levels at regional blast furnace mills due to higher energy, carbon permit and logistics costs.
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.
— Hector Forster
