Europe steel-raw materials spreads continue to rise in June, Q2 hits record

The European hot-rolled coil steel and raw materials price spread continued to rise in June, with higher spot coil pricing and new mill offers compensating rising last month’s rise in met coal, iron ore and scrap costs.

The Northwest European HRC-steel raw materials spread increased to Eur761/mt ($913/mt) in June, from Eur716/mt in May, according to estimates by S&P Global Platts on July 1. In the second quarter, the European HRC spread averaged a new record high Eur695/mt, up 61% from Q1, on the back of record steel prices.

Steel margins have remained strong, building from a low of Eur193/mt in June 2020. Spot-based HRC spreads tracked during much of 2020 were well below operating break-even, based on industry data.

An 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 around Eur241/mt.

The rise in spot prices for commodity-grade HRC over the second quarter were said to be not yet fully absorbed into sales and deliveries for a range of coils, with steel plate and some long-steel prices lagging coils.

Those factors limited the scope of indicative steel mill margins based off underlying spreads using spot HRC and main raw materials prices, setting mills up for a more cautious second-half due to higher raw materials costs, according to procurement executives.

Iron ore, scrap and coking coal costs delivered in Northwest Europe and basis Rotterdam port rose sharply during the month. Spot HRC prices remained strong, falling in the last few days of June.

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

The effects of managing inventory and quotation periods on top of additional costs in running operations after disruptions last year continue to lag on steel company margins and earnings, with company guidance and analysts expecting stronger prices and orders since Q4 2020 to be reflected more in Q2 and Q3 results.

China, US spreads

In China, the spread between HRC export prices and iron ore and coking coal costs fell to $390.94/mt in June, from $478.28/mt in May.

Lower steel prices and high raw materials costs squeezed indicative margins, during a period of steel price volatility in Chinese domestic markets. The China HRC export spread was lower than June’s average at $345.52/mt on July 1.

US HRC to shredded scrap spreads reached a record of $1232.16/st in June, from $1,1164.61/st in May. Stronger US steel prices outpaced a rise in Midwest shredded scrap pricing.

In Europe, higher steel prices continued to outpace a basket of reference steel raw materials costs, with iron ore and met coal costs with scrap per ton of crude steel moving up to Eur397/mt in June, from Eur363/mt in May, according to Platts estimates.

The latest 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. June saw a new record for spot HRC steel, averaging at Eur1,158/mt ex-works Ruhr, up 7.2% from May.

Steel mills increased official price offers on new orders further in June, with reported increases slowing from earlier in the year.

EU mills ran at higher pig iron and steel rates in May than a year earlier and compared with April, factoring in recovery from the COVID-19 pandemic, according to World Steel Association data.

EU pig iron rates were 36% higher at 6.82 million mt in May, and for January-May were 11% up at 32.9 million mt, from a year earlier.

Iron ore prices in China, used as a benchmark for global seaborne contracts, rose to $214.55/dry mt CFR China in June, up 4.3% from the prior month.

Coking coal prices on a delivered net forward basis into Rotterdam rose 31% from May to average at $192.66/mt CFR Rotterdam in June.

With the rebound in Australian prices, Platts estimates took into account changes in price relativities for US coking coals and PCIs to the Premium HCC FOB Australia benchmark for pig iron costs.

Northern Europe

Regional northern European shredded scrap prices rose 10% to Eur432.50/mt delivered basis in June, as European scrap costs rose to a new high, from an earlier peak in May.

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.

Break-even 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.

— Hector Forster