Some Italian service centres have been left scrambling for hot-rolled coil supply for later this year, after a mill cancelled deliveries due under contracts pegged to a monthly index.
Several service centre sources said they received notifications in the last week that their allocations were unavailable from the large mill, leaving them short of coil amid an uptick in demand from customers in the white goods and automotive sectors.
The buyers have few domestic alternatives with one producer running at reduced capacity, and a large processor operating on a long eight-week lead time.
Another Italian steelmaker had tried to move away from contracts linked to the same index last year as it deemed them unprofitable, but ended up honouring them after a backlash from customers. The latest move is purely driven by capacity constraints rather than the structure of the contracts.
Nevertheless, a monthly index will struggle to reflect the volatility of the Italian coil market, with its need for imports and exposure to global prices. This volatility has been heightened by tight domestic supply and reduced steelmaking output across Europe.
Argus‘ domestic Italian index has risen by €72/t since August 18, to €475/t yesterday, and in the last week alone has increased by €11/t: it is incredibly difficult for an index that prints just once a month to capture such volatility, given that the market regularly moves on a daily basis.
As a result, any mill selling against the index will miss out in a rising market, while buyers will be insulated from higher levels provided contracts are honoured. In a falling market, contracts pegged to a monthly index will typically see buyers miss out, as it will lag the downside.
By Colin Richardson
Published date: 18 September 2020
