The European steel sector's current positive operating environment as highlighted by investment bank Jefferies and other analysts is supported by high growth in indicative steel margins against iron ore and coking coal, according to an analysis by S&P Global Platts Tuesday.
Higher implied steel margins may linger, as Jefferies expects high 2018 contract coil price increases in Europe.
The full impact of underlying lower prices in spot coking coal and iron ore references may be seen in the fourth quarter. The benefit to Europeans of cheaper feedstocks is likely to be seen after the third quarter, when contract frameworks were against higher spot prices and as earlier cargoes are cleared.
The pricing spread between Northwest European hot-rolled coil steel (HRC) prices, with local procured shredded scrap and a mix of delivered Rotterdam prices for coking coal and iron ore grades -- including fines, pellet and lump -- has shown further expansion.
As of Monday, the spread surpassed Eur404/mt ($475/mt), from the Eur349/mt average for September, as the costs of raw materials fell.
This spread is based on Platts estimates and calculations using spot data and premiums. It does not include inland transportation, ferroalloys and other raw materials, and assumes an operating mix that may be different based on strategies pursued by different steel groups and at individual regional blast furnaces.
Further lower raw material prices may aid working capital requirements.
This may aid inventory build before and during the European winter season, which is prone to weather disruption from key coking coal basin Queensland.
EUROPE STRENGTH
"Euro steelmakers are enjoying the strongest market conditions in eight years, and with Chinese supply-side reform and mounting EU trade protections re-setting the supply/demand balance tighter, we believe robust margins may persist for the foreseeable future," Jefferies analysts led by Seth Rosenfeld wrote in an industry note dated Tuesday.
Jefferies suggested European HRC spreads with raw materials were at $362/mt, "an impressive 46% above historical average."
Credit rating agency Moody's expects steel spreads in Europe to gain support from steel prices and iron ore and coking coal costs not rising beyond average levels in the first half of 2017.
Platts IODEX averaged $74.45/dry mt CFR China and Premium Low Vol HCC at $179.10/mt FOB Australia, respectively, over H1 2017.
"We expect steel spreads to remain at their current healthy levels at around Eur330/mt for the rest of 2017 and to soften somewhat during 2018 towards Eur300/mt, which would still be above the 2016 average of Eur270/mt," Moody's analysts led by Gianmarco Migliavacca said in a report Tuesday.
With 2018 contractual pricing terms ahead and purchasing planning in full swing, tendencies such as wider relative differentials established between lower and higher grade iron ore fines with base fines may affect choices and pricing frameworks.
PRICING TERMS
Pricing contract terms in iron ore and met coal such as grade escalators, penalty and premia structures, freight calculations and differentials are often negotiated yearly. Prices for 65% Fe fines and IODEX 62% Fines, as well as for lower iron, higher silica, material widened in spot markets into China.
Further pellet and lump premiums saw strength in the China spot market developing later this year on pollution cutting-related demand for purer and easier to process material, consuming less energy and emitting fewer pollutants.
Atlantic Basin iron ore pellet contract prices rose 5.8% in the third quarter, due to higher fines prices, while Platts estimated Atlantic monthly contract blast furnace pellet premiums at $44/dmt during Q3. In October, Platts assessed the premium up to $45.50/dmt.
The spread between 65% Fe fines and 62% Fines ballooned to $23.43/mt on average in September, the highest in monetary terms since Platts started assessing the two products.
Steel mill margins have been sky high in China, where September spreads between HRC with iron ore and HCC, as well as those for rebar with the raw materials, rose to the highest levels since the financial crisis of 2008-09.
Moody's believes Chinese steel demand and prices have improved while steel capacity fell gradually since the start of 2017.
This aided balance, with lingering installed steel overcapacity, and is likely to support steel prices in China and elsewhere, it said.
More importantly, this may "reduce the threat of cheaper Chinese imports being increasingly directed to Europe," to aid margins for European steelmakers, Moody's said.
