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Analysis: Europe HRC steel spreads fail to improve in October

European steel indicative margins did not improve in October from September, as lower regional HRC steel prices offset cost advantages from declines in iron ore pellet premiums and scrap, according to an analysis by S&P Global Platts on Friday.


The Northwest Europe hot-rolled coil steel to raw materials spread averaged Eur247.28/mt ($274.48/mt) in October, from Eur251.40/mt in September, based on Platts calculations.


Europe HRC to raw materials spreads were largely flat in the third quarter from the low of the previous quarter, and much weaker than in Q1 2019 and from 2018 and 2017 levels.


The regional HRC spread averaged Eur235.75/mt in the third quarter, from Eur229/mt in the second.


The spread hit a low of Eur206.76/mt in July, as high spot iron ore prices used in contracts factored into costs.


According to European industry sources, a Eur250/mt HRC to raw materials price spread may be close to break-even operating margins at steel mills, after accounting for additional logistics, energy, services and labor costs.


In China, steel to iron ore and coking coal spreads were weak last month for both rebar and HRC, close to lows seen in June and July.


In October, S&P Global Platts European HRC steel dropped to average Eur434.87/mt ex-works Ruhr ($482.71/mt), down from Eur459.81/mt in September and falling to the lowest price all year.


The decline in steel spreads over the past six months clouds the outlook for European steel producers, which have struggled with weaker demand from automakers.


Some mills have tried to consolidate operations in order to cut costs.


Profitability is being hit just as companies seek to invest further to commercialize cutting-edge steelmaking technologies over the next two decades to reduce emissions.


In October, benchmark iron ore prices delivered to China were relatively stable from the previous two months, after a 25% decline from July.


Netback prices using spot Capesize rates saw iron ore FOB prices in the Atlantic fall sharply, due to a surge in voyage rates to China.


The 62% Fe-65% Fe spread widened in China's spot market over October from September, boosting overall premiums paid for higher-quality and direct charge material over benchmark sinter fines.


The reference premium low-vol coking coal delivered to Rotterdam was little changed in October.


Regional North European shredded scrap prices fell further in October from September.


Platts steel to raw materials price spreads are indicative margins that do not account for inland logistics costs, power, natural gas or other blast furnace and steelmaking inputs such as ferroalloys, anodes and refractories.


Spreads trending below Eur250/mt have led to lower steel production in Western Europe so far this year.


PIG IRON OUTPUT LOWER

Pig iron output in the EU in the first nine months of the year fell 1.7% year on year, according to World Steel Association data.


The Platts Northwest Europe HRC spread was well over Eur300/mt in 2018, peaking at Eur375/mt in April last year, which led to higher earnings and EBITDA ratios in 2018 for many steelmakers.


Indicative crude steel mill margins are based on a combination of iron ore fines, lump and pellet prices weighted for use with feedback from steel mills on a typical burden mix. The current iron ore burden referenced is 30% pellets, 32.5% high-grade fines and concentrates, 22.5% medium-grade fines and 15% lump.


Prevailing Platts Atlantic contract pellet premiums are used, with benchmark met coal pricing adjusted for range of quality in the coke blend and PCI consumption.


Use of shredded scrap to pig iron at a 15:85 ratio is taken into account, which is a higher rate of ferrous scrap usage than at some operations.


Flexibility in boosting scrap consumption rates may be limited based on some blast furnace and Basic Oxygen Furnace unit configurations.


Source: S&P Platts

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