Global steel mill margins have shrunk in 2019, in turn pushing down iron ore and coke consumption and prices for coking coal.
In 2018 Platts benchmark US hot rolled coil (HRC) spot prices exceeded $1000/mt delivered Midwest for the first time since 2008, and the sustained run in steel pricing and demand since 2016 delivered high profits for steel producers.
High global steel prices last year have quickly been forgotten, as offtake from steel buyers in the US and Europe reduced into 2019, and high iron ore and coke costs squeezed margins.
Steel markets are still currently testing their lows, after high profits last year at steel producers following a sustained run in steel pricing and demand since 2016. A steel price rebound off current lows has failed to solidify in Europe since northern hemisphere markets slowed into summer.
Global trade tariffs in steel and raw materials, in markets such as the US, EU, Turkey and India, may have added more volatility into the downturn. This is further impacting on the well-known cyclicality in the steel sector.
Steel production declines are gathering pace in the Atlantic Basin, and reducing consumption of coking coal. Price negotiations in North America for coal supplied through 2020 are seeing low bids back at 2018 levels.
High-grade ores suffer
Lower steelmaking rates are pushing down consumption of merchant coke and high-grade iron ores such as pellets, blighting the outlook for raw materials premiums, and overall demand.
In addition, lower steel mill productivity and EU mills’ unused carbon permits may be aiding the switch to lower quality raw materials in Europe.
Any surplus carbon allowances at a time of weak margins and lower steel production may limit demand for purer and better quality raw materials, which give higher pig iron rates and lower emissions per ton of steel produced.
Pellet premiums were agreed earlier in some contracts for new 2019 volume at a reference of $58/dmt over 65% Fe fines indices for blast furnace grades, in Atlantic and northeast Asia markets. But with the first half 2019 rise in iron ore benchmark fines persisting into July, those premiums rendered pellets unaffordable.
No relief in sight
Since northern hemisphere markets slowed into summer, a rebound in steel prices has failed to solidify. Even with 25% lower benchmark iron ore prices into August from the peak in early July, mill margins remain slim.
A stronger rebound in steel prices looks elusive on myriad economic and market factors influencing sentiment around demand for steel goods.
China’s expected deceleration in stimulus measures was one driver, and the risk of global recession is now shaking investment confidence further, reeling metals markets.
Flat steel mills may be too exposed to the auto industry, which is searching for answers as auto suppliers evolve against changing consumer demand and buying patterns, according to several market sources. A shakeout in drivetrain technology and vehicle ownership and financing changes may be contributing to weaker forward orders, as consumers seek more information and wait for clarity on regulations before investing into new units.
A brighter spot is in rebar as construction steels won support on additional property and fixed asset investments in China and demand for housing elsewhere.
The next challenge may be getting accustomed to lower steel margins, as iron ore and met coal prices remain better supported after the decline in prices on rising marginal mining costs and steadier long-term demand growth n steel and raw materials led by Asia.
August’s NW Europe HRC steel spreads with raw materials costs estimated by Platts recovered in August from July, which was the lowest monthly spread in over three years of data, However, indicative margins remain weaker than in Q1 this year, and levels seen in 2017-2018.