European steel pricing has been resolutely supported by trade defence measures, loose monetary policy, and rising Chinese mill profitability over the last 18 months.
Mill sources in western Europe have been painting a bullish picture for fourth and first quarter pricing, perhaps understandably as contractual negotiations with original equipment manufacturers are underway. One major mill has been offering at €600/t ex-works for hot-rolled coil (HRC) and is booked out into the first quarter.
Import arrivals have been slim, with over 3.5mn t of the European Commission's 4.2mn hot-rolled sheet and strip quota left. Mill consolidation should bring more pricing discipline to the market — integrated steelmaker ArcelorMittal will take on the sales activities of Italy's Ilva in the next few weeks. On top of this, the EU economy is growing, and consumer demand has been strong despite a drop in automotive requirements.
But the tide could be turning amid a shakier macroeconomic backdrop and a relaxation of steel output cuts and credit restrictions in China, despite the supposed fundamental support for European steel pricing.
"Everyone was waiting for a positive market because of macroeconomics and consolidation", a large southern European seller said. "But demand is quite weak".
Eurozone industrial production fell by 0.1pc year on year in July, with German output down by 1.1pc month on month. Exports have also stalled amid uncertainty over policy, the trade war, and the run on emerging market currencies driven by the issues in Turkey and Argentina. European consumer confidence hit minus 2.9 in September, from minus 1.9 in August and a low since May 2017, despite a strong labour market. The European Central Bank is rolling back its bond-buying programme, meaning a less accommodative monetary environment going forward.
Looser winter production cuts in China could see output increase by more than the market has factored in, and mill profitability will be hit by rising coking coal and coke costs. Softer Chinese steel spreads typically filter into the rest of the world, despite the significant barriers to entry now implemented in large import hubs. European mills have been atypically profitable too, but margins could be compressed by high raw material costs — particularly pellet and coke — if steel prices do fall. Supply and demand fundamentals, rather than costs, have been more of a market driver since spreads have improved.
Closer to home, most are focusing on Turkey's impact as an exporter — and tellingly so at present — with HRC pricing into southern Europe as low as €500/t cif — and slightly lower according to Turkish sources. This is comfortably below the €530/t ex-works quotes from some domestic mills, and way below the €580-600/t ex-works level being quoted in the north of the continent. Turkey was competitive into the UK too, but the seesawing pound has seen offers disappear for now.
Turkey is also a key market for European coil sellers as well as merchant Black Sea exporters. The country took 735,549t of EU hot rolled wide strip over the first seven months of this year, down from 857,308t over the same period of 2017, but still over 54pc of all EU hot strip exports. Its recently announced import quota could cause hotter competition in other markets between Black Sea sellers and European mills.
Selling prices also remain under pressure in the EU 28. Outsell prices do not reflect replacement costs, particularly in the competitive UK market, and margins are under pressure as a result. Given uncertainty about forward pricing and tepid demand, service centres are discounting invoices and generating cash, rather than holding too much steel.
