The cost of insuring the debt of European steelmakers is rising exponentially as demand collapses.
The cost of insuring €100 of five-year debt on ArcelorMittal has risen to €5.30, from below €2 earlier this month. ThyssenKrupp five-year notes can now be insured for €7.23, up from just €1.78 at the end of January, and despite the deal to sell its elevator business.
Lenders can buy credit default swaps to pay out in the event of bankruptcy, restructuring or failure to repay. As the risk of these event increases, the cost of a credit default swap, or insurance of the debt, also rises. The holder of the swap pays a premium to the seller.
ArcelorMittal and ThyssenKrupp have announced production cuts to try and offset the huge reduction in steel demand. ThyssenKrupp has not yet decided to idle any furnaces, but most sources expect all European mills to have to reduce crude output further.
And the market is still pricing in a strong backwardation despite the current cuts — the CME Group's north European hot-rolled contract traded at €435/t for August and €420/t for June yesterday. Argus' headline northwest European index is settlement basis for the contract.
The month-to-date average of Argus' index is €479/t so far in March, with the index stable at €474.5/t ex-works yesterday. The index fell by €11/t on 16 March, on the back of €480-485/t delivered service centre deals, but rose to €474.50/t on 20 March with a deal at a similar price but from a nearby mill to the buyer involved.
