FORECAST: Ilva’s HRC output cut will lead to short-term price hikes, longer lead times

Italian steelmaker Ilva’s recent reduction in hot rolled coil (HRC) output is likely to push up prices in Europe in the short term and extend lead times, market sources told Metal Bulletin this week.

Ilva ceased offering HRC to the market in January and is restricting its production of the material in the first half of 2017, Metal Bulletin understands.

“Ilva’s coil production in 2017 is likely to be reduced by about 1 million tonnes [compared with 2016],” one Italian trader said.

The company produced around 6 million tonnes of coil in 2016, which was an estimated increase of more than 1 million tonnes from 2015’s 4.90 million tonnes.

EU anti-dumping duties and high raw materials costs have boosted the price of HRC over the last year.

HRC prices were €520-550 ($552-584) per tonne ex-works in Southern Europe on Wednesday February 8, which is an increase of €240-250 ($255-266) compared with prices of €280-300 ($297-319) per tonne ex-works a year earlier.

One of the consequences of Ilva’s output cut is the extension of lead times, given that the company is spreading out its existing orders up until June or July, sources said.

“Ilva stopped offering coil and it seems that whoever booked from the mill will have trouble with collecting the orders in time,” a source in the European coil market told Metal Bulletin.

The decision to cut output could “create an opportunity” for coil prices to increase in Europe, especially when considered alongside ArcelorMittal’s move to increase HRC prices in Northern Europe, one Italian producer source said.

“With Ilva’s [production] cut and ArcelorMittal’s [price] rise, we will see a move [upwards] again before the end of the month,” the producer source said.

ArcelorMittal and Italian re-roller Marcegaglia have teamed up to form a consortium competing to acquire Ilva.

“The impact on average prices this year is unlikely to be significant but in the short term we can expect some price rises, even if Turkish suppliers are poised to take some of Ilva’s market share,” according to Alistair Ramsay, research manager at Metal Bulletin Research (MBR).

Coil prices are likely to fall again once raw materials costs decrease later this year, he added.

Making up for lost tonnage
Ramsay’s assertion that Turkish importers are well-positioned to capitalise on Ilva’s output cuts is based on the fact that HRC imports from certain countries, including China, are penalised by significant EU anti-dumping duties.

“The last time Ilva’s production fell by more than 1 million tonnes back in 2015, imports, notably from China, more than filled the vacuum. However, another 1 million tonnes or roughly a 17% fall in hot rolled production from Ilva this year could cause importers more problems,” Ramsay said.

“Chinese supplies have been falling since 2015 and the broader investigation – against bigger and smaller rivals such as Russia and Iran – is likely to cause a further cut this year,” Ramsay said.

So far, both ArcelorMittal’s increase in Northern European HRC offer prices to €600 ($637) per tonne ex-works and Ilva’s cut in production have had little effect on prices for the material across Europe.

Metal Bulletin’s price assessment for Northern European HRC rose slightly on the top-end at €550-580 ($584-616) per tonne ex-works on Wednesday February 8, compared with €550-575 ($584-611) per tonne ex-works one week earlier.

Metal Bulletin’s Southern European HRC prices have been stable since the beginning of February, remaining at €520-550 ($552-584) per tonne ex-works.

Although Ilva is cutting back on HRC output, the move will not change the output of the more expensive cold rolled coil (CRC) and hot dipped galvanized (HDG) products, another Italian source said.

“Ilva is more focused in production of cold rolled coil and hot dipped galvanized coil, products that allow to have higher margin,” another Italian source said.

Reasons for the decision
Raw materials costs continue to place pressure on steelmakers such as Ilva, which buys using a contract price agreed late last year when prices for material such as coking coal were higher, Ramsay said.

Hard coking coal prices were $171.95 per tonne cfr Jingtang on Monday February 13, compared with $305.86 per tonne cfr on December 1.

“Ilva’s financial situation does not allow it to buy enough raw materials,” one Italian trader said.

But the pressure of input costs on Ilva should reduce once contracts take into account the reduction in spot market raw material costs since the end of last year, Ramsay said.

“As prices rise [and] Ilva is able to pay for its raw materials requirements – contract prices of which should fall after the recent spot price retreat in China – so tightness will ease and [coil] prices retreat later in the year,” Ramsay said.

This would then lead to a retreat in coil prices later in the year, he added.

The decision to cut production and stop offers was also attributed to planned mill maintenance at the company’s 12 million-tpy plant in Taranto, sources said.

Ilva had planned to undertake maintenance on one of its rolling mills in January, but this was postponed for an unspecified period after the deadline for the two bidding consortiums to submit their final business plans for the steelmaker was extended, Metal Bulletin understands.

Volumes of HRC produced by Ilva were limited despite the fact that the steel producer postponed the maintenance, market sources said.

According to local media reports, the deadline for final bids from the consortiums has been postponed until February 26, from the initial deadline of February 8.

“Until the bids are in, there is nothing we can say,” a spokesman for ArcelorMittal said on Thursday February 9.

He added that he was unaware of any delay and had not been informed about a new deadline.

Spokesmen for Ilva and Marcegaglia did not respond to Metal Bulletin questions at the time of publication.

Need the data behind this analysis? Take a look at Steel Market Tracker from Metal Bulletin Research, a regular service providing you with extensive data and in-depth analysis for this market.

Maria Tanatar in Dnepr contributed to this article.