Profits of European metallurgy may decline in the second quarter amid weak demand

In the second quarter of 2020, Europe's hot rolled steel production margins may decline further due to weak demand as the coronavirus pandemic disrupts global trade.

HRC steel distribution by feedstock in Northwest Europe in the second quarter may decline to 231 € /t (USD 249) on the back of relatively higher raw material costs, from around 253 € /t in the first three months of the year, based on calculations using futures prices on April 3 for steel, iron ore and coking coal.

Blast furnaces in Germany, France, Spain, Italy and elsewhere have been shut down in the past few weeks to more accurately reflect the demand for steel as automakers and other end-users in Europe sit idle in factories and production lines.

HRC futures prices on Friday showed that the NWE HRC was available to hedge at lower levels than the March average, with expectations of further weakening in prices later this quarter.

This came after the plant's European HRC targets were restored in February and March.

Steel prices have held up amid declining production, and sharper declines in iron ore and scrap prices could support steel margins closer to March levels.

However, the decline in iron production in Europe may continue to put pressure on producers as the EU fights to import flat products from Turkey, the Commonwealth of Independent States and Asia.

Pig iron production in Germany fell 9% year on year in the first two months of 2020. In the first quarter of 2019, production decreased by 3.5%, and in the first quarter of 2018, production decreased compared to 2017.
Iron ore

Global demand for iron ore can be supported by China, where the steel industry relies primarily on imported iron ore and needs high quality ores to combat air pollution and increase productivity.

China could switch to a range of iron ore grades based on the value of use at the time and the availability of domestic and imported brands.

China is trying to bolster steel production as the economy absorbs an increase in stocks of up to 100 million tonnes - the equivalent of over a month's steel production.

Current stocks of finished and semi-finished steel are more than double that of typical stocks in China, as demand slowed in January and February at the peak of China's coronavirus restrictions and the Lunar New Year.

Since Q2 2019, indicative margins for European steel have remained low and below sustainable levels. In 2018, the distribution of steel and raw materials by NWE HRC averaged more than 344 euros per tonne.

Further decrease in profitability