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Europe Creaks Under Raw Materials Oversupply



September 8, 2019 - Europe continues to creak under oversupply of certain iron ore and coking coal products as summer comes to an end, with redistribution efforts continuing and talk of significant iron ore supply being redirected from Europe to China in the fourth quarter.

Australian hard coking coal exports to Europe fell by 33pc month on month to 1.2mn t in July, and U.S. exports to Europe dropped by about 30pc to 1.4mn t (1.59mn t short tonnes) over the same period, trade data released this week show. Exports of Australian semi-soft coking coal and PCI to Europe came to 188,350t in July, up slightly from 169,962 the previous month.

Australian hard coking coal exports to Turkey fell by more than half to 80,080t in July from 163,938t in June. The U.S. exported 105,301t to Turkey in July, up from zero in June — linked to Turkey's decision to reduce its import tariff on U.S. coal — but down from 318,880t in May.

Sales show little sign of picking up in the near-term, with European market participants returning from a particularly slow summer to continued weakness in the steel market and blast furnace-based mill margins still under significant pressure, despite raw materials prices having fallen from this year's highs — iron ore, in particular.

Yesterday the Argus daily northwest Europe hot-rolled coil (HRC) index stood at €462/t ex-works, compared with the ICX index for 62pc Fe iron ore fines at $91/dry metric tonne cfr Qingdao — a healthier scenario than July but some way off from late November 2018 when the ICX dropped to $65/dmt cfr Qingdao against the northwest Europe HRC index of €535/t ex-works.

On the coking coal side, Europe's situation is seen as worrying but not dire, and contracted tonnes are making it through as scheduled for the most part. Many Atlantic market participants hope Asia-Pacific benchmarks may be bottoming out as fresh deals emerge this week, also anticipating the imminent return of Indian buyers and a potential revival in Chinese bookings next month as mills gear up for the country's annual coal import quota renewal. The Argus daily fob Australia index for premium hard low-volatile coking coal today moved up for a third consecutive day, by 95¢/t to $151.10/t fob — although it is still hovering around a critical threshold for many coking coal producers' profit margins.

Some European steelmakers have been able to take advantage of summer maintenance schedules to make adjustments — extending upgrades at previously earmarked facilities and adjusting coking times in order to trim production volumes without having to take any blast furnaces off line. But this exercise can only be pushed so far and summer is now winding down.

U.S. coking coal producers have managed to stave off as steep a price drop as their Australian counterparts in the past three months, thanks in part to the highly structured nature of their term sales contracts and already-limited availability of most key brands as the seaborne coking coal market began to drop in May-June. The Argus fob Australia index for premium hard low-volatile coking coal has fallen by about $64/t since mid-March, while the fob Hampton Roads low-volatile assessment has come down by $44/t.

But U.S. producers are keen to see some more positive demand signals across the whole seaborne market as 2020 approaches, and some trading firms are slashing offer levels for spot high-volatile coking coal at the moment as they attempt to offload their ascribed monthly supply.

The compression of fob Hampton Roads vs fob Australia price spreads suggests there may be scope for U.S. prices to drop further, some market participants say — albeit this week all eyes are on Hurricane Dorian, wondering how long Hampton Roads port will remain closed and how extensive any disruptions might be.

On the metallurgical coke side, some European mills are still occasionally dipping into merchant metallurgical coke to buy extra cargoes but this activity is sporadic and far outpaced by the supply picture — particularly since mills continue to sell small clips of their own excess coke.

A German trading firm described "huge competition among sellers for whatever [metallurgical coke] business is available" and multiple onlookers are asking how Poland's metallurgical coke plants are faring, given Italy's reduced requirements and ArcelorMittal's decision to delay the idling of its Krakow blast furnace.

Iron Ore

Iron ore exports to the EU rose in August, to 2.5mn t from 1.7mn t in July, the latest Brazilian trade data show. But this is still a considerable drop from 4.1mn t in August 2018. Sales to Turkey rose to 584,531t in August from 321,574t in July.

But going forward, the picture looks more uncertain, with widespread talk of Brazilian iron ore cargoes of pellet, concentrate and fines being diverted from Europe to China in the fourth quarter, and some aggressively low price levels noted in the Chinese market this week as sellers attempt to redirect supply.

The redirection of some Brazilian pellets away from the Atlantic will bring welcome relief to pellet producers that rely more heavily on non-Asian markets, a European market participant said. Swedish pellet producer LKAB last month confirmed that it might need to reduce its shipments to Europe and the MENA region as steelmakers cut capacity and prioritise purchases of cheaper, lower-grade iron ore products.

Swedish iron ore exports to the EU fell to 813,365t in May, down from 1.4mn t in April and 1.3mn t in May 2018, trade data show.

Rotterdam's EMO terminal has 2.7mn t of iron ore stockpiled, up from 2.5mn t a week ago, port authorities said.

Atlantic pellet premium indications have come down lately, but actual price levels being paid under long-term contracts are still perceived as uncomfortably high by buyers. European mills welcomed August's steep drop in iron ore fines, with the Argus ICX index for 62pc Fe fines dropping to a seven-month low of $81.50/dmt cfr on 29 August. It now stands at $88.70/dmt cfr Qingdao.

But turgid steel price conditions mean they are hopeful of iron ore costs dropping further, particularly in light of Australia's higher iron ore exports in August and recent weekly exports from Brazil to China hitting annual highs.