(Reuters) - European steelmakers can survive a jump in the cost of feesdstock iron ore -- for now, relying on charging more as their customers are keen to restock.
But the real pain of soaring costs for iron ore, coking coal and scrap will hit in the third quarter, when analysts see a possible slow down in restocking and end-user demand yet to pick up.
Europe's steel industry has called on authorities worldwide to look into what they call is unfair competition, reflected in an almost doubling in iron ore prices and a historical shift to quarterly pricing.
But analysts believe they have enough margin to absorb these raw material costs, at least until late 2010, when they say the margins will only narrow as consecutive price hikes in steel meant they have so far been comfortable passing on their costs.
"The production cost of hot-rolled coil (HRC) in Europe has risen about $140-150 recently, and so has the price," said analyst Colin Hamilton at Macquarie. "In our view, they have already passed on the cost, the question is how much more they could get."
In the Black Sea region, where long steel is commonly traded, the price of billet on a free-on-board (FOB) basis has risen to above $600 a tonne from around $440 a tonne in mid-January.
ArcelorMittal (ISPA.AS), Thysenkrupp (TKAG.DE) and Voestalpine (VOES.VI) have all announced several price hikes over the past six months, pushing the average hot-rolled coil (HRC) price in Europe to $680 currently from $561 a tonne in last quarter of 2009.
The world's top steelmaker ArcelorMittal is among analysts' top picks as it is the most self-sufficient in iron ore, producing 59 percent of its needs in the fourth quarter last year.
Ukranian Metinvest and Russian Evraz (HK1q.L) are also in a better position compared to their peers, analysts say, because of their iron ore mines, shielding them from spot iron ore prices that have doubled since September.
"(Steelmakers') margins have been recovering over the last three months in terms of sales that have been booked because they've been on annual price contracts," said analyst Gavin Wood at Nomura.
"The Q2 realized prices should see margin expansion from having raw materials purchased under the annual contract while the prices have been relatively strong."
Salzgitter (SZGG.DE), Germany's second largest steelmaker, said last week that it had raised steel prices for the second quarter and more hikes were expected later in the year due to raw material costs.
EYES ON THIRD QUARTER
The world's biggest iron ore miner Vale (VALE5.SA) (VALE.N) struck a deal last week with Japanese mills, who will pay 90 percent more for the ore compared with the current benchmark price.
South Korea's POSCO (005490.KS), the world's fourth largest steelmaker, agreed to pay $200 per tonne for its April-June hard coking coal imports, which reflected a 55 percent hike from last year's benchmark prices.
But these costs will only be visible in the latter part of the year.
"What will happen in the third quarter will be the issue. We think demand will be relatively strong and prices keep moving up, but the increase in iron ore and coking coal prices will add probably $200 a tonne to costs," Wood at Nomura said.
A possible slowdown in demand, which several analysts see coming from restocking of inventories rather than the end-users of steel such as automotive or construction industry, could leave steelmakers in a vulnerable position.
"It appears to me that end-user demand is not growing as much as the steel production, which to me is an indication that people are buying steel to have it in stock at a cheaper price to prevent having to buy it when the steel prices are higher," said Matthias Hellstern, Moody's analyst.
"Which means when the stocks are full and everyone thinks that the price has reached a certain level then they would stop buying."