Rising ferrous scrap prices impact winter outlook in China

The relative expense of ferrous scrap prices in China is impacting the winter outlook on steel production within the country. Ferrous scrap prices this year in China are at five-year highs and up 40% from last year.

"Increased scrap addition in converters was one of the key reasons why winter cuts were less effective in reducing steel output in China in [2017/2018]," Citi Research said in a November 15 report noting how mills were able to maintain output last winter even amid seasonal pig iron output reductions.
Citing S&P Global Platts pricing, Citi noted heavy melting scrap prices in East China were Yuan 2,780/mt ($400.25/mt), up from Yuan 1,880/mt in mid-November 2017 and at the highest level since February 2013.

In February 2013, 62% Fe Iron Ore averaged $135/dry mt CFR North China. On Tuesday, Platts assessed 62% Fe Iron Ore at $73.50/dmt CFR.

"The disconnect between scrap and iron ore prices has a big bearing on the amount of scrap that can be loaded into converters economically," the note said.

Some market participants believe current profit levels will allow mills to accept the elevated cost of scrap.

"Mill margins are very high in China, hence they are able to pay for higher-priced scrap," a Vietnamese trader said.

Citi estimates that scrap usage in converters was 16-18% in Q1 2018, compared with 6-8% in Q1 2017, as steel mills took advantage of newfound scrap availability from induction furnace closures.

"The economics of scrap loading were the most attractive in well over a decade during Q4 2017," the bank said, noting HRC/scrap and rebar/scrap spreads of above Yuan 2,000/mt in Q4 2017, compared with a 13-year average of Yuan 1,300/mt and Yuan 1,050/mt, respectively.

Those spreads this year have slipped to Yuan 1,190/mt in the case of HRC and scrap and Yuan 1,700/mt for scrap and rebar.

There is no such sudden availability of scrap expected to emerge this year as there was with the induction furnace closures last year. Furthermore, China imposed a 25% tariff on imports of US scrap beginning in August.

"If pig iron output is more tightly controlled, scrap loading becomes less of an attractive 'work around' this time," Citi said.

Scrap pricing within China is becoming a bigger factor in a steel market long dominated by iron-ore based production. China's scrap usage ratio hit 20.1% in the first nine months of this year, up 4.3 percentage points from the same period last year, according to China's Association of Metalscrap Utilization.

China consumed 141 million mt of scrap in the first nine months of this year, up 39.4 million mt, or 38.9% on the year, CAMU reported. Annualized scrap consumption was expected to total 187 million mt this year.