What factors will keep global steel scrap prices elevated?
The global steel scrap market is experiencing a very strong bull run at present. Prices will remain elevated in the short to medium term, which in turn would keep demand ...
The global steel scrap market is experiencing a very strong bull run at present. Prices will remain elevated in the short to medium term, which in turn would keep demand for prime grades buoyant, as per views at 'Engage', a webinar on "Changing trade dynamics of the global ferrous scrap market," organised by SteelMint recently.
What factors will keep prices high?
- Logistical challenge: This is one of the biggest today affecting not only scrap but commodity trading worldwide, pushing forward prices, said Abhijeet Mahanta, Head-Ferrous, European Metal Recycling (India, Bangladesh), and a webinar panelist. As on date, 80-85 container ships are standing at various ports in the US, one of the largest scrap suppliers, unable to unload containers, because the present ones have not been lifted yet. Further, there is a major shortage of trucks and this trend is replicated in other countries too. As a result, yards are receiving material but not able to transfer to end-buyers.
"The logistical challenge for both containers and bulk is not going to be resolved before Apr-Jun'22," Mahanta informed.
Echoing him, Zain Nathani, Director, Nathani Group of Companies & Vice President, BIR-Ferrous Division, said bulk freight has reached record heights. From pre-Covid levels of $35-40/t, these sped up in July and August to $105/t before dropping a tad to $97-98/t but still these are "extremely high".
"This is challenging for end-consumers across India, Pakistan, and Bangladesh. The only way to secure this raw material is by paying these higher freight rates," Nathani added.
He also said bulk vessel operators are not keen to head to South East Asian markets like Bangladesh due to waiting, discharge delays etc, as a result of which bulk freight can rise even further by year-end. "The post-Covid game has completely changed and it is impacting steel and scrap markets in diverse ways that no one expected 18 months ago," he added.
- Supply constraints: The global market is short on scrap, especially from the US, "where yards inflows in October - and we have not gone into the winter months yet -are not good, as per US recyclers," informed Nathani.
Supply globally is down because of lower auto production, which is impacting the strong second-hand car market in the US. Consumers, unable to buy first-hand, are falling back on second-hand vehicles, which, under normal circumstances, move to recycling yards.
Lack of containers is also creating supply hurdles. Shipping lines are rampantly cancelling, rolling over or splitting bookings.
Japan, which catered to 20% of Bangladesh' demand, has been absent for the last 8-9 months, because its auto production is down, along with vessel shortage. This is creating a shortage in the busheling generation. Shredded production, in which 50% is auto bodies, has dropped in Europe, due to decline in auto production, pushing up shredded generation cost.
- Energy crisis: The energy crisis is driven by the shortage of thermal coal at power plants and sky-rocketing prices of coke - factors which are pushing up prices of sponge iron, pig iron and therefore scrap too. Mahanta said there is no clarity on when these prices will moderate but he understands that Indian coke prices ex-plant, at around $600/t, are still cheaper compared to coking coal prices of $400-450/t as per the thumb-rule that coke prices should be 1.65 times of the landed coking coal prices. "That means, coking coal prices should be upwards of $700/t ex-plant. If another price rise of $100/t happens then you can figure out where sponge iron and pig iron are going to be..." Mahanta warned, especially with sponge plants starved of domestic coal due to shortage at power plants.
The energy crisis will not impact scrap demand but make power increasingly costlier. With Indian power plants told to import a certain percentage of coal not allowed earlier, they will have to factor in this cost. Already, it is heard, some power plants are supplying at INR 12/unit against the previous INR 7-8/unit.
High demand: Supply is falling short of demand. South East Asia, especially Vietnam, has come back strongly in the last few weeks after lockdown easing, their economies now active. Majority of bulk cargos from the US west coast have gone to Vietnam but there is demand from several other hungry markets like Peru, Mexico, South America.
Mahanta said Bangladesh is constantly looking for material. But being container importers, it would be impacted since container ships will be majorly hit in the next three months by logistical challenges. He foresees the bulk trade also impacted in next quarter with ship owners pushing up freight rates further.
- Demand for higher grades rising: Because of the above factors, demand is rising for higher priced prime grade scrap, which can lower power consumption. Already, shredded supply in the US and UK is short and demand is higher. In Bangladesh, the premium for shredded container freight compared to HMS is currently at $45-50/t against last year's $15/t, said Mahanta. "High quality busheling, bundles have crossed $130-140/t premium over shredded. I could never foresee this two years back," he added.
Demand for better grades began increasing as China started importing the same, becoming one of the largest importers of PNS and busheling from Japan. Nathani said demand for higher grades is keeping prices strong in markets like the US, Japan and Vietnam.
"The market that pays the highest price will be able to secure their cargo. Smart customers are booking shipments in October for December and that is not common! observed Nathani, adding, "this shows the market is going to be strong, supply will be short and the price uptrend will continue".
The hurdles of freight, logistics delays, power constraints will add up to the traditional winter scrap movement challenges in the next quarter, "Because of these factors, prices are going north. How far and long this situation will continue cannot be assessed yet," Mahanta observed.
Supply shortage will increase further on the back of logistical challenges, and affect steel prices globally.
The US will remain one of the largest exporters to Asia but prices are going to be strong while China's scrap imports have fallen due to production and energy curbs contrary to last year and it will not be an influencer in the global scrap trade in the short to medium term.