Will global scrap prices follow rising billet prices? Too early to say
The price spread between scrap and billets has widened of late, because of a sudden surge in billets buying by Chinese mills — since their domestic prices had h...
The price spread between scrap and billets has widened of late, because of a sudden surge in billets buying by Chinese mills - since their domestic prices had hit a significant high, which gave them some room to import.
China is entering its peak steel buying season when construction resumes after the rains, which has nudged up the benchmark steel futures. Re-bar futures on the Shanghai Futures Exchange (SHFE), for Jan'22 delivery rose to RMB 5,682/t ($879/t) on 09 Sept'21, staging a recovery of RMB 230/t ($36/t) against the closing on 8 Sept'21. This is a spurt from around RMB 5,273/t ($817) seen on 2 Sept'21, registering a more than $60/t w-o-w gain. Domestic billet prices in China's key steelmaking province of Tangshan rose RMB 90/t ($14/t) last week and by RMB 50/t ($8/t), d-o-d, on 9 Sept'21 to RMB 5,170/t ($800/t) inclusive of 13% VAT, as per SteelMint reports.
The sudden rise in domestic prices drove the mills to explore import options in the last fortnight. Over 500,000 tonnes of billet deals were concluded between Chinese mills and sellers from India, Middle East, South-East Asia, Turkey etc at prices ranging from $680-720/t CFR levels.
Moreover, soaring coking coal and met coke prices have put pressure on the production cost of blast furnace-route Chinese mills, forcing them further to opt for comparatively cheaper imported billets. However, coking coal looks like a temporary phenomenon which may get resolved in a couple of months.
The total seaborne scrap trade volume was at almost 66 mn t in CY20. The top seven importers are Turkey, Vietnam, Bangladesh, the US, Pakistan, South Korea and India, comprising about 80% of the global ferrous scrap imports market.
Will scrap prices follow billets?
SteelMint's assessment is that it is too early to say scrap prices will increase in line with billet prices. The reasons are listed below:
- The key issue is that local demand in most of the scrap-consuming countries, especially South East Asia, is still weak. Vietnam may further extend the lockdown. Major buyers of long products are showing no appetite for buying, thus, mills are lifting lesser scrap volumes.
- Hyundai Steel, a trend setter for imported ferrous scrap prices, on 13 Sept'21 set the tone for the near term. At Monday's Japanese bids, it negotiated lower offers for various grades. The most commonly traded Japanese H2 scrap price was lowered by Yen 500/tonne (t) ($5/t) and for the high grade Shindachi bara by Yen 1,000/t ($9/t). This is surprising considering that the benchmark Kanto tenders concluded last week fetched bids higher than market expectations, although the entire volume here was concluded for Vietnam buyers and not South Korean or Bangladeshi mills which also generally participate in the tender. But the latest Kanto rates made market participants feel that Japanese scrap export prices would not fall further from here. However, Hyundai's bids are lower than Kanto's.
- Market circles believed that US and European prices had probably bottomed out but the deal concluded for Turkey on 13 Sept'21, have come down further by $5/t. Were these recent deals from the US a signal to Hyundai to lower its Japanese bids? Probably!
- India is not buying because of the sharp disparity between local and imported scrap prices. Pakistan and Bangladesh are also showing resistance to buy scrap at the current price levels since domestic demand is not supportive at present, especially for Bangladesh which is yet to fully recover from the Covid impact. Container availability is also an issue here.
"Billet prices are rising because of China's production cuts and this looks very good for China and Turkey. But, in India, Pakistan and Bangladesh, the spread from scrap to billets is not going to change much. In Pakistan, rebar prices are at around $1,100/t while the mills are buying shredded at about $535/t. But high power tariffs of Pak rupees 20/unit (compared to India's INR 9.50/unit) are making production unviable.
- Turkey, the largest buyer of global scrap, is seeing a lucrative gap between scrap and billets and thus can import scrap at current levels and export billets to China. But China cannot continue importing billets at a consistent pace because of its own production curbs. The "rise in billet prices was a China-only phenomenon which will not support an overall push to global scrap prices," said a source.
Global scrap prices may not increase sharply.
But will not fall sharply either, because demand will remain and availability is poor with the tight container availability scenario. Also, not many countries can buy in bulk. If Turkey is able to sell billets or rebar to China then it will return to the market to buy scrap. On the other hand, China's production cuts are very serious and may not support consistent buying.