As the first chart below illustrates, the gap between the MBR’s proxy for imported pig iron price in China and the Metal Bulletin’s Chinese domestic heavy melt scrap price assessment had shrunk by late 2017. The premium averaged $17 per tonne this year to date, compared with $89 per tonne over the corresponding period last year. We believe the increased competitiveness may prompt Chinese steelmakers to boost merchant pig iron (MPI) imports in times when local pig iron/hot metal production slows down.
Import pig iron competitiveness vs scrap is starting to improve in China,
while the domestic MPI market's size has shrunk
Thus, import pig iron may well compete with local scrap in China to cover additional demand fed by the widening gap between the country’s iron and steel production volumes. Chinese iron output dynamics have been decoupling from crude steel, and the widening gap has been filled by higher consumption of relatively cheap and widely available scrap, particularly last year. Rising demand for scrap has, however, started to support prices: Domestic heavy melt scrap in China has now sustained a premium over hot metal for more than half a year (averaging $22 per tonne). But while hot metal/pig iron production in China may be restricted at times by government environmental regulations, it should be pure profitability that drives demand for imported pig iron.
China has imported merchant pig iron from Russia, Ukraine, Brazil and sometimes Japan in the past. Total quarterly import volumes declined from an average of 170,000 tonnes in 2010-13 to 45,000 tonne per quarter on average in 2014-17, and have almost completely faded away by the first quarter of 2018, as the second chart below shows. But imports may revive now as prices become attractive. We estimate the size of China’s MPI market was around 2.6 million tonnes per year for 2014-16, but likely shrank in 2017. Due to a lack of liquidity in the market, Metal Bulletin discontinued its Chinese domestic pig iron price assessment earlier this year.
China's faded pig iron external trade may revive, as MPI
competes with scrap to fill the iron-to-steel output gap
We at MBR anticipate that the Chinese import pig iron market may revive, provided prices remain competitive versus ferrous scrap. Although the country’s environmental aspirations support scrap consumption, there is a limit to scrap intake by basic-oxygen furnaces (BOFs) and investments into new electric-arc furnaces (EAFs) take time. Moreover, MBR calculations indicate there may be a shortage of ferrous scrap in China in the coming years if steel output continues to grow at 5% per year. However, in a more realistic scenario potential MPI imports are likely to be tiny compared with other global importers. For instance, the United States, Italy and Turkey - key import outlets for pig iron - imported 5.13, 1.66 and 1.01 million tonnes of the product in 2017.
Seaborne pig iron has become relatively competitive versus ferrous scrap over the past year in most regions, and China is no exception.