• The recent decline in Chinese scrap prices - to their lowest in a couple of years - even as demand rises, suggests that Chinese scrap supply is increasingly sufficient. In terms of scrap demand, the question is more about price attractiveness. Mini-mills were reducing demand in February, largely because steel margins on scrap-dependent EAF operators were far worse than for integrated mills. For integrated mills, domestic scrap has remained more expensive than hot metal costs, we estimate.
  • EAF operating rates are more flexible than BF/BOF integrated works and so far this year, we have seen this flexibility in action. Chinese EAF operating rates fell to just 15.2% during the week ending February 20 before rising to 75.5% in the week ending April 16. In contrast, BF operating rates have been far steadier this year, hitting a low of 81.43% in the week ending March 6, while they were at 90.75% in the week to April 16. As EAFs in China are more responsive to demand changes, we anticipate they will remain so while the year progresses and volatility remains likely. Moreover, closing or idling EAFs is far less expensive than integrated machinery because of the higher fixed costs and restarting and repairing costs for the latter.
  • But one key thing is that crude steel production via the BF/BOF route accounted for approximately 88% of crude steel production in China in 2018 and we believe it remained the dominant process last year so even if EAFs have continued to gain market share - since rising to 12% in 2018 - they remain a small minority of steel producers. Therefore, they cannot act as a stable alternative to integrated production if iron ore supply to China becomes constrained by Covid-19-related restrictions on either external or internal mining operations.
  • Improving scrap price attractiveness may lead to some fall in iron ore demand and prices, with an increasing risk to the price outlook if Chinese mini-mills continue to boost imports of metallics, which also remain more price-attractive than local heavy melt.
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