• The first quarter continued the trend of 2019 - for China to actively import relatively cheap metallics and semi-finished steel - but can this be sustained? The answer to this question will come down to the price competitiveness of the products, we believe. One additional incentive to continue to import metallics this year - compared to the situation a decade ago when the country also actively imported those products - is the almost non-existent inflows of imported ferrous scrap. Longer term, before any significant action is taken to stimulate the shift from integrated steelmaking to the electric-arc furnace (EAF) route in China, price attractiveness will remain key in determining a future trend for metallics and semi-finished product imports into the country. The recent falling prices for domestic heavy melt scrap in China may, therefore, put some pressure on metallics imports.
  • The recent decline in Chinese scrap prices - their lowest levels in a couple of years, even as demand has been rising - 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. In the meantime, we estimate that domestic scrap has remained more expensive for integrated mills than hot metal costs.
  • EAF operating rates are more flexible than BF/BOF integrated works and, so far this year, we have seen this flexibility in action. As EAFs in China are more responsive to demand changes, we anticipate they will remain as the year progresses and volatility remains likely. Moreover, closing or idling EAFs is far less expensive than closing 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 integrated 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. EAFs, therefore, 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.
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