Lockdowns and restrictions of movement in several cities in Brazil have increased worries about the potential impact on iron ore export volumes. The situation has already had an impact on the market sentiment. These concerns, combined with strong demand from China, have boosted iron ore prices. The fall in shipments from Brazil, partly attributed to the heavy rains earlier this year, has already been evident. Vale lost its position as the world’s largest iron ore producer - the miner has been overtaken by Australia's Rio Tinto.
After the restrictions eased in China, there was a strong recovery in blast furnace utilization rates - so far this month they reached their highest on record at above 93%. As production rose and there were not enough seaborne volumes to meet demand, Chinese mills have drawn from stocks; at 110 million tonnes, inventory levels are at the lowest since 2016. While Chinese mills are paying higher prices and risk seeing their margins squeezed, Australian miners have been benefiting from the situation. China is set to develop domestic iron ore sources to meet up to 20% of the country’s demand.
Scrap consumption rates by Chinese integrated mills appear to have declined this year (on a per-tonne basis). This year has seen the ratio of pig iron to steel output tighten, leaving increasingly less room for scrap consumption. Over the first four months, the pig-iron-to-steel ratio has been above the prior-year level, climbing to 85% in April, indicating increasing utilization of hot metal/pig iron in the crude steel production mix, typically in place of ferrous scrap. This trend also reflects tight scrap supply, particularly in the first quarter amid Covid-19 outbreak.
Mills have returned to relatively normal working levels following sharp drops earlier in the year, with blast furnaces and electric-arc furnaces (EAFs) operating above 90% and 75% of capacity since mid-April respectively. This suggests that there is little room left for more scrap consumers to return to the market, with EAFs having only some space to raise operating rates further. We expect therefore that scrap prices will trend downward as scrap supply continues to improve.
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