Asia billet, scrap prices could drop amid weaker Chinese demand, sources say: 2022 preview

Asian steel market participants are gearing up for another action-packed year in 2022, when they are set to battle with the effects of possible economic headwinds from China and a deepening drive for decarbonization on the continent, sources told Fastmarkets

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Fastmarkets polled Asian steelmakers and traders in the week ended Friday December 17 on their predictions for the year ahead, with most sources forecasting higher demand in many Asian markets, but with lower prices amid expectations of a weaker market environment in China.

Higher demand outside of China?

Sources said that regional demand in countries such as Indonesia, the Philippines and South Korea is likely to rise again in 2022, depending on progress with the Covid-19 pandemic.

“In South Korea, with the presidential election in 2022, the government wants economic growth to be going up, so construction output will not go down,” a South Korean steelmaker source said on December 17. However, regarding prices next year, “the key is China,” he said.

There will also be a presidential election in the Philippines in May of next year.

“I can sense business will be improving in 2022 with new buildings [starting],” a Philippine trader said in late November, but that source added that the election may put a halt on government-led projects.

According to an Indonesian steelmaker source, expectations of poor sentiment in China’s housing markets - which are pivotal for both long steel prices and demand across Asia - will pull down Asian steel prices in 2022 even if local demand improves.

“Indonesia will remain strong next year, but Indonesia is a price taker and doesn’t really influence the price. There will be more imports of steel billets to Indonesia next year, but at lower prices,” the Indonesian steelmaker source told Fastmarkets on December 15.

Price drops coming?

China’s exodus from the import steel billet market between late October and late December led to an excess of supply offered to the Asian markets, meaning Fastmarkets’ price assessment for standard 5sp 120-150mm steel billet import, cfr Manila fell to $625-630 per tonne cfr on December 17, down from $705-720 per tonne cfr two months before. China has since restarted billet importing.

“On a macro level, the Chinese economy is not doing well - [as we saw with] the Evergrande default earlier this month. I have a pessimistic view on the global market as a result,” the Indonesian mill source said, adding that it will take a while for confidence to return to the property sector. The potential introduction of property taxes in some provinces will provide further headwinds if such measures are implemented, he said.

“We are going to see an adjustment in scrap prices next year - and not just a correction of $5-10 per tonne,” a steel and scrap trader based in Singapore said on December 16.

“Some people at Fastmarkets’ conference in Dubai the other week thought that scrap prices to Turkey will go below $400 per tonne cfr [next year],” he said.

The trader’s reasoning for these predictions was also heavily linked to China. He predicts lower Chinese steel consumption in 2022, which will weigh on steel output and therefore demand for iron ore, with 62% Fe iron ore prices likely to fall back below $90 per tonne cfr China next year, he said.

Chinese steel output is widely expected to be kept on a leash until the Winter Olympic Games end on February 20, but sources were divided over what may happen after that.

“I expect a worse market environment. From the second quarter of 2022, we predict steel production in China will be decreased by 30% year on year,” a second South Korean steelmaker said.

Decarbonization

Another important piece of the puzzle, sources said, is how the Asian markets react to the ongoing drive for greener steelmaking on the continent.

Carbon hedging and trading markets are now operational in nations such as China and South Korea, with other Asian countries considering setting up such mechanisms. Major iron ore miners are looking into solutions for key steelmakers in Asia to reduce carbon dioxide emissions from their steel production, while Chinese authorities are actively encouraging the build-up of electric-arc furnace (EAF) capacity in the country.

This regional trend is great news for steel scrap prices and demand in the year ahead, a Japanese scrap supplier source said.

“Decarbonization and a greener economy means consumption of scrap will keep increasing. Posco in South Korea is wanting to build two new EAFs, for example,” he said.

“Energy costs in Europe have been going up, and so production costs for steel will not go down. It is not easy, but mills in Asia need to still push up their steel product prices,” according to the supplier.

Higher scrap consumption and prices for the secondary raw material in Japan have led to a sharp drop in exports from the country in 2021. Japan exported 6.33 million tonnes of steel scrap in January-October 2021, down 20.28% year on year from 7.94 million tonnes in the same period of 2020, according to Japanese customs data.

Higher demand from blast furnaces (BFs) in Japan together with tight supply has meant that high-grade material in Japan has particularly benefitted this year. In the year to date through Tuesday, December 21, the Fastmarkets’ price assessment for steel scrap Shindachi bara export, fob main port Japan averaged ¥56,586 ($496) per tonne, almost double the average of ¥29,824 per tonne fob recorded in the full year 2020.

On the other hand, the Singapore-based trader said that the moves of automotive companies toward procuring “greener” steel may be bad news for prices of commodity steel made via the BF route, which currently dominates much of the hot-rolled coil supply available in the Asian markets.

The availability of higher-grade steel scrap will also be a key factor in whether nations can achieve a lower-carbon steel industry, speakers said at Fastmarkets’ Middle East Iron and Steel (MEIS) in Dubai this month.

A lack of steel scrap availability in key Middle East-North Africa (Mena) markets could undermine efforts to reduce carbon emissions in the region over the short term, panelists based in the region said at the event.

Meanwhile, a shortage of busheling scrap in Europe means that scrapyards on that continent must generate higher-grade shredded material for use in EAFs to produce higher grades of steel, Denis Reuter, chief operating officer at German recycler TSR, said at the event.

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