2020 PREVIEW: Bullish outlook for Indonesian scrap demand despite new rules
Indonesian ferrous scrap demand should continue to grow in 2020 despite the new rules imposed by authorities.
The new regulations should be smoothed out over the next couple of months and containerized scrap shipments should resume within the first half of the year,” Hoffman Iron & Steel chief executive Phil Hoffman told Fastmarkets.
He was referring to the new regulations enacted by the Indonesian government in October, which state that ferrous scrap imports must be shipped directly from the exporting country - cargoes are not allowed to be transhipped through other countries. There is also zero tolerance for impurities.
“The Ministry of Industry has indicated that it will be meeting with the Ministry of Trade to try to resolve the regulatory issue to normalize scrap imports so that steel production can be maintained, so I expect the situation to blow over in a relatively short period of time,” Hoffman said after meeting government officials in early December.
Trading in the Indonesian import ferrous scrap markets remains sparse, numerous traders told Fastmarkets recently, with market participants waiting for new direction from the government before attempting to buy or sell material. There has been some market chatter about bulk shipments still being sent to Indonesia but containerized trade has almost died out, industry sources said.
“In any case, it’s impossible to have no impurities in ferrous scrap. Any kind of ferrous scrap will likely have some dirt or dust on it. So the new regulations don’t really make sense,” Hoffman said.
Hoffman Iron & Steel CEO Phil Hoffman expects new regulations to be smoothed out over the next few months.
Increased shipments of bulk scrap or billet
Indonesian demand for billet has risen in the wake of the regulations, with sellers offering Vietnamese material at $425 per tonne cfr. A major Indian steel mill has also floated billet tenders sourcing for bids on an fob India basis. But this is unlikely to be a long-term trend.
“Indonesia is indeed arranging for more billet to be imported,” Hoffman said. “However, a significant portion of Indonesian steel production is based on induction furnace technology. These IF-based mills rely entirely on containerized scrap, not bulk shipments. It is easy to say that bulk shipments may increase but not all steel mills have the infrastructure and logistics facilities to handle these shipments.”
The higher cost of bulk shipments will also deter buyers from purchasing such cargoes.
“For example, if the Vietnam market is at $275 per tonne cfr, then the Indonesian market will easily fetch $285-290 per tonne cfr. This high price will put off buyers, who will continue to want to buy lower-priced containerized scrap,” Hoffman said.
“Furthermore, each mill has an import quota. They can’t just buy bulk shipments and then break up the bulk shipments to resell to containerized buyers,” he continued.
The expected continued demand for containerized scrap in Indonesia and the country’s economic growth are the reasons Hoffman Iron & Steel has started domestic operations in the country.
“We have invested in Indonesia and are basically the first Americans with a local business there. We are setting up a small scrapyard and testing out the markets. We are also working with the largest domestic broker in the country to accumulate and sell scrap,” Hoffman said.
The Indonesian domestic ferrous scrap market is generally fragmented, with groups of people who accumulate tonnages and then sell them off on daily basis quickly. Brokers then consolidate the tonnages and sell it on to steel mills.
The construction industry in Indonesia maintains a positive outlook, in part because it operates in a protected market.
“There are some imports of billet and slab but some finished steel products like I-beams and H-beams are protected by the government,” Hoffman said.
Steel demand also remains positive, especially with the economy growing at 3-4% each year, and a young population of 270 million.
“Government projects and infrastructure rejuvenation around the Jakarta area will boost steel demand,” Hoffman said.
According to the Indonesian Iron & Steel Industry Association, building at height in Indonesia has been increasing steadily, driving up demand for stronger steel. In Java province, more than 86% of total floor space is in buildings that are more than 12 stories high.
Population growth also requires additional housing and related facilities. This is especially so in high-density areas such as Jakarta, where the average number of people per square kilometer has reached 15,500.
The high level of seismic activity in certain parts of Indonesia will also require high-grade earthquake-resistant construction steel, especially in Sumatra.