2021 PREVIEW: Will US, China continue to compete for pig iron?
In 2020, the global pig iron market faced the threat of a demand slump due to the reduction in steel production from all major outlets under the pressure of the Covid-19 pandemic.
In March, however, when the steel industries of Europe and the United States began to feel the effects of various national lockdowns, the Chinese market began to recover and soon resumed normal operating rates. Thus, China started to absorb almost all merchant pig iron supplies, leaving almost no availability to other buyers and pulling pig iron prices up.
“Pig iron availability is limited. The Commonwealth of Independent States (CIS) prefer to use as much as possible for their own steel melting, while Brazil can’t increase merchant pig iron output immediately because they’re limited in charcoal,” one trader said. “When supply is limited but demand exists, buyers need to compete.”
Buyers in the US - the largest global pig iron importer - had been hoping demand in China would fade and postponed restocking for as long as possible. But when US buyers ran out of stocks – concurrent with the US steel market improving significantly and increasing steel production - they had little choice but to start competing with China for pig iron by paying higher prices.
The average Fastmarkets’ price assessment for pig iron, import, cfr Gulf of Mexico, US jumped to $555 per tonne in late December, from $393.50 per tonne on November 20, when the US buyers started to restock.
Buying activity in China continued until early November, disappearing “as soon as pig iron price soared,” one large international trader said.
Over the first nine months of 2020, China imported 3.8 million tonnes of pig iron, overtaking volumes imported to the US, where 3.57 million tonnes of pig iron was shipped during the period, customs data shows.
For comparison, pig iron imports to China were just 292,000 tonnes in January-September 2019, while the US imported 4.11 million tonnes during the same period.
Fastmarkets examines market expectations about whether competition for pig iron between the two largest consumers – the US and China – will continue in 2021 or not.
“Both the US and China will continue demanding [pig iron] in 2021 but it needs to be seen if China can follow the prices,” one large international traders in the pig iron market said. “There might be a technical price correction soon.”
In December 2020, Fastmarkets’ weekly price assessment for high-manganese pig iron, export, fob main port Black Sea, CIS averaged $484.80 per tonne, up by almost $100 per tonne from the November average at $388 per tonne.
China paused purchases in early November after prices passed $400 per tonne cfr, equivalent to $370 per tonne fob Black Sea. The latest cargo intended for the Chinese market was bought at $422 per tonne cfr in mid-November from Russia, but it didn’t find a buyer in China and by the end was redirected to the US market in mid-December.
“We have continuous demand from mills, however, the import price has prevented us from purchasing for now because end users simply cannot afford such high costs, despite using it for the production of high value-added products,” one source from China said. “We can only wait and see if the gap is filled out with a finished product price rise or a correction to the pig iron price.”
One exporter from Russia told Fastmarkets that China had only paused its bookings for the moment and that it was just a lull before new purchases were made.
“China will remain a buyer amid ecological initiatives,” the exporter said. “Now they’re consuming pig iron from stocks and have switched their production output to steel products that do not require pig iron.”
“There has been an increase in electric-arc furnace (EAF) steel production in China, but I think what’s really happening in China [strong demand on pig iron] is more fundamentally related to iron ore price [indicator of pig iron purchases cost effectiveness] and scrap [complementary to pig iron raw material in steel melting] availability,” John Atherton, secretary general at the International Iron Metallics Association (IIMA) said during Fastmarkets’ Middle East Iron & Steel conference in mid-December 2020.
“When China resumes scrap imports it will provoke an increase in scrap prices globally, thus putting the attractiveness of pig iron at a higher level,” one supplier from Ukraine told Fastmarkets.
Meanwhile another supplier from Russia said that the resumption of scrap imports to China and the resulting increase in scrap prices could push pig iron prices up to $600 per tonne fob.
“I don’t think China will be as big of a factor next year in the pig iron market based on what’s happening with their scrap market,” one buyer from the US said. “Concurrently, a lot will depend on iron ore prices.”
In December 2020, Fastmarkets’ index for iron ore 62% Fe fines, cfr Qingdao averaged $155.35 per tonne, up from $124.08 per tonne month on month.
“We’ve repeatedly argued that if Chinese demand for imported metallics sustains, the products’ price competitiveness will be key,” Alona Yunda, senior analyst at Fastmarkets, said.
Although the restart of the import scrap trade flow in China should support international scrap prices, it will also bring China’s local price closer to parity with global prices and pull it down eventually, Fastmarkets research team said.
Since restrictions on scrap imports were introduced in China, domestic scrap levels decoupled from global trends. After international scrap prices adjust to changed trade flows with the possibility of short-term spikes in 2021 - especially in Asia where China normally sources its ferrous scrap from - Chinese local scrap prices will likely come under pressure. This will consequently diminish the comparable price attractiveness of importing metallics for Chinese buyers, Yunda said.
“In the short-to-medium term, the restart of ferrous scrap imports into China will bring additional competition to the market so price attractiveness will remain key to sustain demand,” Yunda said. “Longer term, more affordable scrap will likely encourage the much-discussed shift to EAF steelmaking, therefore, demand and prices for iron metallics will find support again,” she added.
“There’s optimism in the steel market, in particular due to [Covid-19] vaccines. There will also be a huge increase in demand on steel as a result of economic stimulus due to take place in China’s construction sector,” Atherton said. “China has already showed the way so you’ll see economies in the West [using] construction as a go-to to stimulate economic recovery. That is positive for steel making and for pig iron demand ultimately.”
“EAF-steel production is increasing globally, thus in 2021, the pig iron market will be very firm and the US will be a hotter market than China,” one exporter from Brazil said.
The exporter from Ukraine expects the market to stay strong for at least the first half of 2021.
“In general, there will be more demand coming from the US so even without China there will be sufficient demand for pig iron,” Fastmarkets was told.
“The pig iron price in the US was higher than $800 per tonne when capacity utilization rates there were around 90%,” one exporter from Brazil said. Now that utilization rates are slightly above 75% there’s room for the pig iron price to go up to $700 per tonne cfr in the US, he said.
In August 2008, the average Fastmarkets’ price assessment for pig iron, import, cfr Gulf of Mexico, US was $857.50 per tonne, meanwhile the average capability utilization rate was 89.16%, according to Fastmarkets calculations based on the American Iron & Steel Institute (AISI) data.
“More EAF capacities are coming on stream in the US, which will increase pig iron demand there,” Atherton said. “In the next five years, a projected shortage of domestic pig iron production relative to demand in the US will be about 5 million tonnes.”
In 2019, the US produced 87.76 million tonnes of steel, 69.7% of which was produced in EAFs, according to World Steel Association (Worldsteel).
“Steel prices go up in the US, which stimulates steel mills to produce as much steel as possible and then pushes pig iron demand higher,” another buyer from the US said. “In addition, JSW is restarting their EAF in March, which will add to demand [for pig iron as well].”
Fastmarkets’ daily steel hot-rolled coil index, fob mill US, which requires merchant pig iron for steel production in an electric-arc furnace, was calculated at $51.50 per hundredweight ($1,135.37 per tonne) on December 31, more than doubling since September 1, when it was $25.53 per cwt ($562.83 per tonne) on strong demand.
The additional demand in the US will be predominantly met with imports because consumers will only be able to source very limited volumes of pig iron domestically, sources said.
Canadian Stelco is ready to sell pig iron but just 3,000-5,000 tonnes per month, “because they want to make as much of their own steel as possible,” the US buyer said.
Another merchant pig iron project - a joint venture between ERP Iron Ore and Republic Steel - has shown no progress, the source said, adding that the project also “requires massive investments.” The JV was initially supposed to start in 2018 and make about 1 million short tons per year, equivalent to around 907,000 tonnes, in Lorain, Ohio, the companies said.
It is possible that US Steel may supply pig iron to the local market “but they don’t yet have a pig iron caster at their integrated mills [so can’t transport pig iron]. Once they install a caster they will first feed their own [EAF-steel making sites] Big River Steel and Fairfield assets.”
The balance in the market will also depend on supply from Russia, Atherton said. “The availability of merchant pig iron from Russia [the largest global pig iron supplier] will depend on the internal consumption of their own steel mills.”
Russia’s Metalloinvest exported 919,000 tonnes of pig iron over the first nine months of 2020, down by 33.9% from 1.4 million tonnes in the same period of 2019.
Industrial Metallurgical Holding (IMH), which ships pig iron from its Tulachermet asset, sold 1.91 million tonnes of material in the first nine months of 2020, up 8% year on year. Although, among this tonnage only 666,000 tonnes were exported, which is more than half of what was exported a year before, when exports hit 1.35 million tonnes. The company has increased shipments to the local market, however, while it feeds the Tula Steel asset - a partner project of IMH.
Novolipetsk Steel (NLMK), in contrast with other major Russian suppliers, sharply increased its pig iron exports to 1.05 million tonnes in January-September 2020, compared to 257,000 tonnes over the same period year before.
Russia exported 2.28 million tonnes of pig iron over the first six months of 2020, International Steel Statistics Bureau (ISSB) data shows. That was down by 6% from the same period in 2019, when exports hit 2.41 million tonnes.
Meanwhile, Metinvest - the key pig iron exporter from Ukraine - shipped 1.79 million tonnes of pig iron to the market over the first three quarters of 2020, up by 26% from 1.42 million tonnes in the first nine months of 2019, making it the largest global pig iron exporter of that period of 2020.
Ukraine exported 1.47 million tonnes of pig iron in January-June 2020, up by 23% year on year from 1.2 million tonnes, ISSB says.
Many sources said that CIS countries are unlikely to increase exports in 2021 because they expect all mills to concentrate on their own steel production.
Brazil, another major pig iron supplier, is also unlikely to increase its exports in 2021, sources said.
“Charcoal availability is restricted in the north of Brazil while all furnaces are already working in the south,” one exporter from Brazil said.
“Exports from Brazil may even reduce because of a strong local market, which is more attractive to us,” one Brazil-based seller said
Brazil used to ship 50% of its merchant pig iron to the local market, sources estimated.
In 2020, Brazil exported 3.75 million tonnes of pig iron, up 34% year on year from 2.79 million tonnes, according to the ISSB and Brazil’s foreign trade ministry, MDIC.