FOCUS: Cheap Japan busheling likely to gain share in Asian scrap markets

Shindachi - a Japanese grade of busheling - is one of the cleanest and highest-yield materials in the scrap sector, but a sharp drop in prices over the last year has made the product increasingly attractive to overseas buyers.

A combination of weaker demand among Japanese mills and slower buying from South Korea have left scrap market participants with the expectation that more Shindachi cargoes would be exported to developing Asian markets this year.

Shindachi scrap is largely generated from steel sheet discarded in the manufacturing process for products such as white goods and automobiles. In Japan and South Korea, it is also the scrap of choice for furnaces producing flat and special steel.

In the first quarter of 2019, export transactions for Japanese Shindachi were said to have been concluded at an average premium of ¥6,500 ($60) per tonne over prices for H2, the most common grade of heavy scrap exported from Japan.

Fast-forward one year later, this premium is just ¥2,500 per tonne based on Fastmarkets’ newly launched price assessment for steel scrap Shindachi export, fob main port Japan, which was at ¥26,500-27,000 per tonne on February 26, as well as that for steel scrap H2 scrap, fob main port Japan, which was at ¥24,000-24,500 per tonne on the same day.

This 61.5% drop has allowed new buyers in price-sensitive markets such as Vietnam and Bangladesh to secure cargoes of the high-grade scrap at cut-rate prices, and market participants expect similar activity to persist for the rest of 2020.

“This year, Japanese sellers must aim to export Shindachi scrap further, and to countries more distant than just East Asia,” one industry source said.

While lower demand for Shindachi is problematic for prices, broadly stable generation rates for the grade of scrap from the automotive sector in 2019 has resulted in an oversupply, which puts more pressure on this segment of the market, sources said.

“There is too much Shindachi generation in Japan, so sellers will have to export more this year,” according to a major Japanese exporter.

Korean demand crashes
A reduction in demand for Shindachi in South Korea has been the largest determinant of prices for the high-grade scrap over the past year, sources told Fastmarkets.

South Korea is the single largest importer of Japanese scrap but the country’s Shindachi purchases fell 13.7% year on year to 1.04 million tonnes in 2019, according to the Japan Iron & Steel Recycling Institute (JISRI).

“Early last year, the spread between Shindachi and H2 was huge. South Korea wanted to buy Shindachi because the automotive sector was good,” a second Japanese scrap exporter said. “This year, Korea doesn’t want to purchase so aggressively.”

South Korea’s automotive sector has been hurt by the outbreak of the novel coronavirus (2019-nCoV) this year, with Hyundai Motors first closing plants in early February due to a shortage of Chinese components. Korean media later reported the closures of Hyundai auto plants in February and March due to the spread of the virus in the country itself.

The first scrap exporter said that the reduced demand for Shindachi was mostly due to lower output at a major integrated flat steel mill in Dangjin, in the western part of South Korea.

“The Dangjin steelworks had increased its purchases of Japanese scrap before last year, which raised the Shindachi premium. But more recently, the mill decreased their steel output and now the situation with their operations is terrible,” he said.

He estimates that South Korea will reduce its intake of Shindachi by some 500,000 tonnes this year.

A principal reason for the decline in flat steel output in South Korea is the lower demand from the country’s automotive sector, market sources said.

South Korean automotive output fell by 1.9% to 3.95 million units in 2019, according to the Korea Automobile Manufacturers Association. Both local sales and exports declined last year.

Demand for Shindachi in Japan’s domestic market has also fallen due to a slowdown in the manufacturing sector. “[Some] 60% of steel made in Japan goes to manufacturing and the manufacturing sector is weak,” one Japanese mill source said.

Japan’s Industrial Production Index fell by 2.9% in 2019 to 101.2 points, according to the country’s Ministry of Economy, Trade & Industry, while crude steel output dropped 4.8% year on year to 99.28 million tonnes last year.

Opportunities elsewhere
Despite reduced sales to South Korea last year, Japan’s overall Shindachi exports rose 12.9% year on year to 1.55 million tonnes.

Vietnam has been one of the main beneficiaries, with exports of the grade to the Southeast Asian nation rising by more than 200% year on year to 214,000 tonnes.

Taiwanese mills are now also regularly bidding for Shindachi shipments. One such cargo was sold at $272-273 per tonne cfr Taiwan on February 26.

Low prices for Shindachi have also attracted greater buying interest from countries further west.

One major mill in Bangladesh has raised its intake of the high-grade scrap in the last six months, market sources said.

An Indian trader told Fastmarkets that Shindachi was so cheap currently – especially in contrast with prices for scrap from the United States, Europe and the Middle East that buyers in India typically import – that he is attempting to arrange container shipments of the material into India.

He admitted, though, that he would be likely thwarted by the high container freight rates that have driven mills in India and Pakistan to buy bulk cargoes over the last fortnight.

But the luxury of selling westward for higher prices is not available to all exporters because some Japanese firms only have the loading capacity and vessel sizes to export bulk scrap to South Korea and Taiwan.

Steady supply
Japanese vehicle output fell less sharply than in South Korea, inching down by just 0.5% year on year to 9.68 million units, according to the Japan Automobile Manufacturers Association.

With the automotive sector also being a key generator of Shindachi scrap, this largely stable car output rate has kept supply of the steelmaking raw material elevated in certain parts of Japan, one scrapyard source said.

“Toyota was seeing good car production, so Toyota-heavy areas have had good Shindachi scrap generation, while in the Tokyo region where Nissan has more plants located, generation is not strong,” the source said.

Toyota – based in Aichi prefecture, where the major Port of Nagoya is located – produced 4.25 million vehicles in Japan in 2019, up by 6.9% year on year, according to the carmaker’s full-year results.

In April-December last year, Tokyo-based Nissan produced 584,974 units, down by 13.72% year on year, the company said.

This year, Japan’s automotive sector is already being affected by disruptions attributed to the coronavirus outbreak. The first exporter said that if these continue, Shindachi generation will be lower over the first few months of the year.

But given the importance of South Korea to Shindachi demand, market participants are also watching with great caution the recent automotive plant closures in that country, in addition to the alarming spread of the coronavirus there.

In line with expectations of higher Japanese scrap exports this year, Fastmarkets is proposing to launch two cfr Bangladesh import prices and two cfr South Korea import prices for deep-sea HMS 1&2 (80:20) and Japan-origin H2 scrap later this month. Details about how to participate in the consultation can be found in this pricing notice.