INTERVIEW: Chinese billet ‘never an option’ for Feng Hsin
Taiwan’s Feng Hsin Steel has decided to revamp its operations and cut production costs instead of resorting to importing low-priced billet from China like some of its peers have been doing.
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The steelmaker also plans to focus solely on its business in the East Asian territory and put off any overseas expansion for the time being – a different strategy than the one being pursued by some of its biggest compatriot mills.
These were some of the items on the drawing board that Michael Lin, special assistant to Feng Hsin’s chairman Mark Lin, shared with Steel First in a recent interview at the company’s headquarters in Taichung, in central Taiwan.
In this first segment of this two-part article, Lin talks about the controversy surrounding Chinese billet imports – and the few advantages that electric arc furnace (EAF) mills have that allow them to fight back.
“We’ve been complaining to the government that overseas billet, with its controversial alloy issue, is corrupting our local market and we have to maintain that argument,” Lin told Steel First earlier this month.
“Our position must be firm. If we buy it, then we become one of them [the importers]. Then we would lose our position to complain,” he said.
Low-priced Chinese billet has become one of the hottest topics in the global steel industry over the past couple of years, with both re-rollers and EAF mills all over the world – from East Asia to Southeast Asia to the Middle East and all the way in Europe – buying the semi-finished product.
Chinese mills and trading companies typically declare billet as alloy square bars with the intention of avoiding a 25% export duty on semi-finished carbon steel products, as well as claiming a 13% export tax rebate.
They have been exploiting this loophole to find markets for the country’s steel output amid domestic oversupply and a slowing economy. Finished steel exports from the world’s second-largest economy have increased by nearly 25% year-on-year to 92.1 million tonnes in the first ten months of 2015.
In Taiwan, cheap Chinese billet has put “tremendous pressure” on EAF mills, George Adams of USA-based SA Recycling, an ad-hoc board member of the Bureau of International Recycling’s ferrous division, said last month.
As an example, he cited the recent closure of World Best Co, an EAF mill located in Kaohsiung in southern Taiwan.
Other Taiwanese firms have also landed in trouble. Among them is Wei Chih Steel Industry, an 800,000-tpy EAF mill located in Tainan city in south-west Taiwan that recently had its assets seized by a local court after an unpaid creditor took action against it.
For Feng Hsin, “the idea of importing Chinese billets was never an option at all”, so lobbying for governmental support together with other EAF mills will remain on its agenda.
“Maybe the fact that World Best is shutting down will push the government to look at this situation more carefully than before,” Lin told Steel First.
“This might get the government’s attention, but will it push it into doing something? We have no idea.”
The case is a sensitive topic for the Taiwanese government, according to several local market participants who spoke to Steel First.
It involves two groups with opposing demands: on one side are several rebar and bar re-rollers that depend on third-party billets, and on the other, EAF mills that complain about the imports from China.
Re-rollers in Taiwan have historically depended on imported billet, since there is not enough local supply from domestic EAF operators.
Feng Hsin itself does not sell any of its billet as it has no surplus, Lin said.
Up till about ten years ago when it expanded its steelmaking capacity, the mill too needed to import billet. China had yet to emerge as a significant exporter of steel back then, however.
“Before 2006 we had to purchase billet from other countries like Russia and Brazil, because our crude steel output didn’t match our finished steel capacity,” Lin noted.
He acknowledged that the lobbying by the Taiwanese steelmakers is further complicated by the fact that some EAF mills themselves had occasionally imported billet from China.
In fact, only a handful of local steelmakers have never imported Chinese billet at all, local sources on the island told Steel First. Among them are the biggest EAF operators Tung Ho Steel, Feng Hsin and Dragon Steel.
“There’s no consensus among the EAF mills, and this is an argument used by the re-rollers,” a local trader who has been in the business for close to 30 years told Steel First.
Scrap vs billet
For mills that continue to use only ferrous scrap to produce billet before rolling them into long steel products, the numbers have not been very encouraging of late.
It costs just under NT$5,000 ($153) per tonne to convert scrap into billet in Taiwan, according to Lin, though he did not disclose Feng Hsin’s exact figures.
In the first week of November, when there were containerised cargoes of HMS 1&2 (80:20) from the USA available as low as $140 per tonne cfr in Taiwan, Chinese billet was offered around $255-260 per tonne cfr.
This means EAF mills relying on imported scrap would have recently had a billet production cost of around $290 per tonne.
This compares with billet imported at $255-260 per tonne cfr or even lower.
So how to handle the price gap?
“That’s exactly the problem we are facing right now: you can’t beat that cost,” Lin said.
One of the few advantages that EAF mills have is access to local scrap supply that is available at much shorter delivery times compared with imported billet.
Taiwan is Asia’s third-largest ferrous scrap importer – behind South Korea and India – but imports make up just around half of its total consumption of the steelmaking raw material, Lin said.
Domestic scrap is usually cheaper than imported material. It is also delivered on a daily basis.
These help EAF mills produce billet at an average cost that is a bit lower than the figure above and allow them to manage their risks better.
“There are always risks for people who buy billet from China, and the first one is the delivery time,” he said.
It usually takes two to three months for a billet cargo from China to reach the buyer’s stockyard from the time a contract is signed.
In a falling market like the current one, this usually means that “by the time the billet arrives, the local rebar price is already lower” than what it was when the import deal was closed, Lin pointed out.
There is also talk in the market about the lack of consistency in the quality of billet supplied by some Chinese mills, he noted.
“People were so amazed by the quality and price of the billet in the first deal – the price was so low and the quality was so good that, I believe, no one thought anything could be better than that, ever,” Lin said.
“But after the first few months of supply, the quality started going up and down,” he added.
Michael Lin talks about Feng Hsin’s planned investments and the state of Taiwan’s steel market in the second segment of this two-part interview with Steel First.