RESEARCH: Key takeaways from the latest Steel Raw Materials market tracker

• Heavy rains in China, which can negatively affect iron ore supplies and pig iron production, and bolster demand for scrap, continued in July 2020. Although this was more an upside risk to our bearish base case one month ago, Chinese scrap prices remained strong. The firm prices gained support from the rains and from a more general demand pull for steelmaking raw materials. Based on data from member-mills of the China Iron & Steel Association (Cisa), we estimate they will have produced 7% more crude steel in July and 8% more pig iron, further boosting the already unexpectedly strong year-to-date growth. Although scrap consumption at Cisa mills is rising, the scrap and metallic shortage (steel-to-iron gap) is actually not as big as it was before to the Covid-19 outbreak began. Fastmarkets’ price assessments reveal to some extent a reason for this contrasting performance.

• At more than $330 per tonne before tax, heavy steel scrap in China is relatively expensive. This compared with other similar scrap materials, such as US-origin blended HMS offered into China, for which reported prices are as little as $265 per tonne. This is not dissimilar to Fastmarkets’ price assessments of the container market into Taiwan, or bulk materials into South Korea or Vietnam. As a result of the relatively high scrap prices, steel mills in the north of China look favourably at offers of Russia-origin pig iron at prices from $305 per tonne cfr. These mills use electric-arc furnaces and produce long steel, but they are struggling to remain profitable and also face tough competition from integrated mills. In addition, “realized” prices for high-phosphorus pig iron imported into China were below $250 per tonne cfr in June, supporting a huge surge in volumes. Pig iron imports reached 1.21 million tonnes in the April-June quarter.

• Steel mills and their traders have taken extraordinary measures to import metallics that are nominally cheaper, and theoretically far more valuable, for the ultimate purpose of producing low-value steels. This suggests to us that there is a shortage not only in prime availability, affecting integrated mills in Northern China, but even in obsolete scrap, affecting mini-mills. The ability of scrap sellers to maintain a local premium for obsolete material over hot metal will be temporary, as we have repeatedly forecast, although its recent persistence suggests that it is underpinned by supply-side constraints.

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