Steel scrap markets start hot in 2023, but major challenges remain for Turkey: 2023 preview

Given the sharp price increases recorded by several major seaborne steel scrap markets at the start of this new year, it can be easy to forget the host of structural issues still bubbling under the surface of the trade

Once the first working week of 2023 was in the books, Fastmarkets’ import steel scrap indices for the CFR Turkey and Taiwan markets had hit their highest levels since June, and several market participants are predicting further short-term increases.

A significant reason for the sustained rise this time is tight scrap availability in key supplier markets such as the United States, with seasonal factors exacerbated by extreme wintry weather over the past month. Demand has increased from Turkish mills wanting to stock up after under-buying in recent months.

But dig a little deeper, and it becomes clear that some fundamental issues are still at play in Turkey, which some sources say could prevent prices from continuing their upward momentum over the medium term.

Margin pain

Even a cursory look at economic forecasts shows that the year will be tough for many nations.

In October, the International Monetary Fund (IMF) cut its forecast for global economic growth to 2.7% for 2023, the weakest level since 2001, excluding the 2008 financial crisis and the acute stage of the Covid-19 pandemic. The organization now predicts one third of the world to be in recession this year.

Although the IMF forecasts Turkey’s GDP to grow by 3.0% this year — down from a 5.0% increase for 2022 — it could be argued that the rumblings of a recession were already detectable in Turkey’s steel and scrap markets last year.

The world’s largest ferrous scrap importer bought 19.62 million tonnes of the material in January-November 2022, down by 12.7% year on year compared with the same period of 2021, according to the Turkish Statistical Institute (TÜIK).

Turkish steel production also suffered toward the end of last year, with the nation producing 32.5 million tonnes of crude steel in January-November 2022, down by 12.3% year on year, according to the World Steel Association. Production in November 2022 stood at 2.4 million tonnes, down by 30.7% year on year.

A key reason for the production drop and subsequent lower steel scrap demand? Margins.

While energy costs are certainly biting scrapyard operators in other regions such as the EU, Turkish consumers have been among the worst-hit steel market participants when it comes to power costs in the past year.

Perhaps the most dramatic flashpoint came on September 1, 2022, when Turkey’s energy market regulator, EPDK, declared a 50% increase in industrial electricity costs. In one fell swoop, this added $25 per tonne to steelmaking costs in Turkey for spot electricity costs, and another $15 per tonne for natural gas.

For steelmaking margins, it meant that to break even on producing steel from scrap in the final quarter of 2022, Turkish mills buying energy from the spot market needed to make a margin of around $335-350 per tonne between their CFR steel scrap cost and FOB rebar price, market participants told Fastmarkets.

Not only is that margin up sharply from the traditional break-even levels of $150-170 per tonne observed as recently as 2021, but Turkish mills have been falling well short of attaining this margin based on their most recent steel scrap and rebar prices.

The margin between Fastmarkets’ assessment for steel rebar export, fob main port Turkey and North Europe steel scrap, cfr Turkey was just $282 per tonne on January 5, which is simply not high enough for a typical mill to break even. Worryingly for steelmakers, the margin has been trending downward since October, when it averaged $325 per tonne.

Turkey margin chart 2023-01-09.jpg

Turkey is far from the only major steel scrap market dealing with high energy costs. Japanese steelmakers have been asked by the country’s government to preserve electricity between January and March 2023, which means both electric arc furnace (EAF) steel production and scrap intake in the country are likely to decline this year.

“We cannot clearly predict a forecast at this stage,” one Japanese exporter source said. “Therefore, we made our positions ‘square’ by the end of last month,” he said, adding that “2023 will again be a tricky market for all of us.”

Energy costs

Turkey’s EPDK announced a 16% discount on electricity costs for industrial use starting from January 1. That should reduce steelmaking costs by $7-8 per tonne, according to market participants. A 25% drop in natural gas prices for industrial users was also announced starting the same day.

Although the energy price decline will start to provide some respite from high costs, the decreases pale in comparison with the roughly 400% increase in electricity prices and 780% rise in natural gas prices in Turkey since the start of 2021.

Margins will remain difficult territory for Turkish mills, Alex Kershaw, senior analyst at Fastmarkets, said.

Kershaw forecasts Turkish rebar-scrap spreads to be at around $285-290 per tonne for at least the first half of 2023, before dropping further, due only in part to lower energy costs.

“In the second half of 2023, the spread is expected to tighten further amid energy costs for mills easing down based on forecasts of gas prices,” Kershaw said.

But margins could also be hurt by higher steel scrap prices during the year, with steel scrap supply from the US tightened due to expected increases in that country’s electric arc furnace (EAF) production, he said.

If spreads remain around the $250 per tonne mark from August as Kershaw expects, “this should see Turkish demand for scrap continue to be weak,” he said.

Export rebar demand weak

Another issue faced by Turkish steelmakers has been a continued lack of demand for the country’s finished long steel in export markets over recent months.

Markets in Asia have been finding cheaper prices from long steel suppliers in the Middle East and Southeast Asia, which have not been as badly affected by energy costs as Turkey has been.

But the low demand for long steel exports has actually led to a boost in Turkish import scrap demand, at the expense of steel billet importing.

This shift is being driven in part by Turkey’s 22.4% import duty on billet, which can be avoided under an inward-processing regime if the finished steel product made from the billet is exported.

Due to a lack of demand for long steel exports, Turkish steel mills are now unable to benefit from this system. As a result, they are instead deciding to use more imported scrap for production.

“Steel mills in Turkey are still looking to buy scrap, but they are struggling with the firm prices,” a trading source said. “Turkish mills do not wish to import much billet at the moment. They are unable to benefit from the inward-processing system since long steel export sales are constrained.”.

Unless export demand for long steel rebounds, this trend is anticipated to persist in 2023, market participants said, which could mean that Turkish steel mills will continue to rely on imported scrap for production, potentially contributing to increasing global scrap demand and prices.

Kershaw maintains his view, however, that Turkish mills will continue to face margin pressure, keeping their demand for imported steel scrap in check for much of the year. But he does point to a number of risks inherent to this view. These include changes in the war between Russia and Ukraine, possible geopolitical tension involving China, and the potential emergence of new strains of Covid-19.

With such a volatile combination of factors at play, accurate information and strong data are more important than ever. That is why Fastmarkets will be covering every twist and turn of the 2023 steel scrap markets in great depth.

I wish you a very happy new year and invite you to join us on the journey! Feel free to drop me an email at lee.allen@fastmarkets.com should you want to discuss this article or anything else on the markets.

Cem Turken, in Mugla, contributed to this article.

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