Reporting live from The Steel Index Steel Scrap Conference in Amsterdam, we have just had a fascinating presentation from Tim Hard of TSI regarding developments in the North Asian Scrap markets.
In the US we have tended to view Turkey as the main story and indeed in tonnage terms that has been the major growth story for the last ten years. But when you step back and look at the ten-year trends and the growth of EAF production around the world, you realize that the steel scrap market is becoming tighter with each passing year. While EAF production has risen slightly in North America even as total steel production has declined, EAF production in the Middle East and Asia has increased dramatically to some 83 million tons in 2011.
It was expected that there would be substantial scrap arisings from Japan post-tsunami, but fears of radiation contamination and problems in processing and preparing scraps have meant scrap exports actually fell from the single-most important supply market in Asia. Meanwhile, although the majority of Chinese steel production is BOF (some 90 percent of total steel production in fact) scrap is still used as a component of blast furnace operation and as the preferred feed for EAF. The Chinese are trying to develop their domestic scrap processing industry and many major shredder and processing investments have been made in recent years. But even so, domestic Chinese scrap prices are still at a premium to the rest of the world and steel producers are opportunistic buyers that step into the global scrap trade when prices fall. As such, even if finished steel prices fall and downward pressure is placed on scrap prices in the US and Europe, the presence of Chinese buyers willing to come into the market and take positions will increasingly create a floor under the scrap prices, supporting them at levels that may seem unjustifiable due solely to domestic US supply and demand fundamentals. Where Turkey has been the scrap story of 2000 to 2010, the next decade will increasingly be about Asia, even as Turkey continues to add further demand the market.
As demand from the North American construction industry has remained weak, US EAF producers have been squeezed between uncomfortably high scrap prices driven by Turkish and North Asian demand, a trend that is likely to drive greater volatility in scrap prices and the need for parties throughout the supply chain to turn to hedging techniques to cover their exposure to price movements — ideas on which we are looking forward to hearing some solutions later in the conference.