There has been quite a bit of analyst chatter about the likely impact of China’s return to the steel scrap market next year.
In 2019, the authorities essentially banned steel scrap imports. The move came, in part, because many of the grades were classified as waste. However, of late the rumor is China will be moving to reclassify ferrous scrap as a recyclable resource and could lift the import ban (probably in Q1 2021).
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Steel scrap imports plunge
According to Platts, China has 184 million tons of EAF steelmaking capacity at the end of 2020. Furthermore, the country will likely have 197 million tons by end of 2021.
The totals are up from 175 million ton at the end of 2019, when scrap imports had plunged to just 180,000 tons due to the ban.
Domestic steel scrap production has been on the rise, generating some 240 million tons in 2019. As such, the 2014-18 average annual imports figure can be seen as minuscule by comparison.
But while they may be small, they are not insignificant.
Normally, imports rise and fall relative to the premium arbitrage of domestic prices over world prices. Currently, domestic steel scrap prices in China are said to be about $60/mt or Yuan 400/mt over Southeast Asian seaborne scrap prices on like-for-like grades (when freight and taxes are included).
Should imports be relaxed, there is, therefore, the potential to suck in considerable imports.
Platts suggests this would not top the record 13.7 million tons imported in 2009. Some, however, disagree, saying it could reach 20 million tons.
Setting prices for steel scrap market
China essentially sets the global prices for seaborne iron ore. The country could potentially have a similar impact on the Asian steel scrap market.
By comparison, the U.S., the world’s largest single exporter of steel scrap, exported only 18 million tons in 2019 after four years of gradually rising volumes, much of which went to Turkey. Coincidentally, Turkey imported a similar 18.857 million tons in 2019, to the likely upper limit of potential Chinese imports next year.
Would that be enough to move the market and raise global steel scrap prices?
Yes, almost certainly.
However, one caveat is that rising prices could close the China arbitrage window to domestic scrap prices. It could be that rising global scrap prices choke off imports, as they near domestic steel scrap prices.
While capacity additions are no direct driver of actual output, domestic scrap producers may struggle to meet the demands if the planned expansion of between 17 million and 24 million tons of steelmaking in 2021 is realized. This is particularly true as converters have the scope to also increase their current scrap percentages from 14-16% this year to as high as 20-30% if steel margins warrant it, potentially adding further pressure on the scrap market.
Even if only some of the potential upside drivers to the global scrap market are met next year, the return of China to importing scrap is sure to have a supportive or inflationary — depending on your point of view — impact on prices in 2021.
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