Analysis: Iron ore increasingly divorced from steel

  • Market: Metals
  • 22/02/24

Some ferrous market participants have long called to scrap "new iron ore" because of its increasing usage in lower carbon intensity steelmaking and potential threat to iron ore in the future.

But Turkish scrap is currently much more highly correlated with Chinese hot-rolled coil compared to Chinese iron ore, despite the latter being the primary input for the world's largest steel consuming and producing region. Just 9.5pc of Chinese steel is produced via electric arc furnace, according to Worldsteel trade association data.

Since the start of 2023 the straight correlation between Chinese iron ore import prices and HRC export prices has been a meagre 25pc, implying little relationship. Even lagged for the lead time from purchasing the raw material to consumption, the correlation is still below 45pc.

That lower correlation encourages direct hedging of fob China HRC as opposed to hedging steel via raw materials: the LME's fob China HRC contract saw volumes jump over 89pc in January compared to the October-December 2023 monthly average volume.

The straight correlation between Turkish scrap imports and Chinese HRC exports over the same period is 80pc, much higher than for iron ore.

There are a number of reasons for the tighter relationship between scrap and HRC. China imports made up more than a third of Turkish HRC imports in 2023, selling over 1.6mn t into the country, up sharply from just over 562,000t the previous year.

Last year 8.4pc of all China's HRC exports went to Turkey, with only Vietnam taking more. China was aggressive in terms of HRC exports last year. Overall it sold almost 24mn t of HRC into overseas markets, even higher than 2015, when its total steel exports surpassed 112mn t and the price of steel anywhere in the world was effectively the Chinese price plus freight. This aggressiveness affected all markets, including Europe, where Asian sellers gained significant import share from their Turkish counterparts.

Turkish mills regularly flex between scrap, semi-finished products and to some extent finished steel, depending on price competitiveness. For example, where the price of scrap is too high, they may opt for slab or, if workable, HRC. Sources suggest Chinese HRC has been purchased in Turkey, and transformed into hot-dip galvanised coil before being sold into the EU.

When entering the scrap market, the price of steel in China, which clearly has a strong influence on the global market, helps Turkish mills gauge value for their purchasing.

At the same time, some suggest iron ore is trading out of line with fundamentals, given its tight supply base — scrap supply is much more fragmented — and the impact of Chinese government policy. Where the government wants to bolster gross domestic product figures, increased industrial production remains a key policy lever given the difficulty of shifting to become a consumer-led economy. Iron ore is also impacted very heavily by macroeconomic news, given how dependent on finances it has become, whereas scrap is more driven by steel supply and demand.

Blast furnace and basic oxygen furnace-based producers in parts of the world have also ramped up their scrap charge to help lower their carbon footprint for certain consumers that want greener products, such as European carmakers. Even some integrated producers in Asia have nearly doubled their charge for this reason, according to supply- and buy-side sources.

Iron ore losing relevance?

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Q&A: Ramaco adding production, sees market growth

New York, 16 April (Argus) — Randall Atkins is a founder and chief executive of metallurgical coal producer Ramaco Resources. He also has been involved in energy-related investment and financing activity for over 40 years. In this Q&A, edited for length and clarity, he discusses effects from the Francis Scott Key bridge collapse, his outlook for coal and the company's research projects. What effect has the Key bridge collapse and Port of Baltimore closing had on Ramaco and the US coal industry in general? Like most things of that tragic nature, it is going to take longer than everyone expects to actually solve the problem. I think where it is going to impact producers probably more is on the rails. There will be a need for...producers to rearrange stockpiles and to rearrange where they are going to try and ship, even at reduced levels. Particularly, CSX is going to have an immense logistical complexity to deal with over the near-term. We do not ship from Baltimore. We have not seen any problems, knock on wood, with our rail shipments post the incident. What are your long-term projections for metallurgical coal given expectations that low-volatile coal reserves will shrink in coming decades and the steel industry could be in oversupply? Low vol coal has traditionally been the highest priced coal and the dearest, if you will. High vol A coal has over the last few years grown in importance, and to the extent that there is any new increase in production in the US, it's high vol. What we perceive is that there is going to be a crowding in the high vol space. As a result, our increase in production is primarily in low vol. As far as the demand side is concerned, we do not believe that blast furnace steel demand is going to decline anytime soon. There's a lot of noise from the green community that hydrogen is going to replace coal in blast furnaces. We took some advice on that from the IEA…and when that question was posed (to IEA), the answer that was given was it would take about $1.5 trillion to build a pilot plant using hydrogen by 2035 and probably about another equal or greater sum to build a commercial facility by 2040. So, I don't lose a lot of sleep on the demand for coal for blast furnaces. What I do see shifting, however, is the US has held relatively steady at about 20mn short tons (18.1mn metric tonnes) of met coal demand over the last 10 to 15 years. The growth is clearly overseas, and the growth is clearly at the moment in Asia. When we started back in 2017, and 2018 was really our first year of production, we predominantly sold coal domestically; I think 80pc of our coal went to US steel mills. Now that is almost reversed. We're going to sell probably this year, 70pc overseas, and about a third or less domestically. 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16/04/24

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