Viewpoint: European scrap set for strong start to 2020

Limited scrap stocks, slow flows to yards and healthy domestic and export demand are likely to drive European domestic ferrous scrap prices higher early in 2020.

But slower economic growth and steel demand uncertainty may dent any momentum gained in the first quarter.

Many suppliers will brand 2019 as one of the more challenging years in the past decade, with Germany's domestic delivered-to-mill prices registering a month-on-month fall in seven out of the 12 months, including six consecutive declines from May to October. Prices were down around 20pc on the year in December.

After four months of small downward price adjustments, German delivered-to-mill prices collapsed in September and October, falling by more than €50/t and dropping to multi-year lows of below €200/t for E40 shred.

This sharp price drop forced many suppliers to drastically slow down ferrous scrap collection. A number of smaller suppliers even completely ceased collection to better utilise resources on other recyclable waste that offered higher margins. Many of these suppliers have not yet returned to ferrous operations despite a rebound in prices since November.

Supply of new scrap was also dented by slower manufacturing activity as Germany's purchasing managers' index (PMI) was mostly below 45 since the beginning of the second quarter, signalling contraction in factory activity.

A fall in both obsolete and prime grade scrap supply, combined with an increase in export demand from Turkey and other destinations in north Africa such as Egypt and Morocco, lowered scrap availability to German mills and drove prices up by over €30/t in November and December.

Tight scrap availability is not expected to alleviate until winter conditions fade in March-April.

But German mills' scrap demand will likely be very healthy in January and February as they purchased very little, if any, volume above their monthly requirement in October-December. Consequently, they are holding very limited winter stocks.

Any remaining deep-sea import demand from Turkish steelmakers for January shipment is anticipated to mostly be served by the US and Europe as Baltic scrap exporters are almost completely sold out.

Scrap prices in January-February are poised to be supported by the increasingly fierce competition for scrap between northwest European mills and exporters. An Argus survey shows that German suppliers will in January initially offer scrap to mills at a minimum of €10-20/t above December levels.

Domestic delivered-to-mill prices in southern Europe are also expected to rise by a minimum of €15/t in January from December levels. Premiums of Italian and Spanish prices over German prices both moved higher in December and stood above €25/t for most grades. These premiums are anticipated to persist in the first quarter of 2020 because of the tight scrap availability.

Italian mills' requirement for large scrap volumes in November and December caught many suppliers by surprise. The increase in Italian scrap demand and prices was predominately driven by a more rapid recovery in steel prices in Italy compared to northern Europe because of capacity reductions and higher import prices. Italian steel prices are expected to rise further in January-March and continue to support scrap prices.

Many European market participants are unsure whether scrap demand and prices will maintain the momentum gained in the first quarter through the remainder of the year because evidence of a real recovery in steel demand is still lacking.

The World Steel Association in October forecast steel demand in Europe to grow by 1.1pc to 168.6mn t in 2020 after a 1.2pc contraction in 2019. Construction and automotive – the two major steel consuming industries – are set to remain under pressure as global economic fundamentals are expected to experience a limited recovery in 2020.

The European Commission lowered the euro area's 2020 GDP growth forecast to 1.2pc in November, down from 1.4pc and 1.5pc forecast in July and May, respectively.

By Chi Hin Ling