Ferrous scrap market split on China import impact

The global ferrous scrap market is widely anticipating that China will resume imports in the first quarter of 2021, but opinion among suppliers and Asian importers is split on the extent to which it will influence seaborne pricing and trade flow.

Scrap exporters to Asia widely anticipate that China's return to the import market will provide immediate support for scrap prices next year. However, it is by no means certain that Chinese imports will fundamentally restructure the Asian scrap market, or that China will import large volumes of scrap on a predictable annual basis.

Historical analysis of prior Chinese scrap import trends indicates that Chinese demand will be highly dependent on finished steel and iron ore pricing, but that it is likely to raise the underlying floor price for seaborne scrap across east Asia.

China ferrous scrap import volumes from 2006 to its import ban post-2018 were on a decreasing trend, with the exception of a spike to an all-time high of 13.7mn t in 2009. Only 1.34mn t of scrap was imported in 2018.

During this period of import decline, China has typically increased imports of ferrous scrap either when prices of scrap were low or when their domestic or export finished steel prices were high. Iron ore prices also need to be high relative to scrap to incentivise basic oxygen furnace (BOF) mills to increase scrap utilisation. China is unlikely to pay high prices for seaborne scrap if steel prices do not sustain it.

Prior Chinese scrap import patterns may become less relevant once seaborne buying resumes, depending on the extent to which China is committed to increase and incentivise scrap usage for steelmaking in its bid to reduce emissions. But that is unlikely to be a significant driver for Chinese purchases in early 2021.

Scrap importers from north Asia told Argus this week that they are doubtful that China will significantly impact global supply-demand dynamics for ferrous scrap. They argued that China is close to self-sufficiency in scrap volume requirement, as indicated by its ability to support a rise in ferrous scrap consumption to a record high of 215.93mn t in 2019 without the need for overseas purchases.

North Asian steelmakers estimated that China now generates around 100mn t/yr of primary scrap from the steel production process and a further 200mn-300mn t/yr of obsolete scrap from its recycling industry.

If accurate, this means China is close to generating the 400mn-450mn t/yr of scrap it would need in its current highest-use scenario, under which all of its electric arc furnaces run at high utilisation rates and BOFs increase scrap utilisation to their maximum possible 30pc of raw material input.

But although China's raw scrap processing volumes are high, its domestic recycling infrastructure is still not fully optimised to service the steel industry, which is why the ferrous scrap import resumption is widely expected to be targeted at allowing the purchase of high-grade scrap.

Some market participants said this week that they expect there to be an initial large influx of scrap into China once imports have the green light, but that this activity will cool as domestic market scrap prices start to be competitive and steel prices stabilise.

Japan-China trade key to new Asia scrap balance

Japanese suppliers said they do not expect their total export volumes to rise significantly, but believe that the bottom of the price fluctuation range will be lifted after China joins the competition for seaborne tons.

Once international ferrous scrap prices drop enough to generate any arbitrage window, Chinese buyers will step into the market to import and thus prevent the price from dropping further.

Japan was the largest supplier for China before it closed the door to imported ferrous scrap in mid-2018. Japan's overall yearly export volume was stable in a range of 7.5mn-8.5mn t during the past several years.

Before China banned ferrous scrap imports in mid-2018, the country imported 1.8mn-2mn t of ferrous scrap from Japan yearly in 2014-17, accounting for around 25pc of Japan's total export volume. Japanese suppliers are happy to see China restart ferrous scrap imports. Many of them have received enquiries from Chinese traders for shipment in the first quarter next year.

Chinese businessmen have long had a presence in the Japanese scrap market, but the recent development of Chinese imports has incentivised those that are bullish on Chinese seaborne demand to increase efforts to invest in scrap yards in Japan's Kansai region. Japan's other main export hub, the Kanto region, is better established and does not provide any opportunity for Chinese investors to enter.

After China stopped purchases, Vietnam, Taiwan and Bangladesh absorbed the excess amount shifted from China.

Scrap demand from Vietnam and Bangladesh is rising rapidly on higher crude steel output generated from many newly launched steelmaking projects. In 2020, Vietnam is expected to surpass South Korea as the biggest buyer of Japanese scrap based on its surging demand.

Japanese suppliers expect some of the tonnage directed to Vietnam and Bangladesh to move back into China next year, in part because of China's proximity to Japan. The longer freight distance means the minimum sized cargo per shipment to Vietnam is 5,000t, rising to 10,000t to Bangladesh.

Not all ports in Japan are capable of berthing large vessels, so some suppliers near small ports have no choice but to sell at relatively low prices to South Korea, which can accept minimum cargoes of 2,000t. China holds a similar geographic advantage.

Most market participants think Chinese buyers will mainly import higher grade Japanese scrap such as shred, HS and shindachi, rather than H2 or H1/H2 50:50. But these grades are in strong demand in Japan's booming domestic ferrous market, and Japanese traders are not sure whether their material will still be attractive for Chinese buyers next year if prices remain supported at current levels or move higher.

Japan's leading electric arc furnace steelmaker Tokyo Steel aggressively lifted collection prices from early November. The H2 price delivered to its Tahara plant rose by ¥8,500/t ($81.42/t) from 2 November to 9 December. Suppliers' target price for HS is already higher than current Chinese domestic prices for the equivalent grade.

Some Vietnamese mills this week admitted that the global scrap price will be higher after Chinese buyers enter the market. "Prices will definitely go up if China starts to buy, no matter which product. We can only try to push finish product prices higher, otherwise we have no profit," a Vietnamese mill said.

By Terry Chuay and Xia Ji

China iron ore and ferrous scrap imports Million tons

Japan ferrous scrap exports Million tons