Higher costs may boost EU shred, new scrap consumption

Surging energy costs in Europe and higher seaborne metallurgical coal prices may drive the continent's steelmakers to increase consumption of shredded and new scrap in order to lift production yields.

Many European steelmakers have raised their sales offers in the past few weeks because of higher energy costs. Some market participants estimated that steel production costs have increased by more than €100/t over the past few months. And mills are expected to further lift offer levels in the coming months as there is no sign of energy costs across Europe abating. But mills may find it difficult to sell at higher prices that fully cover the higher energy costs because steel demand is still sluggish.

Steelmakers may therefore look to reduce scrap costs to preserve margins. They will likely attempt to drop scrap purchase prices further in February after achieving limited decreases in January. But any move by mills to cut scrap prices will likely face resistance from scrap suppliers as collection rates and overall availability, particularly for new scrap, are still low in all major European scrap markets.

Another option for mills is to boost production yields. Mills can increase the portion of shredded, prime and other high grade scrap used in their furnaces to reduce the energy required to produce 1t of crude steel. Another advantage of increasing consumption of higher grade scrap is that blast furnace-based mills will also require less inputs of some other raw materials, such as coking coal and met coke, for which prices have also moved higher in the past 3-4 months.

The seaborne benchmark premium low-volatile hard metallurgical coal fob Australia price was $411.65/t on 17 January, compared to below $250/t on 1 September. Prices for met coke, which is a product of metallurgical coal and is used in blast furnaces for ironmaking, have also increased but not as sharply as coal prices because there is typically a two-month lag between the two prices.

The Argus metallurgical coke 60 CSR cif Amsterdam-Rotterdam-Antwerp assessment rose by $20/t to $520/t on 6 January from $500/t on 23 December. And met coke prices are anticipated to move even higher in the coming months as Chinese demand is now rebounding from low levels in November-December, while prices for Australian and US coal will likely remain strong because of supply tightness.

In reality, mills will probably combine the two strategies — cut scrap purchase prices but increase demand for higher grade scrap relative to overall scrap requirement. This means that delivered to mill prices for ferrous scrap may fall across Europe in the coming month but premiums for new scrap and shred over old scrap may widen further.

The price premiums for delivered to mill E8 new scrap and E40 shred over E1 old scrap in Germany were €86.50/t and €44.64/t in January, respectively. Both premiums experienced small increases in January and some market participants said they may in the next few months exceed the multi-year highs of September-October last year.

By Chi Hin Ling