Shagang lowers scrap price as margins face pressure

China's largest private steelmaker Shagang lowered its heavy melt scrap purchase price by 40 yuan/t ($6/t) today, following other mills pressured by narrowed profit margins.

Shagang will pay Yn2,580/t ($375/t) for heavy melt No. 3 grade scrap with a minimum thickness of 6mm delivered to its mill in Zhangjiagang, north of Shanghai, effective today. Shagang previously lifted the price by Yn80/t on 12 April.

The price cut follows a slide in domestic steel prices over the past week, which, coupled with firm iron ore and coking coal prices, has put mills' gross margins under more pressure.

Shanghai ex-warehouse rebar prices fell by Yn120/t to Yn4,020/t in the week to 14 May. Traders' prices went unchanged today, stabilised by expectations for more stimulus and squeezed margins providing a floor to steel prices.

For blast furnace-based mills, gross margins are still intact at Yn300-500/t for rebar.

October rebar futures fell to Yn3,663/t yesterday, the breakeven cost level for electric arc furnaces, which supported prices and set futures up for a bounce today, a China-based analyst said.

If scrap prices fall further "maybe mills will consider increasing scrap ratios given the high price of iron ore," the analyst said. But charge ratios are unlikely to reach last year's levels with profit margins much lower than levels of Yn2,000/t in early 2018 and Yn1,000-1,400/t in mid-2018. Looser pollution restrictions on iron ore sintering this year have also reduced the need to use scrap. "This makes molten iron supply sufficient, and blast oxygen furnace mills are not very hungry for more scrap."

Even with 62pc iron ore prices close to the $100/dry metric tonne (dmt) level on a cfr Qingdao basis and above this on a delivered basis to mills, scrap is still more expensive. "The cost of scrap is still Yn400/t higher than using iron ore" per tonne of steel, said an official at an east China mill using a scrap charge ratio of 8pc.

Mills surveyed by Argus showed a wide range of charge ratios of up to 20pc, with isolated ratios of up to 35pc when additions to the blast furnace were also included.

A Hebei-based mill lowered its ratio to 20pc from 30pc previously, while a south China mill has kept its ratio stable at 13-15pc. Another east China mill has kept its ratio flat at 14pc for an extended period. Another Hebei mill's ratio is up slightly at 15pc, with scrap prices "not that high at this stage".