Viewpoint: China to provide floor for pig iron

Global basic pig iron prices are widely expected to remain elevated through the first half of 2020, supported by a floor on demand from rising interest in China.

Market participants project China to remain an active buyer of basic pig iron (BPI) in the new year, with a pause for the lunar new year shutdowns in late January.

Higher scrap prices relative to BPI and sintering restrictions have lent support to Chinese buying in the latter half of 2019.

In recent months, China has put in place restrictions on sintering iron ore fines, prompting even blast furnace mills to turn to international BPI sources for iron.

Blast furnaces typically produce their own pig iron internally, including by sintering iron ore fines, removing the need to purchase the raw material from alternative sources. On the other hand, electric arc furnace mills rely on scrap for the majority of their iron content and cannot produce BPI from iron ore, forcing them to enter the market to source the raw material.

Market participants expect a loosening of restrictions could upend most of this trend, but not until the latter part of 2020. Tangshan exempted some mills from December restrictions if they met emissions policy compliance, but mills were still uncertain over limitations for January and February.

Still, stronger demand from China has forced US buyers to purchase more strategically. In early October, US ferrous scrap prices dropped as much as $40/gt in the Midwest, with #1 busheling in Chicago at $223/gt that month, which in turn dragged BPI cfr New Orleans down to $297/t, both at near three-year lows. Tightened scrap-BPI margins and limited US buying prompted Chinese mills to purchase roughly 170,000t of BPI from Ukrainian, Russian and Brazilian suppliers. US BPI prices were forced up by $20/t to $317.50/t in time for the next month's ferrous trade.

As a result, sources expect China to provide an immediate floor for BPI prices. Mills in the country would likely enter the BPI market, particularly when the local price encroaches on the cost for prime scrap. With uncertainty over trade policies and China's expected growth in crude steel output next year, sources were mixed on whether the country could actively contribute to higher overall prices and compete more actively with the typically larger buyer, the US.

Chinese imports of pig iron over the first 10 months of 2019 increased to 384,850t from 56,630t a year earlier, according to Chinese customs data. US imports slipped by 5pc to 4.5mn t over the same period, according to US Commerce Department data.

Still, the US will have a wider selection of local sources of pig iron and alternative raw materials such as hot briquetted iron (HBI) in 2020. Stelco plans to construct a merchant pig iron facility alongside its blast furnace mills in Hamilton, Ontario, and begin sales by the third quarter of 2020. Cleveland-Cliffs expects to begin production of HBI at its Toledo, Ohio, mill by in the first half of 2020, adding 1.9mn t/yr of capacity. The company on 3 December acquired steelmaker AK Steel, which it said will consume around 6mn short tons (st)/yr of iron ore pellet.

By Zach Schumacher and Valery Zavyazkin