Metal Movers: Pig iron in the wake of war

Author Argus

This episode focuses on how the global pig iron market has transformed since Russia’s invasion of Ukraine.

As the US scrambles to replace 60% of its pig iron supply and economic sanctions tighten on Russia, how will the steel industry correct? Listen in as Blake Hurtik, Editorial Manager and Zach Schumacher, Deputy Editor, explore this unprecedented market turn.


Transcript

Blake Hurtik: Hello, and welcome to this podcast, brought to you by Argus Media, a leading independent provider of energy and commodity pricing information. In this episode of "Metal Movers," we're here to talk about the global pig iron market, which has been thrown into disarray following Russia's invasion of Ukraine.

My name is Blake Hurtik. I'm editorial manager at Argus Media, for our metals team in Houston. And I'm joined today by Zach Schumacher, our deputy editor for Americas metals. Hey, Zach.

Zach Schumacher: Hey, Blake. Yeah. I'm happy to be on. Excited to talk about this market, which has been kind of wild recently. Yeah.

Blake: Yeah. I mean, it's really been upended in multiple ways, and so, kind of what we hope to do today is really go over where we were, you know, in the market February 24th, when the conflict started in Ukraine, and how that's evolved since, because, you know, basically went from having Russia and Ukraine, 60% of the supply coming to the U.S. basically evaporating, because it was either Ukraine being taken out of the market, and also there's this kind of secondary thing of sanctions and financial restrictions on the Russian volumes. And it's been pretty wild since. So, I mean, I guess if you wanna set the stage on kind of what did we see happen in the market, you know, immediately following the invasion and the aftermath, and maybe that would bring us kind of to today, and moving, looking forward.

Zach: Yeah. Well, I mean, I think it was a pretty predictable response when you see 60% of your supply of something essentially go off the table. You know, prices spiked for really about the three, four weeks following the invasion, and hit very high levels, you know, relative to where they were. I think we maxed out somewhere just shy of $1000 a metric ton, whereas just before the invasion, we were about half that, closer to $500, $550. And obviously, the market was struggling to sort of wrap its mind around where the U.S., primarily, being the big consumer, was going to source its pig iron to feed the EAF market.

When we look at just pricing since then, I think we've kind of plateaued, really, around those levels, and we haven't really shuffled much out either up or down in any direction. Certainly, there seems to be some weakness now kind of creeping in, as the mathematics of kind of where supply is gonna come from, what the general landscape is gonna look like I think has kind of been getting a little bit more firm and clear for the consumers here, and as alternatives have kind of been tapped to their greatest extent. So, we're beginning to see the signs that, hey, we may have maxed out. There may be some level just underneath this, where the market is comfortable, and we're certainly, I think, seeing that in the general landscape of the ferrous market, which I think is playing a role feeding into this as well, so...

But it certainly has been a rollercoaster for mills domestically. There's obviously a lot of literal logistics and possibility of getting Ukrainian pig iron, to no one's surprise, you know. Obviously, a lot of damaged infrastructure, and people aren't able to come to work. But like you said, you'd look at what's happened with Russia being sanctioned, obviously reputational risk of buying and importing Russian pig iron, here from the U.S. perspective anyways, has been also kind of taken off. But that has been, the latter part of that, buying from Russia, has kind of been a slow process of breaking addiction for U.S. mills here, I guess I could say. And we've even been tracking some vessels here somewhat recently, as, you know, kind of stragglers, despite efforts to cut Russia out entirely.

Blake: Yeah. I mean, I think that speaks to the fact that there isn't a ready-made replacement for this tonnage. And, I mean, the sanctions situation seems to be kind of murky by design, almost, a little bit. There's been specific individuals that are heads of corporations, or companies associated with certain steelmakers, that are clearly under sanctions now, but at least there's at least a couple of Russian suppliers that, you know, from a legal standpoint, seemed clear to do with, but you've definitely seen most of the domestic U.S. steel makers make kind of public pronouncements that they're not gonna be purchasing Russian pig iron, which is, it's created a lot of, you know, you said reputational risk. We've reported on this a bunch, but it's interesting seeing, you know, we've just, there's at least one vessel en route, that sailed in April, so, well after the conflict broke out.

You know, that's still happening, but was that a contract purchase done ahead of time, or a spot purchase done after the outbreak of the war? Either way, I'm not sure how, you know, publicly that would be viewed, but I think, you know, at least in the long term, you've seen steelmakers make a lot of steps to make long-term alternatives. You have, you know, Steel Dynamics saying they've booked out into 2023 from alternate suppliers, such as Brazil, India.

We've had the rise of basically steelmakers increasing what they're calling upgraded, or low-copper shred, shredded scrap, to help in their melt mixes. So, people are moving stuff around. Noting the big question hanging out there, though, still, is can you truly replace this tonnage via other means? And I think that's gonna be a defining characteristic of this market moving forward.

Zach: Yeah.

Blake: And I wanted to ask you, do you foresee... You know, we've saw China, which has, for the last, during at least the pandemic, become a competitor to the U.S. in terms of buying global pig iron, particularly out of Brazil. But then we've also, we've seen China selling pig iron to the United States, in the aftermath of Russia and Ukraine. Is that something, you know, you expect to continue, or is it kind of opportunistic?

Zach: You know, they certainly have the capacity, blast furnace-wise. It would be a change of direction from where they're currently trading pig iron domestically, of course, but it seems more opportunistic than anything else, just because of the way...A, you know, freight-wise, it's something that they have to massively overcome. It's not easy to get to New Orleans from most of the Chinese ports. But I think, B, their focus, obviously, is just very different. It seems like when prices are at $900 a ton, most people who have excess pig iron capacity are willing to sell, and that just happens to include a lot of China, because they do.

It's...alternatives like Brazil, domestic pig iron is kind of being talked about, so I think, like you said it, while it gets less clear over time, it also looks more clear in certain respects that, though the traditional sources like Brazil, or maybe sourcing domestically, are probably gonna come into light, or the low-copper shred that's now being kind of really forcefully pushed, or, you know, discussed by mills here, is gonna become more attractive, given logistics, and where China is at for their own production. If that makes sense.

Blake: Yeah, totally. I mean, and I think one of the other kind of things that's been discussed, you know, kind of quietly, and then Cleveland Cliffs' CEO loudly proclaimed it on their earnings call, just this week, about the potential for transshipment of Russian pig iron via other countries, to make it into the United States, to kind of skirt some of these risk factors that might keep mills from buying that tonnage. You know, I think he raised a couple of points, including the U.S. revoked the most favored nation status of Russia, which, for some commodities, dramatically increased the price for tariffs. I mean, the magnesium went up [crosstalk 00:08:53]

Zach: Yes.

Blake: ...you know, doubled basically. But, you know, it was only a dollar a ton for pig iron, so he was kind of calling it out for being kind of based on dated trade policies. But also, he pretty overtly said that they're fully expecting pig iron to be routed via other countries, including China, India, and Brazil, which I think it's gonna be something pretty fascinating to watch in terms of volume-wise. It seems like it would be very hard to track, considering Brazil exports millions of tons of pig iron a year itself. But I think it speaks to a larger issue that people are searching under every rock to find iron in this environment, and could [inaudible 00:09:39] with potential people could get up to some creative kind of workarounds here, to at least legally import this stuff.

Zach: Yeah. I mean it's something that immediately spiked, I think, on people's radar, post, you know, invasion, how this was gonna get sorted out, and there's no doubt that, I think, domestic consumers would prefer to have Russia as an available opportunity for them to buy pig iron from, especially as new capacity adds are coming online. The U.S. is set to add, I think it was over 15 million short tons of total capacity, and I think something like 10 million tons of which were gonna be sheet, so that's a lot more EAF...sorry, prime and clean iron unit intensive. And so they're going to need more pig iron respectively, and so it's a problem that's only gonna get worse from that point of view.

And so it only incentivizes getting, like you said, fairly creative with your solutions, and I think it's gonna be an ongoing challenge in order to understand where the market, where supply is originally, originally, you know, coming from, when you net back something, but I think one of the things that mills are gonna have to overcome, if you're trying to buy cheap, like I said, is if you're gonna transshipment to, from Russia to China, per se, or Russia to India, is you're adding logistics hurdles for yourself, so it's gonna be a dollar and cents game. I think it'll be something that mills are gonna have to weigh as time goes on. And who knows what's gonna happen with the conflict and sanctions, too. This problem could completely unravel. It feels like, anyways, with the way things are, you know, so uncertain, that I'm sure that would make things easier for them, but at the same time, who knows. It's incredibly tough to say right now.

Blake: Yeah, I do feel like, you know, obviously, U.S. companies appear to be exhausting every alternative to having to maybe entertain those thoughts currently. And I think you've hit the nail on the head, which, I think, with the long-term implications of this are. It wasn't just what we were consuming, as, you know, the United States was consuming, pre the breakout of Russia invading Ukraine. It's what we're supposed to be consuming going forward, because all of this new EAF-based sheet capacity, I mean, I'm sure the economics of that, a big part of that was pig iron, to make these numbers work, to make the quality of steel that they need.

With this massive shift, we are seeing more and more towards EAF-based sheet production. And I do think it's interested seeing... This has hastened, I think, some other kind of moves for alternatives. For instance, U.S. Steel moving forward with putting in a pig iron caster at their Gary Works, which they think will be able to supply most of the needs for the expansion they're doing, the Big River Steel in Arkansas, their big, it's gonna be, like, a mega-mill EAF there. And then we saw, you know, voestalpine, in Corpus Christi, their HBI plant put up for sale, or the majority of it, and Arcelor Mittal kind of coming out of left field to buy an 80% stake in that, with the eyes on supplying their new EAF in Alabama, that'll be starting up in the next couple years.

So, you're seeing the chess pieces move around here to position a little bit, to get around this, and I think one of the things to look out for is more additional North American pig iron casting capacity putting into place. But then you have the other kind of, the other side of the coin is, they could, a Cleveland Cliffs out here, it doesn't have much interest, you know, at least publicly, in putting in pig iron capacity to help out its competitors, right? And I think they're enjoying this, their kind of low-cost production from an integrated standpoint.

Zach: Yeah. They've...I mean, they obviously operate their 2 million ton a year Toledo HBI plant, but that, for all intents and purposes, is a non-third-party sale operation, so, you know, they certainly could have tapped that opportunity back in early March, probably to, you know, reap the rewards at least from some mills' perspectives. It's...yeah, I know. And it certainly incentivized a level of vertical integration that we've seen on the scrap mergers at, you know, scrap yard mergers and acquisitions point of view, now, looking at the sort of flip side of that coin. And everyone, I think, is kind of scrambling to shore up their supply, whether it be, yeah, locking in long terms, like we saw with SDI, and probably going to the next alternative, Brazil. And, yeah, buying up new assets like that, there's only a certain amount available, so I think the question then is who's gonna build something? Cliffs is certainly well-positioned, given, you know, their integrated point of view, and how much of the integrated market they actually control domestically.

But the big guys, like SDI and Nucor, even though they have DRI plans for Nucors and, you know, in Trinidad and Louisiana, certainly has to look appetizing right now to supplement and increase their capacity, even if it just means they're selling into a merchant market here, which, for a lot of smaller, you know, independent players, who are largely relying on bigger vessels being bought by mills like Nucor and SDI, to afford them the opportunity for their little smaller chunk of that volume. So, it's very... The world is an oyster here in terms of probably the bigger players, and some of the smaller guys are gonna have to kind of react to that if they haven't shored up some low-copper shred availability, or some other alternative, which I'm sure is more attractive to them than probably building a pig iron plant, financially and logistically.

Blake: Yeah. I think one thing, maybe we can close on this, kind of, this note, is interesting, that amid this massive spike we saw on raw material costs, I think, you know, we're still seeing U.S. steel producers with near-record profits, and some even projecting for a record profits in the second quarter already, with finished steel prices for sheet, hot rolled coil, $1500 a ton, rebar around $1200 a ton, the margins are still very healthy for them, even through this, what some would qualify as a supply crisis, right? So I think that's, you know, I think they should have some cash on hand to make some investments to help insulate themselves from this moving forward, so...

Zach: Yeah. Absolutely. Of any time, where the need is the greatest and the opportunity's at least available to them, yeah, you would expect so. And for a problem that's only gonna likely stay the same or get worse, as capacity adds come online. So, yeah. Agreed.

Blake: Yeah. Well, I think on that note, we'll call it a day. So, thanks Zach, for your time and your insight into the pig iron market. It's something we'll continue to track. And if you've enjoyed this podcast, please check out our other "Metal Movers" ones that we have on the markets, and for more information on pig iron, and all of our other coverage, check out argusmedia.com. Thanks a lot.

Zach: Thank you.

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