How is Turkish ferrous scrap faring against soaring energy prices and a weakening economy, why hasn’t the scrap import price crashed?
Tune in as Ronan Murphy and Alex Reynolds explore the strength of Turkish ferrous scrap despite soaring energy costs and other market headwinds, including the August/September price floors supported by EU logistics, demand from India, weaker scrap generation, the absence of Russian swing supply and domestic rebar demand.
Ronan: 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'll be talking about the Turkish ferrous scrap price and why it's holding relatively firm despite serious headwinds. My name is Ronan Murphy. I'm European editor of Metal Prices at Argus Media, and I'm joined by Alex Reynolds, our content coordinator and head of our Turkish ferrous scrap coverage.
Soaring energy costs have caused Turkish steel mills to cut production by around 30% year-on-year, with 5% cuts implemented in September alone and further power price rises expected before the end of 2022. Output was already down 21% on the year in August. Turkish steel exports have been hit hard by surging energy costs. FOB Turkey rebar prices are now around $100 per ton higher than FOB China rebar rendering Turkey unable to compete in the lucrative Southeast Asian steel market that has frequently supported both Turkish steel and scrap prices in recent years.
These headwinds saw Turkish mills significantly reduce deep-sea ferrous scrap bulk cargo purchases in September with deals and associated tonnage tracked by August down to just 30% of the equivalent numbers in September, 2021. And on the supply side, the European Union is also experiencing vast steel output cuts with over 16 million tons of capacity taken offline in response to high energy costs as of last week.
Turkey is buying less scrap and theoretically there should be a lot of availability from its main suppliers. That's a clear recipe for a sharp fall in Turkish imported scrap prices. But the Argus daily HMS 1/2 80:20 CFR Turkey assessment was at $368 per ton on 3rd of October and is averaged 378.75 tons per ton since the start of July, down sharply from the record highs hit in March/April immediately following the start of the Russia/Ukraine conflict, but still comfortably higher than trading levels prior to the COVID-19 pandemic. So Alex, I suppose the main question here is why hasn't the Turkish scrap import price crashed? What's keeping it supported?
Alex: Yes, we've seen a law price blow to around $350 done CFR Turkey for HMS 1/2 80:20 in the last two rounds in both in August and in well, at the end of July and in September. I think there's five major points which tell us why Turkish price has not been able to fall below this level. The first being logistics, particularly in Europe, the rise of South Asia, specifically India, the weaker obsolete scrap generation in exporting regions due to the weaker economy, the long-term absence of Russia as a key swing supplier, and the persistence of Turkish domestic rebar demand even at higher prices.
I think the markets are well aware that Russia has been a largely been a long-term absentee in the seaborn scrap markets, primarily kicked off by rising export taxes introduced by the Russian government. We also know that scrap is a product of healthy economies and that weakening economies this year, lower industrial output and the global population's lower turnaround of goods have all led to weaker obsolete scrap generation and lower scrap supply year-on-year, something of course, which is of course very difficult to measure.
So I think there's the three points we focus on the logistics issue, particularly in Europe. The South Asian demand, specifically India, and the persistence of Turkish domestic rebar demand throughout the summer, which have helped to stop Turkish scrap import prices from crashing as macroeconomic indicators may suggest that they would firstly on Europe water levels have risen to more appropriate levels in September following the drought conditions in July and August.
Ronan: This is to this, just to clarify, Alex, this is the disruption we saw in the summer was very much from drought conditions, historic drought conditions causing extremely low level river levels on the Rhine, which very much disrupted barge shipments of scrap from inland locations to European ports. And then you're saying now that that that is in a problem that is starting to ease a little.
Alex: That has ease, still have to pay a premium for barges, quite an exorbitant premium still. And that is driven by Europe's need to prioritize transportation of coal over other commodities like scrap to offset the lower gas supply and use coal as a source of supply power station supply itself, scrap supply itself has improved in September, but it's still an issue. Coal demand is clearly strong and supply itself, scrap supply itself has been absorbed by India to an increasing degree through September after India's huge increase in bulk buying from August.
We could talk more about India. I mean there's been a number of drivers availability of DRI in India has been weak because DRI is coming from the coal natural gas sectors and we know what's been happening to coal and gas prices. And so that's been a clear driver of India substituting DRI for scrap. It's also the lower freight rates, the bulk relative to containing freight rates have moved Indian import demand from smaller container ships to bulk vessels.
Ronan: Yeah, and I suppose the fascinating thing has been that the difficulty for Turkish steelmakers is that whenever the Turkish price moves to that kind of price floor to that $350 mark and below, it's at that point that the kind of cost equation for Indian buyers becomes most attractive. There I think some of the kind of Indian bulk freight rates have kind of drifted around maybe a kind of anywhere between $40 to $50 per ton rate for supermax vessels going from both Europe and the UK into India, which is low historically speaking, and is essentially putting Indian buyers in a position where they can get a significant discount on what they would normally be paying for containerized scrap, while at the same time being able to offer for kind of European and UK suppliers on an FOB basis.
Any words are upwards of $10, $20 higher than what Turkey can offer when the price dips to that kind of $350 or slightly below level. And that's why we've seen, I think these kind of, any time it's dipped that where we've hit that floor and it's bounced up very rapidly. I mean there doesn't, there's no real stickability at that kind of $350 level either, is there?
Alex: No, I think, yeah, you're absolutely right on the price perspective. I think from a supply perspective volume perspective, I mean, if we take Turkish steelmakers average steel production rates going into April this year through around 80%, 85% and we look at them at 50% today, it's around a 30% fall in steel production. A good 15% was cut at the beginning of April, another 10% through July, another 5% as you mentioned, after the energy price increase in Turkey on the 1st of September.
So at 80% to 85% steel production, Turkish steelmakers were buying about 55 deep sea cargos. Today, they're buying around 30 deep sea cargos. It's around the 50% capacity. And when we consider India has bought, well, we've heard that they've bought 15 or 16 bought cargos in August, and another 18 in September, that's almost totally offsetting the lower number of cargos the 25 cargos, roughly fewer that the Turkish mills need nowadays. And it's clearly a reason why, when we get to a certain price, which appears to be at that 350 mark, the availability to Turkey dwindles because of the prices India paid and also the volume that has been absorbed.
Ronan: And I suppose the thing to as, although it's certainly been the case that as the summer progressed it was that India became the dominant Asian buyer, it was by no means the only Asian buyer we have this year seen Pakistan buy its first bulk scrap import shipment DC bulk as scrap import shipment for a long time. They bought a UK cargo a few months back. Bangladesh is a kind of fairly consistent buyer maybe on a kind of annual basis.
It kind of will dip in and out of the deep sea market, but it's shown pretty strong demand. And we are all, we do also see Europeans now, I don't know, it's not clear exactly how much business has been translated, but they've certainly been looking to offer into markets like Vietnam where perhaps the demand hasn't been as strong as South Asia, but certainly the freight rates are giving these exporters the ability to offer almost everywhere.
And I think it'd be useful, Alex also to point out these sales into South Asia are not just being done from Europe and the UK. We are seeing U.S. East Coast, Venezuela. I mean essentially what we're seeing now is these South Asian buyers are competing with Turkey for almost all of its export, almost all of its import term sources, essentially.
Alex: Yes. And as long as the bulk freight rate stay below retaining freight rates, I suspect that will remain the same that say that all these regions will be able to sell into India.
Ronan: And is there a sense also that this is obviously an unfolding situation and it does remain to be seen whether this is a kind of more long-term structural shift, as you say, it's dependent on the freight rates. But is there a sense that perhaps Indian buyers are becoming more comfortable with purchasing bulk shipments? We've seen them the kind of, they purchase in a different way, perhaps the typical Turkish kind of bilateral transaction.
We see a lot of multi-buyer deals done for cargo sold into India where several of buyers will take parcels of a single bulk cargo. Do you think it, this is something that both sides, both buyers and sellers are becoming more comfortable with? And if that's the case, do you think that this is an avenue that can really kind of sales avenue that can really persist even if, even if freight rates were to rise from their very current very low levels?
Alex: Yes. If these purchases remain multi-buy purchases, of course, the buyers can share the freight rates between them. I think clearly from the sell side there is [inaudible 00:10:24] I mean, clearly there's a lot more documentation involved. If you have four or five buyers involved in a deal, there are more LCs to be sorted and there is clear interest from suppliers to continue doing business this way.
Ronan: And I suppose the other thing I just, the consequence of this Asian demand. You know, at a very basic level, it's drawing off excess volume that Turkey would otherwise be able to kind of use as a driver to push prices down, but it's also drawing off excess tonnage building up within kind of these exporting regions as well. So we are, because the Turkish price and because the prices that Asia will pay are staying firm, we are seeing dockside prices for fair scrap stay firm at firm levels in Europe, in the UK, in U.S. East Coast.
We're seeing it's even creating a difficulty for domestic prices in these markets to fall, which is very unusual considering the scale of the demand destruction that has taken place, especially in Europe with those widespread cut. And that does certainly does seem to be the case that we don't seem to be heading into a kind of period of massive excess scrap availability at the moment. I mean, is there anything you think that could kind of change course on this?
Alex: For the time being. I think a lot of this Indian demand has been unexpected through August and September, and exporters in Europe in particular haven't had a chance or haven't had the opportunity to build stocks, partly because of the logistics situation and the drought conditions. They haven't been able to build up stocks and go along. So a lot of these deals are done on shore basis.
A lot of the materials for these deals that have happened over the past six weeks will have to be collected through October. So demand at ports will be very strong through the first half of this month and through October, and that will of course continue to keep fresh upward pressure on prices into both India and Turkey.
Ronan: Absolutely. And let's turn now to just discussing that kind of that Turkish domestic rebound market. As we said, the exports have not been a major driver of Turkish steel sales this year, and even less so as Turkey has become less competitive in numerous overseas markets. But we do see persistent Turkish rebar demand in the domestic market. And we see even though Turkish rebar domestic prices are very high relative certainly to prices in other parts of the world, they are still able to maintain sales. It seems they're still able to maintain the sales of these prices to end users.
How is this end-user demand in Turkey being sustained given how high the prices are and the other kind of economic headwinds that Turkey faced? How is that demand being sustained and do you think, again, is that something that can persist over the winter months?
Alex: Well, there are ongoing infrastructure projects in Turkey. Demand has had to recover and there has been a building up of stocks since around the beginning of July. Of course there was two and a half months between April and the beginning of July where demand fell off drastically because stocks were so high after trader's vigorous reaction to the global events in at the end of February, beginning of March, over those two and a half months, between April and July, they sold off material passed it onto end users.
And finally after the end of June, beginning of July, there's been a rebuilding of stocks which has continued throughout the summer. Turkish mills production cuts, which of course have been influenced by weaker steel demand and higher energy costs have aided or even forced demand. And of course, a very large driver has been the strength of the U.S. dollar and the weakness of the economy also throughout this inflationary environment has put up the pressure on layer denominated rebar for levels throughout the summer.
First of August, was at around 17.9 against the dollar the 1st of September it was 18.2 and now we're around 18.58 today. So Turkey's domestic demands, I think has also been far less volatile in the past eight weeks. It's far more consistent, even though it's for, you know, fewer volumes. We've seen trading small volumes almost every week in the past six to seven weeks as traders take positions relative to their expectation that it will weaken further.
And I think that more, less volatile demand, that more consistent smaller tonnage demand has helped the Turkish scrap price from making major fluctuations and helped it maintain a spread of around $50 in these eight weeks between $350 and $400.
Ronan: And we have seen, of course, as a result of the energy costs to a large extent the spread between Turkish scrap prices scrap import prices, and Turkish rebar domestic and export prices increase substantially this year. It's goes kind of moving to well above $300 per ton, even though bulk of that spread really is down to the extra energy price cost.
Do you think it also creates a kind of psychological barrier that scrap suppliers simply that they cannot accept a certain level of spread or to rebar that they can if essentially have spread, if rebar at kind of say $700 per ton, then there's simply no way scrap suppliers are gonna dip below $350, even if a huge chunk of that spread is down to increased energy price costs?
Alex: I think there is that. I also think with the scrap sell side, we're certainly very well aware of the price in Turkey and that they've been constant through from the 1st of April. And we've seen rises on the 1st of September and now on the 1st of October at least with gas prices. So they're weren't aware the margins that are required. The steelmakers are a lot higher than earlier on this year than the early past of this year.
But I think that they've just not had the ability, particularly in Europe, hasn't had the ability to follow Turkey when its demand has dipped two or three times in the past two months for the reasons we talked about the drought conditions and India. I think those two certainly combined have really not been able to allow them to follow Turkish demand when it's tried to push prices below $350.
Ronan: Excellent. Okay. Well, thank you. Thank you very much, Alex. I mean I think that's a kind of given us a useful snapshot of why certainly the immediate-term Turkish scrap prices are being supported and been supported above a certain level. If you enjoyed this podcast, please tune into our other episodes to learn about the metals market. And for more information about fair scrap, please visit argusmedia.com. And other than that, thank you very much, Alex. And that's goodbye from us.