Steelmakers in the Middle East and north Africa (MENA) are taking steps to try to ease the "pain" being caused by high iron ore pellet costs, in some cases leaning more towards high-grade scrap and other metallics.
"[GCC mills] can probably take another quarter with these kinds of iron ore costs. But if prices are still like this for much beyond that there might be some problems," a regional market participant said.
In such a scenario options may be limited. Some suggest that Egyptian mills might be open to steel production cuts given additional market dynamics. Demand from Egyptian re-rollers for billet has been hit by 15pc safeguards imposed on semi-finished product imports by the government in April. But even after the safeguards were lifted last week, appetite for billet imports has remained low, underscoring weak steel market fundamentals.
Sources said GCC mills may find it harder to cut steel output and therefore might attempt to push back on some raw materials contract terms — but their leverage with the larger mining company would probably be limited.
Most mills are understood to have enough pellet supply locked in under their term contracts. Emirates Steel (ESI) gained an additional supply boost after entering into an initial agreement with Indian pellet producer KIOCL earlier this year.
A couple of market participants pegged prices for Brazilian DR grade pellet at around $200/t cfr Abu Dhabi, a level making some steelmakers wince when aligned with conversion costs and eventual selling prices for billet and rebar. ESI is understood to be targeting $532/t ex-works for rebar.
GCC mills' margins are being further squeezed by high natural gas prices, with one source pegging regional prices in excess of $10/mn Btu.
Some GCC mills have increasingly been turning towards high-grade scrap products, striving to increase the portion of scrap being used for steel production and thereby trim consumption of high grade iron ore products.
Jindal Steel's Oman plant has been seen turning towards scrap and other metallics this year, and Saudi Iron and Steel (Hadeed) has remained a regular buyer of US scrap, booking another cargo recently, according to market participants.
A European scrap supplier said this week that it is looking at "more alternative markets" such as Qatar. And several deep-sea scrap suppliers have noted an increase in demand from the MENA region since the beginning of last week, contributing to some sellers holding back from offering new cargoes to Turkey. Argus assessed HMS 1/2 80:20 grade scrap at $295/t cfr Turkey yesterday.
These instances have not been directly attributed to concerns about high iron ore costs, but the activity underscores higher demand and the potential for this trade flow to increase.
The US exported 311,142t of scrap to Kuwait in January-May, up from 266,863t a year earlier, according to trade data. US exports to Saudi Arabia rose to 75,351t from 44,018t over the period.
Regional availability of hot briquetted iron (HBI) and direct reduced iron (DRI) is understood to be tight. An offer of 84pc Fe content HBI was noted at $300/t cfr Oman, from a regional supplier. The offer was described as a one-off and the price was not considered to be representative of the wider HBI market, albeit offers elsewhere are fairly sparse.
