Viewpoint: Low payables squeeze stainless scrap supply

European suppliers will face increasing difficulty in sourcing stainless steel scrap in 2020 if mills continue to drive down the already record-low level of nickel payables in feedstocks.

To reduce raw material costs and compete with lower-priced Asian imports, European stainless steel mills have been pushing for bigger discounts on nickel content in stainless steel scrap since 2018.

Low nickel payables in Europe for much of 2019 prompted concern that stainless scrap supply will be sent to regions offering higher prices.

"Big traders, big processors and our competitors... we all fear we will be running empty very soon," a source at one processor said. "In order to make a margin somewhere, European mills are playing a hard game — they are also fearful of running empty. A discount of 40pc is too much... they can work with a 34pc discount."

The 304 stainless steel series typically contains 8pc nickel and 18pc chrome. The price formula for stainless steel scrap consists of nickel payables — calculated based on a discount to the London Metal Exchange (LME) nickel contract — and chrome prices. Nickel payables are negotiated between the stainless steel mills and blenders every month in Europe.

"Historically, payables are just below 95pc of LME nickel. At 95pc, it's already bad," one nickel trader said.

The payables for the nickel content in 304 stainless steel scrap in December settled at 60-62pc of the LME contract, equivalent to a 38-40pc discount to the LME nickel price. For November, payables were concluded as low as 55pc in some deals.

In Europe, the average nickel payable for 304 stainless steel scrap solids for delivery to mills in October settled at 63pc — equivalent to a 37pc discount to the LME nickel contract. This is 5-10 percentage points lower than the May-September average of 68-73pc.

When the discount was at 30-32pc in the third quarter, a source at one processor said "the discount has never been this big", yet payables continued to chart new lows, slashing processors' profit margins.

Lower margins for processors have disincentivised trades in Europe and prompted some suppliers to seek more profitable export destinations, such as India and Indonesia.

"It is the mills' own fault — they raised the discount. If you keep doing that for the whole year, people will look for other export outlets," one scrap dealer said.

With Indian mills offering higher prices for 304 stainless scrap, European processors are struggling to compete. As a result, some buyers raised their bids at the end of 2019 to secure supply.

Trades for 304 stainless steel scrap solids (18-8) were most recently concluded at $1,050-1,100/t on a cif India basis in December. To compete with Indian buyers, European processors increased buying prices to €970-1,020/t ($1,085-1,142/t), according to Argus' assessment on 26 December.

Stainless steel mills globally will be watching regional prices closely to ensure the most competitive price for scrap feedstock, but European mills risk pushing supply away if they drive too hard a bargain in 2020.

By Yoke Wong