Viewpoint: China scrap demand to dent pig iron

Seaborne basic pig iron (BPI) prices are expected to ease in early 2021 from recent high levels as new Chinese ferrous scrap import regulations potentially cut that country's appetite for the steelmaking raw material.

A majority of market participants surveyed by Argus expect BPI prices to decline in the first and second quarters of 2021 following a more than 60pc rise in US and CIS prices since April.

The Argus BPI assessment cfr New Orleans hit $497-510/t, up by $117/t over the course of the fourth quarter and the highest price since the assessment launched in 2016.

China played an outsize role in the seaborne pig iron market in 2020 and is on track to import more BPI than the US for the first time since 2009. This trading activity allowed sellers in the Black Sea and Brazil to play against weak US demand over much of the year and decoupled BPI prices from prime ferrous scrap prices.

Strong Chinese demand for BPI in 2020 stemmed from several factors.

Sintering restrictions in steel-producing regions like Tangshan played a key role in lifting the domestic trade high enough to make importing from the CIS and Brazil economically feasible.

High-cost alternatives also played into Chinese buying. China typically relies on imports of iron ore to meet its requirements given its 90pc share of basic oxygen furnace mills, according to data from the World Steel Association. Argus assessed iron ore fines (62pc cfr Qingdao) at a record high on 11 December of $160.30/dmt. Iron ore prices have nearly doubled since the second quarter. A tight domestic ferrous scrap market further exacerbated conditions for melters and made BPI imports the clear choice for many of China's steel producers.

Finally, China continued to raise steel production over the year, even as most of the world's producers cut and often suspended production in light of Covid-19 restrictions. China is on track to produce 1.05bn metric tons (t) of steel in 2020, 5pc more than 2019, and a record for the country, according to data from World Steel.

With new ferrous scrap specifications set to come into effect on 1 January, China will conceivably regain access to seaborne scrap cargoes, thereby removing one of the major causes for the country's long reach for iron units. In 2018, when the country put restrictions on scrap imports, China averaged 111,000 t/month of ferrous scrap imports, but volumes had been on the decline.

In addition to BPI, iron ore prices are widely expected to come off at least 13-year highs in early 2021, as the recent price rally outstripped increases in demand. Lower costs for the raw material will not only encourage greater substitution against BPI but also cut costs for BPI producers as well.

US BPI demand is widely expected to climb into 2021 as new flat-rolled EAF capacity comes on line. US producers are either upgrading or expected to begin operations at five EAFs between late 2020 and all of 2021. Assuming a 10pc BPI melt and full utilization, this growth in EAF production would account for as much as 795,000t of additional BPI demand.

Some of that demand will be filled domestically. The startup on Cleveland-Cliff's hot briquetted iron (HBI) and Stelco's BPI plants will offset some of the need for imports, adding 3mn t/yr of domestic iron metallics capacity. Since suspending operations earlier in the year, Nucor has also slowly raised imports from its Trinidad and Tobago direct reduced iron (DRI) plant.

Voestalpine, which operates a Texas HBI plant, slowed its exports to China over the course of 2020 to offer to Mexican and US steel mills. Exports hit an all-time high in the second quarter of 250,290t, falling to 139,623t so far for the fourth quarter.

Some were less certain of an early 2021 drop in BPI prices.

For another, ferrous scrap markets staged a late year rally, with Turkish #1 HMS prices gaining $126/t while the domestic busheling price tacked on an average of $87.50/gt. There are no signs that appetite for scrap will dip through the first quarter, sources said. Hot-rolled coil prices ex-works US Midwest have also risen to $870/st from $475/st between late August and mid-December.

Finally, the impact of renewed Chinese scrap buying remains unknown. China has been increasing its domestic scrap generation, hitting an estimated 400mn-450mn t/yr recently. At those volumes, the country's BOF heavy plants could hit their 30pc maximum scrap chemistry from domestic sources alone.

Chinese buyers are also expected to buy mainly higher grades of scrap selectively, against the backdrop of prices for alternatives like iron ore and BPI. This combination is more likely to set a floor on scrap prices most clearly in Asia-Pacific, rather than offsetting much BPI demand.

By Zach Schumacher

US, China scrap vs BPI ’000t