South Korean steelmakers sell scrap to China

A recent ferrous scrap export sale from South Korea to China has generated concern among South Korean steel mills that they will soon have to compete with Chinese buyers for the high-grade scrap generated from South Korea's domestic market.

A 3,000t HS grade scrap cargo from South Korea was heard sold in the past week at $495-498/t cfr China. It was likely to be a trial cargo but South Korean mills are aware that once it clears Chinese customs, the floodgates could open for more sales. HS grade scrap availability in the South Korean domestic market was already not massive and Chinese interest means South Korean mills expect a price hike from local suppliers.

South Korean domestic suppliers are trying to establish sale channels with China as they see it as an alternative route to get better pricing for their scrap if domestic mills' collection prices are not to their expectation. It will also enable South Korean scrap suppliers to increase their buying power from other merchants and third parties when they compete for mills to purchase domestic material.

This development might result in South Korean mills paying high prices for HS scrap in both internal and external markets. Chinese mills will also be the main competitor to South Korean mills in the seaborne scrap market as the two countries look toward to Japan for most of their scrap demand.

Chinese interest is already impacting Japanese scrap prices in the way that South Korean mills fear will happen to them. Purchases from China have lifted Japanese exporters' expectations and caused them to raise prices. Japanese steel mills have responded by hiking scrap collection prices in order to encourage suppliers to send scrap their way.

South Korean mills know that they are in a disadvantaged position to compete with China on scrap. Chinese mills are able to procure scrap from South Korea, but sales will not happen in the other direction because China has a 40pc tariff on ferrous scrap exports.

China's purchases of HS will be likely to widen the price gap to the H2 grade. The HS-H2 premium in South Korea's domestic market is much lower than for Japanese export sales, but competition from external buyers will bring that premium more into line with the seaborne market.

The current South Korean HS-H2 spread is estimated to be around ¥4,000 ($37) based on a deal last week of H2 at ¥42,500/t fob Japan. The current Japan export HS-H2 spread is estimated around $35 based on the latest offers of H2 and HS into Vietnam.

Based on the last transaction done on HS to China from South Korea, fob prices will be around ¥50,800/t. This would mean that the HS-H2 spread Chinese buyers are buying at is at least ¥4,000 above what South Korean mills are offering for Japan HS scrap.

South Korea imported around 4.4mn-6.5mn t/yr of ferrous scrap in the past five years, but imports in 2020 fell to the lowest level in 20 years as the Covid-19 pandemic hit domestic steel demand and mills were forced to cut production.

Terry Chuay and Xia Ji