China demand boosts Japanese ferrous scrap premiums

China's restart of ferrous scrap imports this year has widened premiums for higher-grade Japanese scrap, with the potential for premiums to rise further if imports significantly ramp up.

Chinese importers have mostly bought Japanese scrap since Beijing allowed imports to restart from 1 January under new quality standards and stricter customs inspections. The mills and buyers are trialling cargoes to familiarise themselves with customs requirements and avoid the risk of rejection by inspectors. Buyers are targeting the Japanese HS grade that is equivalent to China's HRS101 grade.

The price premium for Japanese HS to H2 has jumped to ¥5,000/t ($46/t) from a range of ¥2,500-3,000/t ($23-28/t) in 2020.

The price shift has come amid modest volumes. China imported 9,825t of ferrous scrap in January-February.

Competition for HS will become more intense if Chinese buyers ramp up imports. Buyers from Vietnam, South Korea and Taiwan regularly purchase HS from Japan, and Japanese domestic demand also acts as significant competition.

Vietnam spot demand helped lift the Argus weekly H2 scrap fob Japan index by ¥1,500/t ($18/t) to ¥43,000/t ($392/t) last week. That is at a discount to the Argus weekly HS scrap fob Japan index at ¥48,000/t ($438/t). The index was launched on 9 April.

China's potential to redraw Asian scrap flows will focus more attention on Japanese scrap price differentials, especially for higher-quality grades like HS. Japan was China's biggest supplier before Beijing shut the door on ferrous scrap imports in 2018. China's imports were steady at more than 2mn t/yr over 2013-18, with more than 70pc of this coming from Japan, Asia's largest scrap exporter.

Chinese spot buyers have so far only shown interest in imports when HS prices fall below domestic prices. The arbitrage window has only stayed open briefly, as once the interest appears, HS prices have quickly jumped.

Japanese exporters are looking to sell HS scrap at ¥50,000/t ($460/t) fob Japan. That would put landing costs at around $495-500/t cfr China, with bulk freight from Japan to east China at around $35-40/t this week.

HS offers from Japanese traders into China are at a premium to that landed cost, at around $515/t cfr China. Traders have added a commission and Japanese suppliers have added a premium of around $10-15/t because of China's stricter quality requirements.

Japanese sellers have rejected bids of $490/t and $500/t cfr basis from Chinese mills and traders, respectively, this week. Those bids are at a premium to domestic prices.

The mills and traders would pay an additional 100 yuan/t ($15/t) in port handling charges, to give a port cost of $505-515/t before a 13pc value-added tax (VAT) is applied.

Chinese steelmaker Shagang Steel raised domestic scrap collection prices by Yn100/t ($15.28/t) on 10 April, putting the HRS101 equivalent price at Yn3,490/t with 13pc VAT included. Excluding VAT, the price is equivalent to $473/t delivered to the mill, a discount to port-delivered HS at the above bid levels.

By Xia Ji and Terry Chuay