Premiums for higher grade scrap to widen in Asia

The spread between HMS or equivalent and higher-grade scrap is likely to rise after Japan's golden week holiday because of stronger demand and tighter supply for higher-grade scrap.

The spread between HMS and higher-grade scrap began to widen earlier when China started to allow imports of HRS101 grade scrap on 1 January. The current spread between Japanese H2 and HS is around ¥6,000-7,000/t, up from ¥5,000/t in March and the typical spread of ¥2,500/t last year.

Sentiment in the market was mixed as buyers and sellers held different outlooks on future prices. Many Japanese sellers expect scrap demand to rise in Asia, particularly after China cut tariffs for imported scrap. But many participants said it is still too early to have a definitive answer as to whether China's removal of scrap import tax will help to narrow or widen the price spread between HMS and higher-grade scrap. And many buyers expect prices for different grades to diverge because some grades will see higher demand. The wider price gap between HMS and higher-grade scrap is likely to be driven by a fall in prices for HMS or equivalent grades.

Higher-grade scrap prices in Asia are more likely to rise than fall in the coming weeks, and it is likely that there will be lower price volatility compared to lower-grade scrap. Higher-grade scrap generation in Japan will be limited as infrastructure construction slowed and the automotive industry cut output amid a shortage of chips. But demand is likely to remain strong as Chinese buyers have greater interest in higher-grade scrap than in HMS because of the country's import requirements. Higher-grade scrap is also highly sought after by other Asian buyers because of limited supply.

But prices for HMS and equivalent grades may move in the opposite direction. Many mills in northeast and southeast Asia were able to source large volumes of these scrap grades in their domestic markets. For example, ample supply of HMS and equivalent in Taiwan has made Taiwanese mills unwilling to consider Japanese offers for H1/H2 50:50 since late March while they cut bids for US HMS 1/2 80:20. Many mills in this region expect Japanese suppliers to be eager to sell H2 and H1/H2 after their golden week holiday, which will end on 6 May, because many Japanese domestic mills hold substantial stocks. Japanese sellers are unable to expand their buyer pools because China does not often purchase HMS scrap. This will increase the pressure on sellers to cut workable levels to attract interest. But Japanese suppliers may be unwilling to reduce offers because domestic demand is still strong. Asian buyers may show increased interest in scrap in bulk shipments from other regions outside Japan where prices are more competitive.

Any increase in the spread between containerised HMS and higher-grade scrap will likely be less, as prices for containerised HMS have already fallen to a level that many suppliers find hard to accept because of higher container freight costs.

Premiums for Japanese shindachi over H1/H2 50:50 were around $65-75/t based on latest offers to Taiwan at $460-470/t cfr for H1/H2 50:50 and $525/t for shindachi, while the price difference between containerised HMS 1/2 80:20 and busheling was $47/t based on sales at $423/t and $470/t. In Vietnam the spread between H2 and HS was $55-65/t, with H2 offered at $470-480/t and HS at $525-535/t.

By Terry Chuay