Japan scrap spreads widen on firm South Korean demand

South Korean demand for premium grade ferrous scrap from Japan has risen sharply in recent weeks in response to firmer demand and higher prices for South Korean flat steel exports to the US. This has widened the price gap between Japanese obsolete H2 scrap to higher quality grades.

The spread between the H2 scrap export price against HS was around ¥4,000-4,500/t at the start of the year and expanded to ¥5,000/t in March. This was when Chinese buyers were active in the seaborne market, as HS is the main grade that they purchase for import.

HS prices rose by ¥4,000/t to ¥61,500/t cfr South Korea during 4-16 June. Recent heavy purchasing activity by South Korean steel mills in June for Japan's premium scrap has seen bid prices between H2 and HS widen to ¥9,000/t. Even higher quality shindachi grade scrap has built a price premium of¥500-1,000/t over HS.

This price strength means that South Korea and Japan have essentially decoupled from the rest of the Asian market, where weaker Chinese steel prices in recent weeks have weighed on seaborne scrap sentiment.

Current bids from China and Vietnam for Japanese HS are at $530 and $550/t cfr respectively, both of which are equivalent to ¥54,000/t fob Japan, which is ¥4,000/t lower than what South Korea is willing to pay.

Firmer exports, coupled with an extremely high domestic market demand and ambitious decarbonisation plans, have generated intense competition among South Korean steel producers for scrap.

South Korean steel mills' exports of flat steel products to the US in January-May rose by 58pc from a year earlier to 340,000t, according to customs data. Firmer US domestic demand for flat steel and special steel pushed import prices to new record highs, with HRC rising as high as $1,650-1,750/t cfr US.

Steel mills prioritise use of premium grade scrap when producing flat steel products as it ensures quality. This is the one leading factor that is pushing Japanese H2 and HS prices further apart.

Demand within South Korea for both flat and long products is high. Mills are producing close to full capacity to meet overseas and domestic requirements, which means they will continue to compete against one another in the seaborne market for scrap. This will likely keep the current price spread between H2 and HS high for some time.

H1-H2 import demand limited

But South Korean demand for imported H1 and H2 scrap is limited as steel producers can source these grades from domestic suppliers at more competitive prices than are available in the seaborne market. The last H2 bid from South Korea was on 9 June at ¥47,000/t fob Japan, equivalent to around ¥51,000/t cfr.

The increased demand for scrap from South Korean mills has also been driven by blast furnace mills seeking to raise their scrap use ratio to reduce carbon emissions, which is also occurring in Japan. In both markets, it is premium grade scrap that is being sought for increased use in the blast furnace.

South Korean mills' firm demand for premium scrap will likely maintain momentum until the middle of the third quarter. Japanese traders are confident that demand for premium scrap will remain robust, so long as South Korean buyers are in the market because they are the only market in Asian that is paying what suppliers are asking for. Japanese blast furnace mills are likely to raise collection prices of HS and shindachi if South Korean buyers continue to increase import prices.

Terry Chuay and Xia Ji