Slow output in Japan weighs on scrap outlook

The ferrous steel and scrap sector in Japan could face headwinds in the near term after the country's factories today posted a decline in output for April, and trade sources said this could weigh heavily on scrap and steel prices if the production rates continue to decline.

Japan's ministry of economy, trade and industry today announced that Japan's factory production fell by 1.3pc in April. This marked the first decline in three months and was driven by slumps in the production of electronic parts and devices, machineries and motor vehicles.

Ongoing Covid-19 disruption in China and restrictive measures by Beijing to curb the disease has led to a breakdown in major supply and logistic chains, which has severely weakened many manufacturing sectors in Asia, trade sources said. China is one of Japan's largest trading partners.

Production woes

According to media reports, seven manufacturers in Japan, including Honda, Toyota, Nissan, Suzuki, Mazda, Mitsubishi and Daihatsu, recorded drops in global automobile production in April. Honda registered the largest year-on-year decline at 190,060 units, down by 54.15pc year on year. Honda's automobile production in Japan declined on the year for the first time in six months to 27,598 in April, down from 65,794 units in April 2021.

Earlier yesterday, Japan's Toyota reported that it lagged behind its global production target in April due to the pandemic. Toyota produced 692,259 vehicles, a 9.1pc drop year on year. This fell short of the plan to produce 750,000 vehicles worldwide.

"Both sales and production fell below the previous year's level due to impact from the spread of Covid-19, both in Japan and overseas, as well as the parts supply shortage caused by the increased demand for semiconductors," the car manufacturer said. On May 27, Toyota revised its global production plans for June down by 50,000 units to 800,000 units due to parts shortages.

Japanese crude steel production in January-April fell by 3.3pc from the same period in 2021 to 30.5mn t. The forecast for crude steel output in the second quarter fell by 4.2pc on the year due to weaker demand for special steel, according to the ministry.

Asia scrap outlook

Trade sources warned that if sluggish factory output persists in Japan, it could weigh on Asia steel and scrap prices as Japanese suppliers will most likely seek external avenues if domestic scrap demand continues to falter. According to data compiled by Argus, H2 collection prices by Tokyo Steel have fallen from April's peak levels by approximately 13pc and 13.5pc at its Tahara and Utsunomiya plant to ¥56,500/t ($8,400/t) and ¥57,500/t today, respectively.

Japan is a regular supplier of various grades of scrap to other Asian countries including Vietnam, South Korea and Taiwan.

Any possible increase of Japanese scrap into these markets could be detrimental to the Asian scrap complex as it is already under pressure from weak demand for steel across the region. In Taiwan, the Argus daily containerised HMS 1/2 80:20 cfr Taiwan assessment has fallen by $55/t, or 11.22pc, since the beginning of May on bearish fundamentals and a bleak outlook.

According to a survey conducted by the ministry, Japanese manufacturers expect factory output to reverse losses and gain by 4.8pc in May, and subsequently increase to 8.9pc in June.

"I wouldn't be that optimistic now to be honest," a trader said. "A lot of sentiment is riding on how China acts and reacts to the Covid situation. If China is going for another wave of lockdown, we can expect more and stronger pessimism."

Some market participants noted that lower manufacturing activity can also lead to reduced scrap generation, which could potentially limit the downside for Japanese domestic scrap prices.

By Xia Ji and Jing Zhi Ng