EAF mills could benefit from iron ore surge

Electric arc furnace (EAF)-based mills could benefit from rising blast furnace costs, with the ratio between scrap and iron ore costs at its lowest in over two years.

The ratio between Argus' headline ICX iron ore index and cfr Turkey HMS 1/2 80:20 assessment reached 3.18:1 unadjusted for yield loss yesterday, according to Argus data. This is its lowest since scrap was 3.16 times the cost of iron ore on 24 March 2017.

The ratio is typically a good barometer for the competitiveness of the primary steelmaking routes, the blast furnace/basic oxygen furnace method that dominates in China, and the EAF method upon which most Turkish output is based. The picture has been clouded somewhat in recent years by trade barriers and macroeconomic issues in Turkey. The country's steel consumption is down by roughly two-thirds from historic averages, and it has lost its primary export market of the US since Washington doubled the Section 232 import tariff to 50pc in August 2018. Turkey's rebar mills are consequently running at around 60pc of capacity, and perhaps even lower.

Nevertheless, Turkish rebar and hot-rolled coil mills have been competitive into southeast Asia in recent weeks, partly thanks to the continued run-up in iron ore costs that has hampered blast furnace-based mills.

Ore has risen precipitously as a result of stronger Chinese crude steel production and growing supply-side constraints. Firm Chinese pricing, irrespective of the ore-to-scrap ratio, has also facilitated Asean imports from Turkey — it is also one of the only bulk-buying markets still really open to Turkish producers.

The rough raw materials basket cost for a Chinese mill was around $332/t yesterday, based on a furnace using 1.6t of iron ore, 0.6t of coking coal and 0.15t of scrap, compared with $347/t for an EAF assuming 88pc yield from HMS 1/2 (80:20). This narrowing has allowed some small relief to Turkish mills. These mills would be in an increasingly perilous situation if Chinese export pricing drops dramatically. There is a 97pc correlation between Turkish scrap import costs and fob China rebar prices, illustrating the deep linkage between the two markets.

Chinese export volumes leapt in March, rising by 40pc from February to 6.33 mn t. China is clearly prioritising economic stability over its supply-side reform and deleveraging agenda of the past few years, as evidenced by rampant credit growth and the increase in steel production and shipments.

But efforts to offset a trade war-induced slowdown should filter into firmer domestic requirements, with infrastructure a primary lever in the government's drive to meet its gross domestic product guidance of 6-6.5pc. And export pricing remains firm, with fob rebar almost $26/t higher than Turkish material, not accounting for differences in actual and theoretical weight pricing.