There has been much focus on the price of iron ore recently, and understandably so. Cooling Chinese demand at a time of surging Australian supply saw spot prices fall to a new nadir of $44 a tonne CFR (cost and freight) for delivery in North China on Tuesday, November 24, according to Platts data.
In an effort to survive this price environment, smaller iron ore miners are trying to diversify their portfolios, with some buying up cattle and dairy businesses to cash in on rising Asian demand for other commodities. At the same time, steel mills have been using this cost advantage, and structural supply surplus, to pour steel into the global market, as has been well publicised.
However, ferrous scrap – which accounts for around a third of steel production outside China – has been comparatively overlooked by commentators.
Scrap is one of the most volatile and transparent spot markets of the ferrous chain, and the relationship between scrap and ore is dynamic and fundamental to an understanding of the steel industry. Shifts in ratios between the two can determine the competitiveness of the blast furnace or electric arc furnace route, and hence the prospects for many steel companies and steelmakers around the world.
Many do not realize that Turkey, straddling the up and coming steel continent of Asia and the old man of Europe, is at the core of the world steel market. Turkey is the largest importer of seaborne scrap, sourcing from regions across the world – notably the US, Europe and the CIS. It is thus the global price setter, as is China for iron ore. Turkey has also traditionally been the largest exporter of reinforcing bar, which is used to support concrete, making this price a key reference for construction markets in Europe, the US and elsewhere.
Turkey is being battered by the headwinds afflicting the rest of the ferrous chain: rising Chinese exports into its traditional end markets, as well as into Turkey itself. Significant currency depreciation has hampered Turkey from a cost perspective, with imported raw materials priced in dollars.
Over the last couple of years, steel produced from iron ore using blast furnaces (which predominate in China) has been considerably cheaper than steel produced from scrap. The chart below shows how the spread between the prices of the two raw materials opened up in the fourth quarter of 2013.
China’s presence and subsequent squeeze on market share saw Turkey’s total steel exports in the first 10 months of 2015 fall 7.6 per cent, to 13.5m tonnes. Demand has also been impacted by political unrest in some of Turkey’s geographically close markets, such as Iraq and Syria.
Turkey has become a net importer of steel – a very strange phenomenon primarily driven by rising shipments of Chinese semi-finished products, slab and billet, as well as finished products such as hot rolled coil.
However, prices of scrap and ore have converged in the past two months, reducing China’s cost advantage to an extent. Turkish import prices for heavy melting scrap 1&2 (80:20), the most commonly-traded grade into the world’s largest market, reached a historical low of $169 a tonne CFR Turkey on October 20, according to The Steel Index’s benchmark reference price. This was primarily driven by cheap semi-finished steel prices, so mills found it more economically viable to buy steel for re-rolling rather than scrap for melting.
Prices have since risen to $195 a tonne CFR, while iron ore has fallen, but scrap seems to have further room to soften with mills well covered for scrap (and semi-finished steel) to the end of the year, and margins under pressure given tepid export demand.
This realignment of scrap and iron ore could signal some respite for Turkey, and indeed the rest of the world, from the impacts of Chinese exports in the months to come. Of course, there are other factors at play, such as cheap labour and environmental costs in China.
Source: www. http://blogs.ft.com/