Melting Margins: Widening scrap to iron ore ratio spells trouble for EAF steelmakers

The price relationship between iron ore and steel scrap delivered into the key import markets of China and Turkey is keenly watched in the ferrous market.

The ratio is seen as a barometer of the health of the two predominant steelmaking routes, the blast furnace and electric arc furnace, and can suggest which route may have the upper hand in terms of competitiveness.

The ratio between HMS I/II 80:20 scrap CFR Turkey — represented here by Platts’ assessment of this grade, and 62% Fe content fines into North China, represented in this post by the Platts IODEX — has been above the long-term average for some time now.

As a result, any statement suggesting we are in for a longer period of above-average ratios may not seem that insightful. However, given recent developments in China, the US and elsewhere, we could be in for a phase of above-average ratios, even in the 'new normal' phase that developed in the last two years of oversupply and over-utilization.

In the first six years of the decade, the simple ratio between the price for Turkey’s scrap imports and China’s iron ore imports was 3.37:1. However, since the iron ore price began to drop precipitously in around December 2013, the ratio has shot up.

Fueled by the dual pressures of vastly increased iron ore production and slowing Chinese domestic steel demand, the red metal’s price spiraled down almost uninterrupted to reach a recent nadir of $38.50/mt on December 15, 2015.

Post-December 2013, the average scrap-to-iron ore ratio reads 4.04:1. Pre-December 2013, the mean tallied at just 2.89:1.

This made Turkish steel, and any EAF-based production, relatively uncompetitive compared to the integrated production route. In outright terms, the scrap price topped five times that of iron ore on 17 days: all of these were in 2015, and nearly all of these occurred in the first half of last year. During H1 2015, the ratio averaged 4.56:1.

It is a significant statistic. Turkey’s steelmakers did their best to adapt to the newly-competitive environment by reducing furnace capacity utilization. If their arc furnaces were not competitive, they would have to act nimbly in the intermediate market; this entailed buying large quantities of ‘square bar’ from China, as well as billet and slab from the CIS and elsewhere.

China’s exports of semi-finished products soared ten times year-on-year in 2015 to Turkey, reaching 1.5 million mt. Turkey’s adaptive steelmakers produced less crude steel but more finished steel last year.

This strategy continued into Q1 2016: Turkey’s imports of semi-finished products from China soared 770% year-on-year in January & February this year, hitting 260,000 mt.

Currently, China’s steel exports are looking somewhat less competitive than in 2015 due to a surge in local prices caused in part by a newfound preference for foliage over construction. The International Horticultural Exposition in Tangshan could cause capacity utilization to drop in this vital steelmaking region.

This threat, and a looser lending regime in China, prompted two things: a jump in finished steel prices and a leap in iron ore. Mills increased output in the run-up to the Expo, and needed to refill iron ore stocks as a result.

A large-scale rebalancing in steel prices globally followed, with depleted stock levels being filled and domestic mills the world over wrestling some pricing power back. Take European HRC as an example: the product ended February 2016 at Eur330/mt ($376.10) EXW Ruhr, and has started April at Eur370/mt.

Movement in China pushed the scrap-to-iron ore ratio down considerably. In the year-to-date the ratio averaged just 4.09:1. It dipped to a low of 3.22:1 on March 7, when iron ore leapt nearly 20% in a day.

Since then the ratio has crept up: iron ore’s rebound had hit a resistance level. Port stocks top 100 million mt in China and the acute restocking needs in Tangshan have waned given capacity utilization could now start to fall.

Additionally, US domestic scrap prices have surged on the back of buoyant price moves in the local HRC market and rising semis costs. Thanks in part to the market being cocooned from international spot developments by a raft of anti-dumping and countervailing duties, US HRC has climbed to $470/st EXW Indiana from $387.50/st this year.

Such a development is doubly-bad news for Turkey’s mills: faced with higher US scrap prices, slipping iron ore but stronger semi-finished product offers from China and elsewhere, EAF steelmakers could be facing a sustained period of relatively higher feedstock prices. Who could be the regional beneficiary of such a development?

Most likely it would be Russia’s mills: semis exports to Turkey from Russia soared 88% to reach 2.2 million mt; were Turkey’s steelmakers to revert to idling furnace capacity and running re-rollers flat-out, it is to the Black Sea they may have to turn.

--Ciaran Roe, ciaran.roe@platts.com --Colin Richardson, colin.richardson@platts.com