Trade review: Seaborne ferrous scrap slips off highs but poised to remain firm on year

This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in metallurgical coal, iron ore, scrapand alumina. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Seaborne ferrous scrap prices have started to cool in the first quarter of 2021, having surged to multi-year highs in the fourth quarter of last year as recovering steel demand was met with a lag in scrap generation. Last year's lofty prices had eventually thinned melt-margins and dulled buying interest for scrap, which left prices with nowhere to go, but down.

The price correction, however, will not be as intense as the Q4 rally, market participants said, as seaborne scrap prices are likely to find support in the continued recovery of downstream sectors and China reopening its doors to scrap imports.

SCRAP PRICES SEEN SOFTENING, BUT FIRM ON YEAR

The S&P Global Platts Japanese H2 FOB assessments surged 59%, or Yen 16,200/mt ($156/mt), through Q4 2020, to end the year at Yen 43,500/mt, while the containerized HMS I/II 80:20 CFR Taiwan assessments leapt 66%, or $177/mt, to close 2020 at $447/mt. Both indexes had reached brand new highs then.

These record high seaborne prices had pushed regional mills to purchase scrap from their respective domestic markets, importing only on a hand-to-mouth basis to regulate risk. The eventual decline in seaborne demand encouraged traders to unwind long-positioned cargoes in an attempt to cash in at 'peak' prices, which resulted in a sell-off in mid-January.

Nevertheless, market sources expect scrap prices to remain relatively firm on a year-on-year basis this quarter as steady improvement in regional downstream sectors like automotive could potentially underpin demand.

According to data from the Japan Automobile Manufacturers Association, sales in December 2020 reached 379,896 units, up 10.2% year on year.

New capacities coming online and furnace restarts in January could drive demand higher this quarter. Vietnam's Hoa Phat fired up its No. 4 blast furnace in Dung Quat complex on Jan. 6, while Japan's Nippon Steel restarted its No. 1 blast furnace at Kashima on Jan. 19, Platts reported previously.

High iron ore prices can also keep regional steel prices firm for blast furnace producers, and indirectly support product margins for scrap consuming melt shops.

Also in this series:

• Met coal: China-Australia relations transform market dynamics
• Iron ore: Soaring prices set to face hurdles in Q1
• Alumina defies global longs with upswing in price

MILLS SEEK REFUGE IN LOCAL SUPPLY

Market activity in the weeks leading up to the week-long Lunar New Year holidays in mid-February is expected to be sluggish as it coincides with the seasonal slowdown in Asia's construction sector. However, trading typically spikes post-holiday in anticipation of a jump in downstream demand.

"We might see more purchasing after the Lunar New Year, when construction activities and hence steel demand usually pick up, due to the [Vietnam] lucky month," a Vietnamese trader said. "But of course that is assuming prices have stabilized from the current correction."

Regional mills had looked to supplement more of their Q4 2020 scrap requirement domestically following the surge in seaborne values and at its peak during the week of Dec. 26, 2020, Japan H2 FOB prices commanded $85/mt and $72/mt premiums over similar grade scrap delivered to South Korean and Vietnamese mills, respectively, excluding freight costs, Platts data showed.

Steelmakers in locations with abundant scrap had relied on domestic supply, while mills with limited access to available material had to bid aggressively to secure the little they could get their hands on. Nevertheless, these prices were still below that of seaborne.

Ferrous scrap prices: Where do you see Containerized HMS I/II 80:20 CFR Taiwan prices ending in Q1?

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As the scrap rally pressured margins lower, buyers took a conservative stance and withheld procuring shipments at multi-year high prices, in a bid to insulate itself from the possibility of a correction in steel prices while the scrap was on water.

This led to the number of Asia-bound scrap trades falling 30% in Q4 2020 to 246, from the 349 deals in Q3, Platts data showed.

CHINESE DEMAND LOOMS

China had banned ferrous scrap imports from Dec. 31, 2018, in an attempt to prevent unwanted material from being dumped on its shores. However, limited access to imported scrap subjected its buyers to relatively higher prices through 2019, leading local industry participants to petition for the ban to be lifted, and effective Jan. 1 this year, China re-allowed the import of scrap.

Since the start of the new year, there has been little economic incentive for Chinese buyers to import scrap, but this reintroduced demand is expected to support prices going forward.

On Jan. 22, Japan-origin HRS 101 scrap offers to China stood at $465-$470/mt CFR Jiangsu, down $15-$20/mt on the week, while major mill Jiangsu Shagang's domestic delivered prices for similar grade Heavy No.3 scrap, was unchanged on the week, at $440/mt on an import parity basis, according to Platts calculations.

"We're keeping an eye on the China market now and foresee more trades happening once prices are suitable to both buyer and seller," a Japanese trader said. "This will support prices in the longer term as the market will then have an additional source of demand."

In the coming months, deals will be largely dependent on Japanese supply as Japan was China's largest scrap supplier over 2010-2020, accounting for 19.4 million mt, or 59%, of its overall scrap imports, China's customs data showed.

S&P Global Platts Metals Trade Review: MET COAL | IRON ORE | SCRAP | ALUMINA