Brazil's evolving role in the global ferrous scrap market

View Full Transcript

Adriana Carvalho:

Hello. Welcome to Platts Commodities Focus podcast by S&P Global Commodity Insights. Today we are diving into a timely topic, the growing presence of Brazil in the global fair scrap trade. And for over a decade, we've been monitoring the dynamics of the Brazilian steel and recycling market. And most recently we have observed a significant shift as Brazil has established its presence in international market, and the weakening scenario in the Brazilian steel industry, which has prompted scrap dealers to then explore alternative avenues. So in response to this dynamic, Platts launched last year the first daily fair scrap export assessments for Brazil, for HMS and shredded grades. And most of these materials are heading to India.

I am Adriana Carvalho, Senior Manager of Metals Pricing for Americas. And to help me dive into this discussion, I'm joined by our prize reporters, Mayara Baggio and Camila Martinez, who specialize in steelmaking raw materials in South America, and our special guest, Abdi Salad, prize reporter for low carbon and base metals in the MEA region. So let's get started and jump right in. Mayara, has the recycling sector in Brazil always had its eyes on the international market, or what is the sector's dynamic?

Mayara Baggio:

Actually, the fair scrap market in Brazil has traditionally been focused on domestic consumption. We are talking about a recycling sector that supplies about 8 million tons of recycled steel each year, which includes consumption across steel foundry and export sectors. Steel mills always being the stronger party of the relationship, dictating the rules around consumption, quality, and quantity. And over the years, we have seen some scrap dealers evolve, become more experienced, and establishing stronger operations. This development has sometimes been welcomed by major steelmakers, but it has also sparked resistance from these buyers. This pressure between steel mills and scrap dealers was present 12 years ago, when plots launched at the domestic price assessments for the sector. And it continues to be a point of tension for both sides, today.

Adriana Carvalho:

Right, and bringing some numbers, Camila, how has this new export profile for the Brazilian industry evolved? I mean, it's more aligned with the chains that we've seen in the international market, so how has it been reflected in the sector's numbers?

Camila Martinez:

Well, historically, exports have remained flat with average annual growth of 0.6%, increasing from 648,000 to 690,000 metric tons in the last decade. While I would say that the exports boom in 2023 at 800,000 metric tons, or more than double export one year before, it has connected the sector more closely to the global market fundamentals and opportunities. And this new export profile is also a result of declining scrap consumption by the domestic steel industry, which has averaged at 3.5% annual decrease over the past decade, according to the Brazilian Steel Institute data.

I think that the post pandemic prices pressures became more evident. We saw domestic HMS prices falling by about 26% between 2022 and 2024. And recyclers always remark, "I had to give back everything I can post COVID." Their main challenge lies in maintaining prices and attend to their margins. So they are always attentive to foreign exchange, which determinates if they are competitive or not in the international markets. So to navigate this, they diversify to serve both domestic and international markets. They play inventories for seasonality, and leverage international market fundamentals when negotiated with domestic mills.

Adriana Carvalho:

All right. So we saw this record-breaking export movement in 2023, and this certainly called the attention of the major steel makers in Brazil. Right? So how significant, Mayara, is this new phase for the recycling sector?

Mayara Baggio:

Yeah, more than an important outlet for Brazil's steel recycling sector in the face of a sluggish domestic economy. The increase in exports, primarily to India, has signaled a new stage of development for domestic steel recyclers. The practice and procedures of the international market, along with a constant assessment of market conditions, have become increasingly common among participants. And this indicates a maturation of the supply chain, which in Brazil has often been associated with lower income populations.

Adriana Carvalho:

But we still have many small and medium-sized dealers in this market. They're not able to export. So these continue 100% dependent of the mass consumption, right?

Mayara Baggio:

Right. It's true. The market is still quite fragmented, with small and medium-sized suppliers, and the steel mills have intensified this search for materials, also, with small ones, knowing their dependence on the domestic market. Not all scrap dealers have the structure to go to the international market, and traders have help it a lot in the sense. And at the same time, we see a strong competition of steelmakers with large dealers when acquiring material from base suppliers. We ultimately tights margins of large dealers.

Adriana Carvalho:

Right. And Camila, we briefly talk about India. India became a big consumer of our material. So was India the key factor behind this surge in Brazil for scrap experts?

Camila Martinez:

Yes and no. India's growth as a top consumer significantly bolstered the Brazilian domestic market in 2023. And in 2024, it's continued to purchase about 60% of all material exported by Brazil. Brazilian recyclers, they have been working hard for many years to enter the international market, and prior to having India as the main destination, they were able to find customers in smaller markets like Bangladesh and Pakistan.

Adriana Carvalho:

But we often hear dealers complaining about the lack of infrastructure to export. So what are the main challenges, if you could list some?

Camila Martinez:

Yeah, they have faced various infrastructure challenges for sure, and have had to adapt accordingly to address these issues. They joined forces and they have collaborated to establish standards and best practices with leadership from both the, for example, National Recycler Association, NSFA, and traders, which provides logistic and commercial support. And Brazil can only export scrap in containers, which means it faces a highly competitive landscape in national ports, as container demand often prioritizes sectors like agribusiness. We see it in Santos Port, the main outlet in Brazil. For instance, in Manaus State in the northern region, capital services are required to elevate cargo to sea level during dry seasons. This has led to a halt in exports from the region because of the increased logistical cost.

Adriana Carvalho:

Okay, thanks. And then turning to Abdi, we mentioned here India is the main destination nowadays for Brazilian fair scrap, but we know Brazil is not the main supplier to India. There are other giants in place. So Abdi, could you tell us a little bit from India's perspective, what is the Brazil share in this market?

Abdi Salad:

Yeah, of course. Yeah. Well, it's very interesting from India's perspective. The country's definitely become more reliant on Brazilian scrap in 2024. We saw growth of around 26% between January and November 2024 compared to 2023, and becoming the fifth-largest import destination for Indian buyers. However, India has definitely imported less ferrous scrap overall, year-on-year. It's been down around 17% between January and November 2024, compared to 2023. And the country has instead chosen to utilize more HBI and domestic sponge iron, due to unworkable imported scrap prices, and higher freight rates along the Red Sea.

Adriana Carvalho:

Right. And there are some quality issues in place, as well.

Abdi Salad:

Yeah, well, market participants say that Brazilian scrap isn't the first choice for Indian buyers, due to quality concerns and longer lead times when imported from Brazil. So India definitely favored imports from the UAE, the UK, and the USA, in 2024.

Adriana Carvalho:

Okay. Brazilians, they're really betting on continued demand from India. So how sustainable will be that trend for Brazil? Or let's say, will India continue with this strong appetite for Brazilian scrap or global scrap, or is this a short-lived story?

Abdi Salad:

It's tough to say. India does aim to ramp up their steel production to 300 million metric tons by 2030, and they've committed to reducing their carbon emissions by 1 billion tons also by 2030, and also to reduce the carbon intensity of its GDP by 45% by 2030. To achieve these ambitious targets, they'll definitely need scrap. And we could see Indian imports of Brazilian origin scrap continue to grow. Current government estimates suggest that capacity has already crossed 161 million metric tons per year, which includes 67 million metric tons by blast furnace, basic oxygen furnace route, 36 million metric tons by the electric arc furnace route, and 58 million metric tons by the induction furnace route.

Adriana Carvalho:

All right. Brazilian ferrous scrap export prices, they have been closely following Turkish price, and then Indian price. Could you just tell us a little bit, what is the current levels of Indian scrap, and what are the expectations of the market in regards to pricing?

Abdi Salad:

Yeah, so as of February the 13th, Platts assessed Indian imports of containerized shredded scrap at $372 per metric ton CFR Nhava Sheva. The price has been relatively range-bound in the last few weeks, simply because the Indians, as I mentioned earlier, are choosing to step back from the import market at the moment, and are choosing to use their domestic sponge iron availability instead of importing scrap. So it's been pretty quiet in terms of activity in containers for shredded scrap imports especially, but I think the near-term expectation is that the market is looking forward to a few infrastructure projects that might come into play, and some more government announcements that will improve finished steel demand in the country.

Adriana Carvalho:

All right. Thank you. And talking about the steel industry in Brazil again, all these activity on the ferrous scrap export side happened at the same moment that we saw a large influx of Chinese steel, mainly, entering Brazil. So how has that affected the Brazilian steel industry as a whole? Mayara?

Mayara Baggio:

In the south where most of the steel imports arrived in Brazil, we observed months of stagnant steel and ferrous scrap prices, due to the steel industry's lack of production prospects, and it reduced demand for raw materials. However, general sentiment improve it in April 2024, following efforts by the largest mills to work with the government on implementing a 25% import tariff for products along with a code system. The domestic rebar, which relies heavily on ferrous scrap for production was excluded from this list because of limited import history. Despite this, in 2024, orders in inflows from Peru, Turkey, and Egypt, although in restricted volumes, caught the attention of domestic steelmakers. So that's why the Brazil Steel Institute indicated that rebar on the list of upcoming requests to the federal government for additional import tariffs. There are also case-by-case negotiations with countries which have trade agreements that offer exceptions or reduce tariffs for trade with Brazil.

Adriana Carvalho:

Okay. I know rebar is the production route that mostly consumes scrap in Brazil, but flat steel was the mostly affected by the Chinese imports in the past two years. So what is the current reality of the flat steel market in Brazil, Camila?

Camila Martinez:

Well, although the mass consumption appears to have increased by 9.6%, flat steel imports rose by 10.6% between 2023, 2024. And since the implementation of import quotas with a 25% tariff in June 2023, the domestic HRC price has risen by 12.6%. So the market suggests is that the quota volumes are too small in a stagnant market, and low demand to make a significant impact. So as long as the Brazilian economy remains sideways, the steel market will continue to face challenges, and a global oversupply of steel.

Adriana Carvalho:

Yeah, well, we continue to see a bearish sentiment in the Brazilian steel market, but the foreign exchange is quite high and favorable for scrap exports. But at the same time, we see freight costs really high as well, and the global ferrous scrap trade, even more competitive. So let's keep an eye on that.

And thank you very much Mayara, Camila, and Abdi for joining me in this conversation. And thank you to our listeners for tuning in. This Commodities Focus episode was produced by Jennifer Pedrick in Houston. And for more information about commodities and energy markets, please get your access to PlattsConnect.com.