Steel scrap price supporting iron ore demand for DRI

London — Iron ore and pellet markets may see demand support from the stability in seaborne ferrous scrap prices this month, incentivizing scrap substitute direct reduction iron and pig iron, according to S&P Global Platts analysis Thursday.

Scrap delivered to Turkey has been rangebound around $270-280/mt CFR for a month since recovering from a steep, but short-lived, correction to $252/mt CFR in early February.

Scrap prices hit $300/mt CFR Turkey at year-end, which had increased the competiveness of iron ore and DRI based steel production.

Direct reduction iron (DRI) plants in North America are reportedly seeing higher demand for iron ore pellets, after scrap prices recovered across the fourth quarter of 2019.

Similar to Turkish delivered prices, US shredded scrap has stabilized after an end-January retracement. US scrap prices in February were still 20% higher than Q4's average.

DR pellet premiums are heard offered by at least two suppliers at higher premiums for Q2 cargo against the 65% Fe Fines CFR China index in contracts, compared with Q1 premiums.

The spread between DRI costs, scrap prices and pig iron prices may remain tight, due to high iron ore base prices, with 65% Fe IOCJ fines product from Vale trading at $107.10/dry mt CFR China on Tuesday.

Even with higher pig iron prices this month, spreads between DRI implied costs with scrap and metallics are yet to recover the margins available in 2018, based on Platts analysis.

65% FE SPREAD

Volatility between 65% Fe CFR China fines prices and the more widely used 62% Fe Fines China index may add to concerns for pellet buyers, after the 62-65% Fe fines spread widened to over $15/dmt last month, from less than $10/dmt over the second half of 2019.

DRI mills are having to absorb market spreads for high grade iron ores, along with a move to quarterly changes to pellet premiums.

Many compete directly and indirectly with steel products from blast furnaces using a mix of lower grade iron ores, and electric arc furnace (EAF) mills with scrap.

DRI, which benefits from stable chemical properties and fixed iron content relative to a mix of scrap, enjoyed lower relative costs to benchmark scrap prices earlier in 2019 and 2018.

Saudi Arabia and the UAE, which are both dependent on high-grade iron ore pellets, reported higher DRI output in January.

Egypt produced 57% less DRI, according to World Steel Association data. The data does not include US DRI output

Scrap prices to Turkey, along with prices for export Turkish rebar and imported billets are all currently relatively in line with expected values, according to Platts Turkey ARC 30-day relative price strength indicators Wednesday.

This may be a signal for limited near-term price volatility in regional scrap and steel from EAF mills, as new market trends wait to shape up.

The indicators close to expected value would limit anticipated responses to any current trade pricing deviations, while the coronavirus pandemic adds to a cautious outlook for steel trading activity and regional demand ahead of Ramadan at the end of April.