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Trade Review: High freight costs, regional steel prices seen supporting ferrous scrap in Q2

Highlights

China's strong billet buying to stir regional scrap appetite

But Chinese scrap buying slows on Tangshan steel output cuts

Singapore — 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 steel, iron ore, metallurgical coal, scrap and alumina. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

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Asia-bound seaborne ferrous scrap prices are poised to remain firm in the second quarter amid high freight costs and rising regional steel prices after prices in Q1 rose more than 20% from the previous quarter.

Average Q1 prices across S&P Global Platts suite of seaborne Asian scrap assessments were up 20%-26% from the previous quarter, with Japanese export prices up 20.4% or $65.30/mt, deep bulk scrap prices up 22.9% or $82.50/mt and containerized scrap prices to Taiwan up 26.4% or $85.10/mt.

This was due mainly to post-Lunar New Year demand, when downstream product market performance improved regionally. China's demand for imported billet, and the country resumption of recycled steel imports, added strength to the seaborne scrap market.

High freight costs, regional steel prices seen supporting ferrous scrap in Q2: scrap prices

Market expectations for Q2 are also being supported by spiking freight costs, which have ushered in stronger profits for ship owners but proven a major bugbear for the seaborne scrap market.

Recovering global trade in Q1 saw demand outpacing the availability of shipping space, resulting in supply chain disruptions, longer lead times and higher prices.

Multiple scrap traders reported having to fulfill or postpone shipments under pre-existing contracts while grappling with rising freight costs and limited vessel availability for April and May. Freight rates from Japan at the end of the Q1 were up to double that of the quarter before, with the cost of chartering a 5,000 dwt mini bulk vessel to Vietnam rising to $55-$60/mt from $35-$37/mt the previous quarter and rates for smaller 2,500 dwt vessels to South Korea surging to Yen 4,000/mt from Yen 2,000/mt.

As Asia-bound scrap prices tapered off at the end of March, sellers said there was little enthusiasm for the CFR market, with workable prices pressured higher by the rise in freight costs.

Bullish steel prices support demand

Sentiment also firmed on China's increase in demand for billet, leading to a rise in regional prices for imported semi-finished steel. Government moves to cut emissions in China's steelmaking hub of Tangshan city has raised the specter of lower steel production and subsequently raw material demand in northern China.

The city's government on March 19 ordered blast furnaces and converters to reduce utilization rates by 30%-50% by the end of 2021, prompting mills to opt to import billet for rerolling instead to help meet targets.

Regional steelmakers soon after reported heightened steel export demand and prices from China, with most having sold out of semi-finished and finished products for April and May. Regional exporting mills could be expected to see more upstream demand for scrap in Q2 in line with the better steel margins and sales.

This was similar to Q2 2020, when Asian seaborne scrap prices surged around 36% following bumper sales of billet to China, Platts reported earlier.

However, other global buyers such as Turkey and Indonesia anticipate a seasonal slowdown in construction activity during Ramadan over April 12-May 12, which could dampen scrap demand.

Also in the Platts Metals Trade Review series:

China's recycled steel imports see slower start to Q2

The rise in CFR China trading activity after the Lunar New Year fizzled in mid-March after Tangshan's production cut announcement.

Chinese traders were aggressive in Q1 in their attempts to increase market share, some even forking out $10-$20/mt premiums for Japanese or South Korean heavy material, while other mills deemed such buying activity as artificially raising prices.

Demand for imports was weak at the start of Q2 as the gap between buy and sell ideas widened after the output cuts reduced demand while positive sentiment in Japan and the strong freight market drove sell-side expectations in the other direction.

Chinese buyers said demand could firm if the spread between imported heavy recycled steel and local prices narrowed, which they expected to happen as more sources grow familiar with the latest customs regulations.

Some sell-side sources said China's demand could pick up later in Q2 as mills may opt to raise scrap utilization ratios in their blast furnaces in place of iron ore to meet limits on carbon emissions. Mills were said to be targeting scrap charting ratios of up to 35%, up from the usual 15%-20%, in the steelmaking process.

High freight costs, regional steel prices seen supporting ferrous scrap in Q2: China-bound volumes up

Additionally, selling expectations for heavy grade material to China are expected to remain at premiums to similar sales to Taiwan and Vietnam. This is in part due to sellers putting "more premium and cleaner" recycled steel in China-bound cargoes in an effort to reduce the risk of complications or rejection at customs.

While small parcels of scrap from other origins like the UK and South Korea were bought in Q1, Japan is expected to remain China's main supplier in the long term as buyers cite a preference for its scrap quality.