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Trade review: China's output, power cuts clear path for billet imports over recycled steel

Highlights

China's billet imports to sustain into Q4 on output, power cuts

Recycled steel imports to stay weak on high overseas prices

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 iron ore, alumina, steel and scrap, and metallurgical coal. 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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The prospects of steel billet making inroads into China could continue to look up in Q4, bolstered by state-mandated cuts to crude steel output and power consumption, while at the same time and for the same reasons, there will likely be a dearth of imported recycled steel.

Against this backdrop of output and power cuts, however, China's demand for billet will also be tempered by the direction iron ore prices take, even though in the case of recycled steel, higher scrap prices overseas will leave China struggling to make sellers look its way.

S&P Global Platts observed 142 spot CFR China billet deals, bids, offers and indicative price points in July, a jump from 86 in June, as iron ore prices hovered above the $200/mt mark. When clear signs as to the extent steelmakers had to cut production across various provinces emerged, billet became a more attractive alternative.

It is worth noting that most of China's billet imports are sold via traders to non-integrated rerolling mills, mainly in the eastern province of Jiangsu, when prices are economically more attractive than buying domestic. There has, therefore, been no large move by integrated steelmakers to replace lost crude steel output through importing billet.

As iron ore prices plummeted in August and September, spot activity in billet also tapered, but was kept afloat by crude steel output cuts, which made domestic billet more expensive.

The prevailing weakness in buying interest for billet could persist into Q4 should demand in the property market soften and concerns over developers' debt burden linger.

While September and October typically herald the peak steel demand season, it has, however, been lackluster this year. High freight costs and stringent pandemic-related measures for vessels calling at Chinese ports have hindered trade, but the emissions reduction-linked cuts to crude steel output seem to have surpassed these concerns.

Since early September, Platts observed an increase in the number of deals for billet of Russian and Middle Eastern origins that were last seen in May, while from Brazil was tracked last in May 2020 -- all despite persistently high freight rates.

Trade flows from Indonesia, Vietnam, Thailand and India have also been steady as domestic demand for construction steel took a hit from lockdowns and pandemic control measures. Although, in most of these countries, the number of new infections appear to have passed their peak, which could mean a recovery in domestic steel use in the coming months.

Recycled steel imports subdued

Unlike billet, recycled steel gave China a wide berth in Q3, as crude steel output cuts dampened interest for scrap, while power cuts rendered standalone electric arc furnace-based mills inoperable.

Spot data for recycled steel on a CFR China basis tracked by Platts showed that activity dwindled from 54 in June to just 19 data points in July, and hovered at similar levels for the rest of the quarter.

Recycled steel imports are likely to stay depressed for the rest of the year, even though its usage, as opposed to that of iron ore, is considered of a lower carbon footprint and therefore in line with government policies, because prices in other parts of Asia, like key supplier Japan's domestic market, are higher.

In the aftermath of crude steel output and power cuts, mills with an intention to buy would have had easy access to domestic recycled steel, cementing resolves to source locally rather than chase Japan's high offers.

In Japan, strong Q3 crude steel output, that had gobbled up the country's domestic supply of scrap, is expected to stay firm in Q4, according to its Ministry of Economy, Trade and Industry. This would continue to render its export offers uncompetitive to buyers in China and Southeast Asia.

METI projected Japan's crude steel output to reach 24.11 million mt over October-December, a growth of 0.8% from Q3, led by stronger demand from the manufacturing sector, which is expected to grow 10.3% in Q4.

Even though Japan's Q3 scrap exports were limited, the quarterly average of Platts H2 FOB Japan assessments had only slipped a marginal 0.6% to Yen 46,422/mt ($412/mt) from the previous quarter, indicating the strength of domestic demand and prices.

With Japanese mills showing no signs of reining in their scrap purchases, Platts H2 FOB Japan had reached a record high Yen 51,000/mt on Oct. 6, for the first time since the assessment was published in January 2016.

In addition, given the gradual easing of coronavirus-related restrictions and measures in Vietnam, Indonesia and Thailand, market participants expect regional seaborne prices to remain buoyed in Q4.

And as China has supplemented its iron ore imports with billet and pig iron, prospects of it importing recycled steel will continue to be subdued for the rest of the year.