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Trade Review: Rise in China's recycled steel imports to pause on seasonal lull, steel prices

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Platts Market Data Metals

Trade Review: Rise in China's recycled steel imports to pause on seasonal lull, steel prices

Destaques

Steel demand lull, global price imbalance to crimp China's recycled steel imports

Japanese suppliers turn to S Korea, domestic market

Billet import prospects hinge on crude steel

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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China's import of recycled steel is set to fall in Q3, after climbing steadily since the start of the year, due to a seasonal lull in steel demand and an imbalance in global steel prices that has made international scrap dearer than in the domestic market.

Over the past month, Chinese traders and mills have backed off from importing higher priced recycled steel as a supplement to iron ore, on concerns they may not be able to pass the extra cost through raising steel prices, especially with heightened state scrutiny on commodity price inflation.

S&P Global Platts observed that the number of deals, bids, offers and indicative price points for spot CFR China recycled steel was 54 in June, up from 46 in May, but below the 97 in April and 134 in March.

As cargoes booked from China's top supplier, Japan, typically take four to five weeks to arrive, the reduced spot activity seen in May and June implies subdued import volumes in June and July.

According to S&P Global Platts Analytics, Chinese domestic rebar margins turned negative since June 23, which has led at least one major Tangshan-based long steel producer to stop buying local recycled steel since late June.

Traders, who had earlier imported at $540/mt CFR China, will incur losses if they sold at current domestic prices, the Singapore-based trading arm of an eastern China mill said. If domestic prices were at Yuan 3,770/mt on a delivered basis to Zhangjiagang, including value added tax, it would work out to $512.60/mt, after considering port charges, reflecting a paper loss of nearly $30/mt.

Japanese scrap skirt China, heads elsewhere

Given the lack of interest from Chinese buyers, Japanese suppliers have stopped offering to China, as they found it more profitable to sell either to South Korea or in their own domestic market.

Unlike China, where government measures have tamed steel prices, Japan's hot-rolled coil prices have stayed at record highs. Driven to produce greener steel, Japan's domestic demand for scrap has been strong, making it less affordable for Chinese buyers.

Since Q2, prices of Japanese prime scrap, like the HS grade, have surged relative to those of lighter grades like the H2. At the end of June, the HS-H2 spread blew out to Yen 10,000/mt ($90.21/mt), compared with just Yen 2,000/mt in January.

As a result, Chinese bids and Japanese offers for HRS101 recycled steel -- akin to the HS grade in Japan -- widened to as much as $90/mt at the end of June, putting to bed any likelihood of a deal.

Also in this series:

Alumina widens disconnect with aluminum prices as buyers stand back

Pressures on Asian iron ore to rise after Q2's record highs

No peak in sight for met coal prices as supply continues to tighten

Billet import prospects mixed

Unlike the case for recycled steel, prospects for Chinese billet imports in Q3 are mixed. An increase could be on the cards if export volumes from regional suppliers Indonesia, Vietnam and India rises as the Delta variant of the coronavirus threatens to further weaken domestic demand for construction steel in these economies.

On the other hand, imports may be capped by Chinese measures to moderate gains in domestic steel prices, which would make imports economically unattractive.

Yet, the industry ministry's goal to cut the nation's annual crude steel output in 2021 continues to hang over markets.

While the target has not been emphasized by the government for some months -- presumably because news of production cuts would add fuel to already soaring prices -- the market's concerns over the plan was renewed at the end of June.

Should these plans be carried out in the second half of the year, then for mills, importing billet may be the compliant way, as they would be able to maintain, or raise finished steel output without producing more crude steel.

As in recycled steel, the number of CFR China billet deals, bids, offers and indicative price points tracked by Platts has dropped in May and June to 81 and 80, respectively, from more than 110 in March and April.

But unlike recycled steel, deals continue to take place as sellers appear to have a greater need to move cargoes. The most recent CFR China transaction Platts observed was done on June 15 for 20,000 mt of Indonesian 150 mm, 3SP billet for July shipment.

Platts Iron Ore and Metallurgical Coal Specifications Tree

While Q3 may be a dry spell for the import of recycled steel and billet in China, what is keeping the market hopeful is the state's ambitious carbon neutrality goals over the next four decades.

Earlier this month, the National Development and Reform Commission announced a target for recycled steel consumption to reach 320 million mt by 2025, a 23% increase from the 260 million mt consumed in 2020.

Chinese traders and mills that have taken a shot on imports, have prioritized obtaining first-hand experience in customs clearance and operational procedures over profit. But once the economics is viable in a more sustained way, they will likely be the front runners to reap the fruit of their sown seeds.