Are surging coking coal costs a boon for scrap prices?

What links coking coal loading from Australian ports with ferrous scrap recycled in New Jersey, USA? And what does this connection mean for Turkey’s electric arc furnace mills?

The inter-connectedness of steelmaking raw materials is currently there for all to see.

Coking coal prices doubled in a month between mid-August and mid-September on a FOB Australia basis, and — after further mine disruption in Australia and with China’s government-enforced domestic coal production slowdown persisting — prices have risen further to above $240/mt FOB.

This has brought the raw material global attention, and thrown steelmaking received wisdom out of kilter. Coal is now a more expensive input than iron ore in the integrated route, accounting for around 60% of the cost.

Blast furnace mills (which make up the majority of mills globally and the vast majority in China and Commonwealth of Independent States countries) are consequently altering procurement mixes as best they can. This involves adding more scrap to their furnace burden, seeking higher-grade iron ore that reduces the coke rate in production and, of course, looking for stronger sales prices.

This is good news for that New Jersey recycler, but it also has major implications for Turkey’s steelmakers; electric arc furnaces in Turkey run off a diet of ferrous scrap, and if more BF mills are buying scrap, supply is reduced. Turkey’s mills have procured as much blast furnace-produced billet as possible in the last year in order to reduce dependency on scrap, which has been relatively expensive compared to iron ore and coking coal up until 2016.

Now Turkish producers are buying more competitive scrap, with export prices of billet from China rising to $332.50/mt FOB Tianjin, up $15/mt in 10 days, according to Platts assessment of the trade route. All of this upward pricing pressure comes at a time of traditionally weaker scrap supply — Q4.

Scrap-based production has been around $20-$25/mt more competitive than the BF route, Turkish mill executives recently told Platts, and this was with coal procured substantially below current spot prices given the lag between procurement and consumption.

But the spike in coking coal prices will prove a boon to scrap merchants, as integrated furnaces ramp up usage in their blast furnaces. One integrated steelmaker in Turkey has indicated it will move to a 20% scrap charge from below 10%, the Bureau of International Recycling said in its latest report. “The economics of this change is sound in my view and, if followed by other integrated mills internationally … this should change the dynamics of the supply/demand continuum for steel scrap worldwide,” William Schmiedel, president of the BIR ferrous division, said.

Indeed, other mills seem to be increasing scrap as a proportion of their furnace burden. “We’ve started to charge more scrap in the blast furnace because the tipping point of coal is now so great. If we’re doing that, you can be sure the major integrated works are,” Ben Cunliffe, sales director for structural steel at British Steel, told Platts. “Demand for scrap across Europe and other regions has to increase over the next few weeks,” he added.