Ferrous scrap Q2 outlook weak despite potential support factors

The Asian ferrous scrap market turned bearish in the first quarter as regional mill demand was sapped by multiple countries suspending downstream construction and manufacturing activity due to the coronavirus pandemic, and the outlook for Q2 is currently equally grim.

Container and bulk prices came under pressure immediately in the new year, coming off high price levels in December, as benchmark Turkish scrap prices turned bearish amid geopolitical tensions and weaker rebar prices. As the coronavirus pandemic escalated globally through February and March, containerized scrap prices into Taiwan fell 23% in Q1 from the previous quarter, while bulk prices in Japan fell 18% over the same period.

Sentiment in early Q2 remains largely bearish, with increasingly stringent regional quarantine measures expected to remain in place until at least the end of April. Seasonal factors such as Indonesia's Ramadan period in late April to May and higher summer electricity prices in Taiwan from June add to the weak outlook.

Mills in Taiwan and Vietnam typically see steel sales and scrap demand improve immediately after the Lunar New Year in what is considered a "lucky" month for construction projects. But that was not the case this year due to the spread of the coronavirus in China in late January, which resulted in downstream activity falling dramatically in February.

Lockdowns in many of China's cities reduced domestic steel demand, resulting in a surge in Chinese billet and rebar export offers in February. This led to oversupply in the region and added severe price pressure to product markets.

The escalation of the COVID-19 pandemic globally in March led to even more stringent responses in Southeast Asia, with lockdowns imposed in key scrap markets such as Malaysia and the Philippines. These quarantine measures increased disruptions to manpower and logistics, adversely affecting regional construction sectors and pressuring steel prices.

Domestic rebar prices in Taiwan fell around T$1,300/mt ($43/mt) and in Vietnam fell Dong 500/kg ($21/mt) over early February to end March, S&P Global Platts data showed.

In response to weaker steel sales and prices, many Asian mills were heard to be decreasing production through Q1. By the end of March, operating rates were heard from 50%-60% of capacity in South Korea to as low as 20%-30% in Indonesia, mill sources said. This reduced overall scrap demand, and mill sources in April expected production levels may have to be adjusted even lower in the near term.

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Q2 OUTLOOK WEAK

With the global pandemic yet to be fully brought under control, many market participants remain bearish about the scrap outlook as construction steel demand is expected to remain tepid. In China, construction activity is expected to return to normal levels by the end of May, but in most Southeast Asian countries may take much longer.

China's inventory levels for finished and semi-finished steel at the end of Q1 was estimated by Platts to be almost three times higher than a year earlier. This could result in oversupply in Asia in Q2 and eat into the market share of regional scrap-consuming electric arc furnace mills.

Seasonal factors also point towards a grim Q2, with Indonesia's Ramadan period, which this year starts in late April, typically reducing construction activity due to the holidays. Taiwan imposes higher summer electricity prices in June, which typically results in mills operating only during non-peak hours to offset higher electricity tariffs. The Philippines typically sees higher steel demand in the first half of the year as the construction sector maximizes operations before the rainy season in the latter half of the year. However this year, an extended lockdown across the northern island of Luzon until the end of April has reduced the possibility on an uptick in Q2.

Conversely, scrap prices could potentially see some support as a result of the pandemic as supply at yards tightens due to strict quarantine measures. Restrictions in manpower and lower manufacturing also led to lower generation and collection of scrap in Q1, with recyclers reporting difficulties in obtaining material to sell.

As long as the pandemic persists, many market participants expect this will continue - and it could get worse as record low scrap prices leave recyclers with little incentive to collect scrap until prices rebound.

MARKED WEAKNESS IN JAPAN

In Japan, domestic scrap prices saw marked weakness through Q1, with battered steel demand prompting mills to reduce consumption and buying prices of scrap.

Japan's leading EAF mill Tokyo Steel cut domestic scrap buying prices a total of 12 times in Q1, according to its published figures. H2 bids delivered to its Utsunomiya mill fell a total of 24% in Q1, markedly outpacing scrap buying price declines in Vietnam and South Korea of 11% and 9%, respectively, according to Platts data.

This weakness was also apparent in the seaborne market, with regional mills frequently citing Japanese scrap offers as more competitive than deepsea ones, taking into account price and shipment timings.

However, Japanese suppliers have also cited significantly reduced Q1 scrap collection due to the outbreak and expect further tightness in Q2 amid the shutdown of auto plants in Japan.

As the steel industry braces for potentially lower product prices and scrap demand in Q2, market participants will be looking to scrap supply for potential price support, or at the very least, to limit the downside.