Trade Review: Turnaround in Asian scrap market in Q3 hinges on China's steel demand

This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, metallurgical coal, copper, alumina, and scrap. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Asian seaborne scrap prices are expected to remain under downward pressure in the third quarter after retreating through Q2 from the multi-year highs reached in the wake of Russia's invasion of Ukraine in late February.

Despite the bearish outlook stemming from weak steel demand expectations, market participants said a pickup in China's steel demand and geopolitical tensions were key factors that would decide whether scrap prices could rebound.

With ferrous scrap's role in reducing #carbon emissions in steelmaking facing a setback on account of rising energy costs due to the #Russia-#Ukraine war, will construction of new electric arc furnaces slow down?#OCTT#metals#steel#decarbonisation

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Asian scrap prices have been on a downward correction since April on mounting end-user resistance to further hikes in steel prices.

The muted steel offtake was compounded by expectations of weak seasonal demand in summer due to high temperatures and monsoon rain in Southeast Asia. The resurgence of the coronavirus in parts of China and the two-month lockdown in Shanghai also weighed heavily on domestic and regional steel markets in Q2.

Anemic buying interest in Q2 saw Japanese scrap prices tumble 26.7% quarter on quarter, with the Platts H2 grade FOB Japan assessment slumping to Yen 48,000/mt ($355/mt) June 30 from Yen 65,500/mt March 31, S&P Global Commodity Insights data showed.

Russian steelmakers diverted billet and pig iron to Asia at competitive prices in Q2 due to wide-ranging sanctions by the US and EU, typically the major destinations of Russia's steel exports, which to some extent lowered buyers' price acceptance levels.

Subsequently, sluggish steel demand and weak steel prices saw steelmakers in Southeast Asia grappling with negative margins and production cuts, ultimately hurting scrap demand.

China returns to seaborne market

Chinese mills returned to the seaborne market for heavy recycled steel in May after almost a year's absence, with Platts observing 26 deals, bids, offers and tradable indications in May and 27 in June for HRS101 on a CFR China basis, rebounding from an average of seven per month in Q1. Platts recorded five HRS101 deals to China in Q2.

Despite China's weak domestic steel markets in Q2, mills' needs for imported scrap increased as local generation slowed amid thinner construction and manufacturing activity during the pandemic lockdowns. Delivery to mills was also hampered by logistical disruptions and COVID-19 related testing requirements for truckers.

Fast-falling international scrap prices made it feasible for Chinese mills to supplement their needs via imports.

Meanwhile, offers for Japanese scrap amid a lack of interest from other regional buyers South Korea and Vietnam fell to levels that matched Chinese mills' buying ideas, which were comparable with domestic levels.

Bears expected for Q3

Plagued by low steel offtake and mills' unprofitability, steelmakers in China, Japan, South Korea and Vietnam have scheduled maintenance and cut production, sharply lowering their demand for scrap.

Amid the widespread production cuts, market participants held a negative outlook for Asian scrap prices in Q3, with most seeing a recovery in Chinese steel demand as one of the key chances that could turn that around. But with typically higher temperatures and floods in southern China in July, the soonest the market could see an uptick in demand would likely be late August or September.

Though Turkish scrap import prices rebounded toward the end of Q2, market participants said this may be a correction that was not necessarily underpinned by improved steel fundamentals.

The outlook for Q3 is further clouded by three other factors. First, the return of China's steel demand critically hinges upon its success in curbing the resurgence of COVID-19. As its government steps up efforts to boost the economy, the threat of outbreaks lingers.

Second, how and when the Russia-Ukraine war will last determines to what extent Russian steel exports will undercut Asian steelmakers to resolve oversupply at home. If Russia has to consistently pump its lower priced semi-finished steel to Asia, prices will continue to be pressured downward.

Lastly, as recession concerns simmer amid high inflation, weak foreign investment in many parts of developing Asia continues to encourage pessimism over the macroeconomic environment and steel-intensive industrial growth in second half of the year.