Trade review: Ferrous scrap eyes firmer Q4 on steel recovery, slower collection

This is Part 5 of 5 in the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in metallurgical coal, iron ore, steel, scrap and alumina. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Asian ferrous scrap prices look set to extend their strong performance of the past three months into the fourth quarter as steelmaking recovers at a time when slower scrap collection in winter typically crimps supply.

However, scrap demand by countries in the region driven by the production of billet for sale to China could soften in Q4, even though semi-finished products remain one of the few steel types to see an arbitrage window into China still ajar.

END-USE SECTOR REVIVAL

Regional scrap demand is expected to improve due to a recovery in a number of downstream sectors like automotive and infrastructure-related machinery.

In Japan and South Korea -- the former a key regional exporter and the latter an importer of scrap -- vehicle output and manufacturing have seen green shoots in October after months of decline, prompting expectations of an improvement in Q4 scrap demand.

Japanese flat steel producers have increased inquiries for scrap deliveries in October as they eye restarts of idled blast furnaces. Toyota Motor has reported global its sales in August had recovered to 90% of pre-coronavirus pandemic levels.

Some mills in South Korea also reported improving utilization rates through Q3, with a few aiming to keep Q4 production close to full capacity amid improvements in the domestic construction steel market.

The number of scrap trades into South Korea reached a year-to-date high at 23 in September, close to the combined number over July and August, according to spot data compiled by S&P Global Platts.

With the deals due for shipment in October and November, continued South Korean appetite for imports will hinge on a number of factors, including whether its rebound in vehicle output in September – which ended five months of decline – can be sustained.

Also in the Platts Metals Trade Review series:

• Met coal prices rebound from multi-year lows as Q4 outlook firms
• Soaring iron ore prices bring buying flexibility to the fore
• China's steel winter balancing act to decide Asia's fortunes
• Alumina anticipates calm Q4 after bumpy Jul-Sep

BILLET SALES TO CHINA

The demand situation in Southeast Asia has been more nuanced, with the region's scrap consumption having in part been fueled by the production of billet for sale to China over the past year.

Southeast Asian countries effectively became a proxy in China's efforts to buy raw materials more cheaply, supplying it with billet as it grapples with iron ore prices at a six-year high and government restrictions on importing scrap.

In producing billet for sale to China, which turned net importer of steel for the first time in 11 years in June, Vietnam's scrap imports have risen at a steady clip.

Spot ferrous scrap transactions on a CFR Vietnam basis observed by Platts jumped 39% year on year to 427,400 mt in Q3, but were down 10% from Q2.

The decline from Q2 was due to the difference in situations faced by Vietnamese producers that have shifted focus to exporting billet and those that have concentrated on domestic sales. The former have managed to maintain a steady outflow from their inventories on sustained Chinese buying, ensuring their need to continue importing scrap, while the latter, faced with tepid domestic demand, have had less need to import.

However, with Q4 seeing a slowdown in China's billet imports, Vietnam's demand for scrap could soften, with the role of domestic steel demand becoming of greater importance.

Domestic steel demand was seen by market participants as flat to higher in Q4 than in the previous three quarters, but without China or the regional market absorbing the higher output, Vietnam's steelmakers will be bracing for stronger competition at home, which would eventually limit buyers acceptance of stronger scrap prices in more saturated domestic steel market.

MIX OF FACTORS

The US, the biggest exporter of scrap, is expected to see demand from domestic mills recover in Q4 alongside prospects for stronger finished steel prices.

Market participants have said December is historically the best month to be long on scrap, as shredded prices in the US have stable or higher every year since 2006.

Improving finished steel prices and mill utilization rates in the US could result in more scrap staying put for domestic consumption instead of being exported to Asia, tightening supply further.

US raw steel capacity utilization was at 66.1% in the last week of Q3, up 10.7 percentage points from the last week of Q2, American Iron and Steel Institute data showed.

This will be coupled in Q4 by the seasonal slowdown in scrap collection in the US and across the northern hemisphere in winter, exacerbating the reduced pace of collection in Q2 and Q3 resulting from the coronavirus pandemic.

Turkey, the biggest importer of scrap, has seen slower domestic and export demand for its rebar at the start of Q4, which has made buyers there cautious about taking positions.

With Southeast Asian #steel demand struggling to recover and Chinese appetite for #billet imports easing, how will Southeast Asia's #ferrousscrap imports fare in Q4?

Our latest #tradereview: https://t.co/vXMEylFZGv

— Platts Metals (@plattsmetals) October 23, 2020

In Asia, where scrap demand is fragmented, factors in different buying economies could balance each other out, resulting in steady scrap prices.

On one hand, the end of higher summer electricity tariffs in Taiwan from Oct. 1 lends support to scrap demand, as mills are incentivized to return to full-day production schedules.

On the other, steelmakers in India have re-shifted focus to the domestic market after a surge in exports to China. However domestic finished steel demand began slowing its recovery in late Q3 despite the gradual lifting of lockdown restrictions since June.

The uncertain overall outlook for Q4 has further watered down price expectations for scrap.

Thus, while China's role in determining scrap's fortunes in Q4 will be indirect at best due to regulations preventing its import, any revival in its appetite for imported steel could mean an increase in scrap demand via proxies elsewhere in Asia.