Commodities 2022: Steel, scrap markets regionalize, led by China, as decarbonization gains pace

China has been the catalyst of steel market regionalization in recent years, in a trend taken up in other regions, notably the European Union, as the decarbonization drive gains pace.

The two movements go hand in hand. China's "winter cuts" and "blue skies" policies have since 2017 demonstrated there is no point in creating carbon emissions domestically to make products aimed only for export, which is tantamount to exporting pollution.

China in recent years also resolved not to import other nations' pollution, restricting waste imports. The measures were later eased on nonferrous and ferrous scrap as the benefits of using secondary metals in circular production chains and as a decarbonization tool became apparent. Now a growing appetite for scrap worldwide, coupled with COVID-19 supply chain upsets, has triggered export control policies in nations as diverse as South Africa, Iran, Malaysia and the European Union.

China steel demand 'peaked'

China's crude steel output slumped to a 44-month low(opens in a new tab) in October, according to steelmakers' association CISA. Exports were at an 11-month low. Smelter cuts pushed global aluminum prices to multi-year highs as the Asian giant curbed coal-powered electricity usage to decarbonize production and adopt more sustainable growth. According to Paul Bartholomew, lead analyst with Platts' Metals Analytics, "the steel and aluminum production cuts this year were about reining in overcapacity and having more control on the markets. China's current 'five year plan' policy is about becoming more domestically focused and therefore the government doesn't want to simply export its excess capacity as in the past."

China's finished steel exports have fallen each year since their 110 million mt peak in 2015 threatened international steelmakers' financial health. From 2019 its annual crude steel production has risen to above 1 billion mt: CRU Group analyst Paul Robinson however maintains China's steel demand has already peaked.

Platts Metals Analytics expects China to export around 66 million mt of finished steel in 2021, up around 20% on pandemic-impacted 2020. Its lower export levels have allowed steelmakers in some other countries to regain domestic market shares, also reducing global freight needs. China's removal in May of a 13% value added tax rebate on exports of 146 product types, including rebar and hot-rolled coil, accelerated the trend, contributing to surging steel prices in the EU and the US, where tightness in markets recovering from the 2020 COVID-19-related slump and logistics constraints forced buyers to seek regional supplies.

Bilateral, regional deals

China's diminishing role in export markets has paved the way for other players to strike bilateral or regional trade deals.

"Since mid-last year when most countries were coming out of the first waves of the pandemic and lockdowns, the global steel markets have largely split into east and west," Bartholomew commented. "Steel prices in the US and EU soared to record highs, due largely to supply constraints and a recovery in downstream demand. Meanwhile, prices in China and India rose but not to the same extent as in the EU and US. This resulted in India lifting exports to the US and especially the EU and countries such as Vietnam targeting the US for the first time due to the wide steel spreads."

Section 232 change ripples

The bilateral accord (opens in a new tab)announced late October, replacing the US' Section 232 import tariffs on EU-origin steel and aluminum with tariff-rate quotas (TRQs) from Jan. 1, 2022, will have a ripple effect on trade. The EU will suspend duties on imports of certain US goods; post-Brexit UK is running after a deal similar to the EU's; a bilateral deal between the US and Japan is under negotiation.

Section 232 tariffs were introduced March 2018 by former US president Donald Trump to keep US steelmakers strong. Resulting steel price rises were however undesirable for US consumers, while consequent trade deviations led the EU and subsequently the UK to introduce their own TRQ safeguards.

While still subject to Section 232 restrictions, UK steelmakers will now benefit from reduced import pressure: continuing high US prices will attract more steel from EU mills, which will in turn send less to the UK, an International Steel Traders' Association source said early December.

Elsewhere, restrictions reinforce regionalization: Mexico is to reinstate 15% tariffs on steel imported from June 2022 to support domestic industry. An OECD Q2 Steel Market Developments report noted global steel trade had been on a moderate decline in the past few years, while numbers of new anti-dumping and countervailing duties cases edge up in a scenario of continuing steel overcapacity.

Carbon taxes

The Carbon Border Adjustment Mechanism to be introduced by the EU in 2023 will promote steel regionalization and decarbonization: taxing imports of steel with a high carbon footprint should protect local steelmakers' investments in their decarbonization programs. California operates a similar mechanism, for electricity imports.

Carbon pricing currently works on a regional level. EU carbon prices have risen steeply this year, touching over Eur80/mt ($90.30/mt) in December from Eur30/mt a year ago. China has recently introduced a carbon market. Of 32 companies surveyed by Platts' Metals Analytics, 6% expect China to impose a carbon tax on the country's steel industry in 2022, 28% in 2023 and 66% after 2023.

Regional scrap usage

Ferrous scrap markets are expected to regionalize to optimize local supply chains. This raw material is essential for electric arc furnace steelmaking, considerably less carbon-intensive than steelmaking via the blast-furnace route.

Under a proposed revised legislation on waste shipments, from 2024 EU scrap metal exports to third countries will be allowable only if these can prove via independent audits they can manage the waste sustainably. The EU is the world's largest exporter of ferrous scrap, with exports of 17.4 million mt in 2020.

Ukraine is to boost customs duty on steel scrap exports threefold to Eur180/mt from early 2022. Russia will raise customs duty on ferrous scrap exports to Eur100/mt or 5% (whichever is greater), up from Euro 70/mt currently, applicable for 180 days from Jan. 1, 2022. This is a de-facto export ban, representing around 22% of Platts' CFR Turkey heavy melting scrap assessment at $460/mt Dec. 20.

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