Ferrous scrap, metallics markets gear up for low-emissions steel shift

Ferrous scrap markets are eying an increasingly broader role in steel sector decarbonization as a move to expand electric arc furnace steelmaking in Europe, North America and Asia gathers pace with a stronger need for high purity scrap and direct-reduced iron.

Recycled steel scrap grades and metallic iron products, along with new plant investments, may enable EAF and blast furnace steelmakers to produce higher quality steel grades while cutting carbon emissions.

In the transition, mills reliant on traditional pig iron-based steelmaking and new EAFs will depend on metallics to bridge their overall feedstock requirements and costs, while competing for scrap grades.

Higher quality steel produced with an EAF requires purer ferrous scrap grades, which are in shorter supply, pushing new EAFs to look for DRI products and merchant pig iron with few residuals as feedstocks.

Based on the initial phase of low-emissions steel investments in Europe, more than 10 million mt/year of DRI and EAF steel capacity has been announced under development before 2030. Various steel groups such as ArcelorMittal, SSAB, Thyssenkrupp and Salzgitter, which are replacing some blast furnace production, are pursuing natural gas and hydrogen-based DRI rather than depending entirely on their scrap collection networks and the local scrap market where prices for higher quality grades would likely spike with new demand and shortages occur.

European scrap yards and processors currently work with traders to export scrap, including high quality grades, under long-term contracts and spot sales to Turkey, North America and various Asian markets. Export restrictions on scrap in the future could lead to a focus on supplying to local EAF and steel mills and within permitted OECD countries.

Cost considerations

The main raw materials costs of BF steel production and prices of European benchmark shredded scrap have trended closely together, according to analysis by S&P Global Commodity Insights.

In April, Northwest Europe steel production costs for a basket of iron ore and met coal product averaged around Eur318/mt, while the Platts monthly shredded scrap northern Europe domestic price was assessed at Eur410/mt. Pricing data from Platts, part of S&P Global, for the pair showed a positive correlation of more than 93% over the past seven years.

The overall cost of producing crude steel, including implied costs for scrap arisings, may be pegged closer to Eur570/mt in April, after factoring in additional steel production, energy, carbon permits and logistics costs of Eur250/mt, according to S&P Global estimates. This is well above current market scrap prices for a range of grades, with German recycling association BDSV publishing its March price for E2/E8 new arising at Eur381.70/mt ex-plant.

The relativity of Platts monthly shredded scrap northern Europe domestic delivered assessment to S&P Global's estimated monthly cost of overall crude steel production trended higher since 2021, averaging at 65.6% of crude steel costs, compared with 54% between April 2016 and December 2020.

The cost of a basket of iron ore products delivered to Rotterdam – including pellets, lump and sintering ore – averaged in April at around Eur178/mt of pig iron, according to S&P Global estimates.

European DRI costs for delivered pellets and Dutch natural gas requirements were Eur390/mt in March, with green PEM hydrogen and gas-based DRI costs at Eur728/mt, based on estimates using S&P Global's iron ore and pellet premiums, freight and hydrogen pricing data.

Replacing part of the iron ore burden with ferrous scrap, adjusted for iron content, on this basis could lead to higher overall costs per iron unit, while a corresponding reduction in met coke and energy injection-based costs as well as carbon emissions savings need to be factored in.

The supply and cost of ferrous scrap grades, along with steel margins and costs for alternative feedstocks and energy, have increasingly come into focus, along with operating constraints.

BF mills typically use scrap in the basic oxygen furnace while cooling down captive pig iron, reducing carbon emissions intensity for crude steel, which is later transformed into slabs or billets. But increasing scrap in the BOF may be limited, as mills would need to find sufficient quantities of scrap grades, increase energy usage to heat cold scrap and decrease yields to increase scrap's ratio.

Scrap, DRI, biomass and other feedstocks utilized in some blast furnaces have also been simulated to express total emissions reductions possible if they were fully utilized in the BF. The emissions savings are certified and applied to steel under the so-called mass balance methodology.

New arisings

The availability of the highest quality ferrous scrap – such as new arisings collected from processing steel products – is largely dependent on underlying steel production rates.

Recycled scrap grades are more dependent on macro factors, including new fixed investments and infrastructure, demolition, subsidies and grants, consumer policies and recycling. Scrap market demand, collection and processing costs and scrap pricing directly influence supply.

Arisings are generated by shorn off steel collected downstream from the steel works through service centers and end-user lines. The scrap may be unavoidable after maximizing steel usage and processing efficiencies.

While arisings costs are dependent on yields and crude steel costs, as well as collection and further processing, the value of arisings may also increasingly look at DRI costs and pig iron market prices. EAFs producing certain steel grades, including high-quality long steel and flat steels, depend on highest quality, low impurity scrap and metallic iron products.

By flexing feedstock ratios against market costs and availability along with steel demand, premiums for US busheling over shredded collapsed and inverted in the second half of 2022. Weaker import scrap prices in Turkey also led to softer demand and prices for scrap and pig iron globally through the same period.

Market sources are increasingly expecting trade restrictions on scrap supply and new supplies of lower-emission DRI products to generate new challenges and options. Changes in scrap and feedstocks as new DRI units start up from 2025 will enable some flexibility in the long-term as the steel industry invests to progressively lower steel emissions.