Trade Review: Asian steel, scrap prices seen firm in Q2 as war-led supply crunch continues

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 steel 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.

Prices in Asia's hot-rolled coil, rebar and ferrous scrap markets are likely to remain strong in the second quarter, after surging in Q1, as supply chains are gradually restored and markets continue to price in the impact of Russia's invasion of Ukraine.

Suppliers in India, Japan and South Korea have increasingly focused on European steel markets in the wake of the invasion, while Chinese mills are emerging as dominant suppliers in Asia. This trend is likely to continue in Q2 after the EU increased quota volumes for HRC imports from India by 62% and from South Korea by 27% from April 1.

The absence of Russian and Ukrainian-origin coils is estimated at around 19% of global supply, analysis of S&P Global Commodity Insights' spot market data for SAE1006 HRC in 2021 showed.

Given the absence in the Asian flat steel market of material from Russia, Ukraine, India and South Korea, the return of Chinese HRC in a dominant position is highly likely in Q2. India and South Korea accounted for 10% of observed HRC offers into Asia in Q2 2021, S&P Global data showed, and their shift in export focus in the current quarter is likely to see Chinese cargoes filling the gaps.

Another reason supporting the growth in Chinese HRC exports is weak domestic steel demand due to a property market slump that has been exacerbated by a COVID-zero strategy, along with logistical disruptions that have weighed on the manufacturing sector.

The spread between Chinese HRC export and domestic prices widened to $52.59/mt March 31 from minus $17.55/mt on Jan. 4, S&P Global price assessments showed, indicating prices were considerably more attractive in the export market. SS400 HRC export prices surged $123/mt or 16% over the same period, outpacing the $52.43/mt or 6.5% rise in domestic prices.

Despite lockdowns in Tangshan and Shanghai, the impact on steel production, which has steadily climbed since the Winter Olympics in February, has so far been limited.

Do you think Asia's hot-rolled coil, rebar and ferrous scrap prices will remain strong in Q2?#steel#metals#Russia#Ukraine#China#COVID19

— S&P Global Commodity Insights Metals (@SPGCIMetals) April 11, 2022

In addition to expectations of a strong seaborne market in Q2, the outlook for Chinese HRC prices is bullish as domestic demand was expected to increase after the COVID-19 restrictions ease. Nonetheless, demand recovery and prices remain subject to any further supply-chain disruptions from the war in Ukraine and China's handling of COVID-19.

Lower supply to sustain billet prices

In the billet market, unabated supply concerns and higher production costs due to the jump in energy prices will define prices in Q2. Billet prices in Tangshan rose 13% from the start of Q1 to near the end, while soaring 33% on a CFR Southeast Asia basis over the same period.

Seeking to avert risks and sanctions associated with buying Russian billet and the shipping risk with Ukraine billet from the Black Sea, Asian buyers have had to seek alternatives. This led to the number of observed CIS trades dropping to just one in March from three in February and six in January, spot data compiled by S&P Global showed.

While domestic steel supply in Q1 was trimmed during the Winter Olympics, pandemic lockdowns in a number of Chinese cities have since led to reductions in overall activity and disrupted logistics. Market participants expect a proper recovery in demand to take place in Q2, if the pandemic situation improves.

Given the Russia-Ukrainian conflict has not shown signs of easing, billet market participants are expecting supply tightness to continue in Q2, at a time when construction and infrastructure demand is recovering in parts of Asia.

Resistance grows to scrap price hikes

The Asian scrap market is poised to see further resistance to price increases in Q2 as steelmakers are squeezed between rising melt costs and limited downstream product demand.

Sentiment in the scrap market is set to be further dampened in Q2 by volatile freight prices, spiking energy costs and the upcoming rainy season from late May that are all expected to weigh on construction steel demand across Asia.

The higher buy-side resistance in Q2 follows the price of Japanese scrap surging 39.3% quarter on quarter in Q1, with the Platts H2 grade FOB Japan assessment rising to Yen 65,500/mt March 31 from Yen 47,000/mt on Dec. 31, 2021.

Rising demand at the start of the year supported the initial spike in Asian scrap prices in Q1, before Russia's invasion of Ukraine on Feb. 24 added more fuel to the upsurge.

Shipment delays for western-origin containerized cargoes also increase regional demand for Japanese material, given the latter's advantage of shorter delivery lead times.

The weakening of the Japanese Yen against the US dollar in the latter half of Q1 as the US moved to rein in high inflation made Japanese scrap even more attractive for East Asian buyers.

Notably, the price of heavy scrap material from Japan was observed to have flipped and unusually become cheaper than lighter scrap material from the US.

Likewise, scrap prices in the US and Turkey were also shaken up following the invasion of Ukraine, with exporters of US material eventually eyeing higher price levels from buyers in Asia.

The Platts deepsea bulk HMS 80:20 CFR East Asia price surged to a 14-year high of $665/mt CFR March 16, up 33% from Dec. 31, 2021.