Analysis: Ferrous scrap prices weaken to iron ore as correlation breaks down

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Highlights

Correlation weakens between CFR scrap, iron ore

Scrap more competitive versus iron ore since 2019

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Ferrous scrap has decoupled from stronger iron ore prices so far in 2021, as low coking coal costs and strong steel demand in China and elsewhere support iron ore consumption at blast furnaces.

Scrap and iron ore tracked relatively closely in 2020, before the link between the two key steelmaking raw materials broke down this year, with scrap falling to the lowest price ratio to iron ore since August 2020.

The outright S&P Global Platts Turkey import HMS 1/2 (80:20) scrap to the China import iron ore 62% Fe fines IODEX price ratio fell to 2.22 on April 27, the lowest since the all-time record of 2.19 on Aug. 19, 2020.

The ratio averaged 2.56 in January-April compared with 2.67 in 2020 and 3.11 in 2019, when scrap prices were relatively higher to iron ore.

Scrap prices for imports into Turkey, as well as for US shredded scrap, followed sharply different dynamics in regional steel markets over the first few months of the year. Stronger hot-rolled coil prices provided greater support to higher-grade bushelling scrap and iron ore pellet prices.

With scrap-to-iron ore ratios still weak, a recovery for scrap is expected.

China export rebate

Turkish import scrap prices are expected by market sources to see strong near-term gains, as broader regional steel and scrap turned positive on China’s to remove a 13% value added tax rebate for the export of 146 steel products, including rebar and hot-rolled coil, effective May 1.

China’s finance ministry also cut the import duty on pig iron, crude steel and recycled steel — its term for what overseas markets call ferrous scrap — to zero from May.

The withdrawal of export rebates should encourage imports of scrap and metallics into China, and dissuade exports of commodity-grade steel products, which may compete for buyers with steel and billet producers in Turkey, North Africa, the Persian Gulf, India and rest of Asia.

Market sources expect these changes to be a tailwind for Turkish import scrap prices, which, in addition to an easing of iron ore supply constraints over the second quarter, could see both the outright and iron-adjusted ratio between scrap and iron ore increase.

In the US, bushelling scrap’s premiums rose over shredded scrap since the first quarter, as higher-grade scrap helps arc furnace mills produce flat steels. US Midwest HRC-shredded scrap spreads widened this year, exceeding $1,000/st in April, incentivizing high-grade scrap and pig iron.

Globally, rebar price increases have been more limited as HRC spot prices ascended, and narrower rebar-scrap in the US and Turkey constrained scrap price increases.

Turkish import scrap prices recently were at historical highs, while remaining relatively weak compared with iron ore, largely due to healthy supply of cut-grade scrap such as HMS 1/2 (80:20) in key exporting regions of Europe and the US.

The Turkish import scrap price for premium HMS 1/2 (80:20) traded largely within the $400-$450/mt CFR range in February-April, below the near 10-year high of $482.50/mt CFR Turkey achieved in early January.

This, in tandem with strong export finished steel demand, especially for flat products, has allowed Turkish mills to achieve healthy margins in early 2021.

However, domestic demand remains affected by volatility in the Turkish Lira and uncertainty over domestic monetary policy, which has capped the possibility of sharp import scrap price hikes recently, market sources said.

Turkish mills’ imports of ferrous scrap rose notably year on year in Q1, in line with the rise seen in mills’ crude steel output, Platts observed from the latest Turkish Statistical Institute data April 30.

Turkey’s crude steel output rose 9.5% on the year at 9.7 million mt in January-March, supported by a buoyant global finished steel market. Turkish mills imported 6.32 million mt of ferrous scrap from global suppliers in Q1, roughly 1.1 million mt higher on the year.

Scrap yields pressured

Higher scrap prices have pushed up costs due to iron yields dependent on scrap quality.

Adjusting Turkey import scrap to iron ore on an 100% iron basis, and assuming 88% Fe for HMS 1/2 (80:20) and 62% Fe for iron ore, the equivalent iron-adjusted ratio for January-April was 1.864, little changed on 2020, and down from 2.19 in 2019.

While scrap became relatively competitive to iron ore since 2019 based on outright prices, the value of scrap/iron ore adjusted for yields has been relatively stable over 2020 and 2021.

In 2020, Platts 62% Fe IODEX had an 84.47% positive correlation with the Platts Turkish import premium heavy melting scrap 1/2 (80:20) index. In comparison, the correlation between the two steel raw material benchmarks was 34.42% in January-April.

Strong Chinese steel production growth in Q1 and margins supported iron ore, leading IODEX to an all-time high of $193.85/dry mt CFR China on April 27.

Iron ore’s price resilience has been compounded by tight supply, particularly in the last three months, as both Brazil and Australia experienced seasonal production reductions and southern Brazilian mines saw decreases in iron ore quality. These constraints are expected to ease in Q2 and later in the second half.

China’s import restrictions on Australian coals since October 2020 kept major spot coking coal buyers out looking for and Russian coal. Imports into Europe, Turkey, Brazil, India and northeast Asia referenced weaker Australian coking coal prices, compensating higher iron ore costs during a rebound in pig iron and steel rates.

Author

Viral Shah

  
Hector Forster

Editor

Manish Parashar

Commodity

Metals

Source: Platts

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