Ripple effect

China’s economy is stalling, and the repercussions are being felt throughout the global steel and scrap marketplace.

China has major problems with manufacturing surpluses, and Chinese exports are flooding the global marketplace, directly affecting global economies. Countries suffering from high volumes of low-priced imports are instituting tariffs against unfair export practices and dumping to protect their manufacturing industries.

The key elements for future success in the steel and scrap industries will require constant global market awareness, competitive cost reductions and prompt process and sales adjustments.
 

The paradigm shifts

In the last 10 years, the global steel and scrap markets have transitioned from regional to global dependency. Before 2004, the steel and scrap industries were local and regional businesses with no major outside influences. The shift began in 2004, when scrap left Chicago down the Mississippi River bound for China at a price that was only about $50 per metric ton off the finished steel sales prices of NAFTA (North American Free Trade Agreement) region steel plants. This created major turmoil in electric arc furnace (EAF) steelmaking operations’ scrap and steel markets. It was an introduction to global steel markets for all individuals concerned.

This scenario was created by soaring demand for steel in China. The world was attempting to export ferrous scrap and steel at attractive prices to the country to capitalize on China’s high demand.

Further, Turkey was rapidly expanding its steel exporting industry to satisfy increased Middle East demand and to simultaneously tap into demand in the developing Far East. Turkey increased its crude steel production to about 28 million metric tons per year, which required scrap imports of about 20 million metric tons annually by 2008. From 2008 to 2014, the country’s steelmakers further increased crude steel production to 34 million metric tons per year.

One-third of the scrap imported by Turkey was sourced from East Coast ports in the NAFTA region; one-third was sourced from European Union/Black Sea ports, and one-third was sourced from the Mediterranean basin.

By August 2008, ferrous scrap market dynamics were escalating to unbelievable prices and volumes. July 2008 saw No. 1 HMS (heavy melting scrap) prices exceeded $500 per metric ton, with some grades approaching $1,000 per metric ton.
 

A shock wave strikes

Everything was suddenly altered, however, as a shock wave struck in the second half of 2008. It drastically altered the perspectives of scrap suppliers and purchasers alike and resulted in steep monthly price declines, reaching less than $200 per metric ton by the fourth quarter. Welcome to global scrap market maturity.

A number of key factors contributed to the tremors the global scrap industry felt in late 2008. NAFTA export demands increased beyond sustainable supply levels, causing extreme competition between exports and local/regional scrap consumption. Turkey and countries in the Far East developed massive scrap appetites, with NAFTA region scrap exports growing to 23 million metric tons annually. NAFTA region economies also were in a growth period, which had begun to sputter in early 2008. Additionally, China’s crude steel production reached epic proportions compared with the balance of global steel production, as demonstrated by this chart:

Since the shock wave in late 2008, the markets went through a critical readjustment phase that ended in August 2009, approximately. Since then, the global markets have settled into a sustained monthly/quarterly rhythm, with price fluctuations varying in the $20-plus-or-minus range on monthly market buys.

Using published RMDAS (Raw Material Data Aggregation Service) pricing from Management Science Associates (MSA), Pittsburgh, for No. 1 HMS, the following NAFTA region scrap market dynamics have occurred, all of which have a direct effect on the planning of scrap buyers and sellers globally and locally:

• The shock wave caused the No. 1 HMS price to decline from $516 to $190 per gross ton by end of December 2008.
• Prices increased by $73 per gross ton to $264 by end of December 2009.
• Prices stayed in the $320 per gross ton range in 2010.
• Prices reached more than $400 per gross ton in 2011.
• Prices slide to the $350 range in the second half of 2012 and held there until fall 2013.
• Because of the severe winter, prices increased slightly to the $400 per gross ton range compared with fall 2013, but prices fell to the $370 range in the spring of 2014, where they stayed until November 2014, when prices declined to the $320 range.
• In January 2015 the market saw a $90 per gross ton decline in prices, reaching the mid-$250 range, and has not recovered to date.

Why would NAFTA region scrap prices rebound after the 2008 shock wave from 2010 until January 2015? What was the catalyst? The key element was China’s continued expansion of its crude steel production while the balance of the world’s countries suffered economic strife and basically zero crude steel growth. Everyone was exporting raw materials and semifabricated steel to China.

China’s steel production from 2008 to 2014 increased from 424 million metric tons per year to 823 million metric tons by the start of 2015. This represents a virtual doubling of China’s crude steel production during that time.

According to the Brussels-based World Steel Association, China’s crude steel production through July 2015 indicates that its total production for the year could be approximately 30 million metric tons less than in 2014. That would be the first time in more than 20 years that China’s steel production has decreased relative to the prior year.

Since the beginning of 2015, the global scrap market has experienced approximately a $90 per metric ton drop in scrap pricing, and demand globally is dwindling. Furthermore, China has reached a serious overcapacity of crude steel production. The gap between estimated 2015 China crude steel production of about 900 million metric tons annually, and local consumption is about 250 million metric tons annually.
 

Looking forward

Expect NAFTA region exports to decline from their peak of more than 20 million metric tons per year to less than 10 million metric tons per year. When or before this occurs, expect scrap prices to hold in the $150-to-$200 per metric ton range.

The following phenomena will contribute to this scenario:

• Turkey continues to require less imported scrap as it has converted from exporting 85 percent of its steel to exporting only 40 percent. Further, its steelmaking expansion program favors the integrated blast furnace/BOF (basic oxygen furnace) route.
• Turkey’s scrap imports have decreased from 24 million metric tons per year to 17 million metric tons per year.
• South Korea is approaching internal scrap balance as its economy’s scrap recycling industry reaches maturity. This is normally a 40-year cycle that Japan completed around 2005. Japan now has 10 million metric tons of scrap export capacity annually. China reached this balance in 15 years with its high concentration of blast furnace/BOF steelmaking in its expansion program.
• China is selling semifabricated and finished steel into the EU and Middle East regions as there are no current tariffs or restrictions. This is reducing local steel plants’ operating rates and cutting their scrap demand volumes.
• Commonwealth of Independent States/Russian scrap and finished steel also are being exported into the Middle East and EU as the ruble’s value has dropped considerably as a result of the oil price reduction globally.
• The Middle East, with its low-cost natural gas, has high demand for DRI- (direct reduced iron-) charged EAFs. Current historically low-cost iron ore will further decrease the appetite for scrap among steel mills in this region.
• Iran could soon join the international market and has DRI-based crude steel production of roughly 16 million metric tons per year.

Regarding the situation in Southeast Asia, China’s excess production of semifabricated steel is flooding the market and driving down demand for imported scrap. China lists rebar and hot rolled coil (HRC) prices in the $300 per metric ton range, cost and freight (CFR) as of early September. This eliminates imported scrap costing more than $150 per metric ton, CFR.

China is handcuffed from shutting down steelmaking production. The country’s steel plants not only supply and sell steel to the marketplace, they also supply power, water and many other local services to towns and communities. If they shutdown, the towns and communities shutdown. Unemployment is already excessive, exceeding 200 million people, and such a shutdown would compound this situation. Consequently, the mills have slowed down, which further increases their costs.

Sixty percent of China’s gross domestic product (GDP) is based on government investment, while 40 percent is based on population spending; whereas, in the U.S. and Canada and in European Union countries, 30 percent of GDP is based on government investment, and 70 percent is based on population spending.

The long-term effects of China’s current policies could include slower global economic growth in the G-8 countries (France, Germany, Italy, the United Kingdom, Japan, the United States, Canada and Russia); a recovery that lingers from two to five years, depending on the country’s policies; and global rationalization in many industries (i.e., iron ore, oil and gas, steel, scrap, etc.) to adjust to surpluses.

China currently has an excess of prompt industrial scrap. The country’s steelmaking operations are 90 percent blast furnace/BOF and require less than 10 percent scrap. Using a conservative yield loss calculation for steel manufacturing versus the scrap required for China’s crude steel production, a surplus of 100 million metric tons per year is estimated.

The country’s surplus of prompt industrial scrap is further compounded by the addition of its obsolete scrap collections. If similar to the NAFTA region, this material could be in the range of 50 million metric tons per year.

Expect continued global pressure from China to export its excess steel, and potentially scrap, to offset closing its manufacturing plants.
 

Closer to home

With the NAFTA region being a net importer of steel to supply its 150 million metric tons of annual steel consumption, expect continued industry challenges to establish tariffs on steel imports. The industry also will be challenged to push the operating rate above 80 percent to keep its pricing in line with import pricing.

Other issues affecting NAFTA region scrap market dynamics include excess available scrap. This will require new business models for scrap companies that wish to survive. Expect a rationalization in the scrap industry or consolidation with other raw material and service providers.

Scrap exports have been cut back to less than 15 million metric tons per year from previous highs that exceeded 20 million metric tons per year.

Imported steel into the NAFTA region of approximately 30 million metric tons annually adds another 3 million metric tons per year to the scrap reservoir.

Flat carbon EAF mills are now using DRI in their charge mixes to target high-margin flat products to compete with the captive market of integrated steel plants. DRI potentially replaces about 15 million metric tons annually of available busheling. DRI for the EAF steel plants is a game changer that allows EAFs to compete directly with integrated steel plants. It’s primarily an ultra-low copper issue for the automotive exposed steel grades.

Scrap price differentials are drastically changing. Busheling/prime scrap is taking on international bonus grade values as DRI is replacing it at a lower cost in NAFTA region EAF operations. If International 80:20 HMS is priced at $200 per metric ton, then expect shred to be priced at $210 per metric ton and bonus/prime to be priced at $220 per metric ton. In the NAFTA region, the differential between busheling and shred dropped $30, and today they trade close to equal.

Shredded scrap quality is a prime focus of steelmakers as they target 16 to 18 copper for their No. 1 shred. Shred demand is probably less than 40 percent of NAFTA region shredding capacity. This is a major concern for the viability of many shredding operations.

Expect scrap market prices in the U.S., Canada and Mexico to be in the $150 to $200 metric ton range for all grades as the availability and developing surpluses continue to grow globally until about 2020. It also may take the Chinese another five-year plan to solve all of the country’s current economic issues if possible.

According to the Washington-based Steel Manufacturers Association (SMA), steel production in the NAFTA region in 2014 was 121.09 million metric tons. Long products (wire rod and rebar, 16.75 million metric tons; structural and rail, 7.53 million metric tons; and semis and others, 13.78 million metric tons) accounted for 38.06 million metric tons, or 31.4 percent, of this production. Flat products (pipe, tube and plate, 16.01 million metric tons; hot and cold rolled coil, 44.22 million metric tons; and tin, galvanized and coated, 22.81 million metric tons) accounted for 83.04 million metric tons, or 68.6 percent, of total production.

NAFTA region steel consumption totaled 152.1 million metric tons in 2014, the SMA reports. The region imported 31 million metric tons to meet its needs in 2014, with 51 percent coming from Asia (20 percent from South Korea; 15 percent, China; 11 percent, Japan; and 5 percent Taiwan). Turkey supplied 8 percent of these imports; Germany, 5 percent; and Russia, 5 percent. The remaining 27 percent came from other countries.

Steelmakers in the NAFTA region must target replacing steel imports to improve their operating rates to reach the mid-80 percent range. This will require competitive pricing and superior quality.

John W. Harris is CEO of Aaristic Services Inc. He also served as director of raw materials for ArcelorMittal, retiring in June 2011. He can be contacted at john.harris@aaristic.com or at 705-791-2280.