FOCUS: Five key currency pairs to watch when trading steel, scrap in 2019

Currency exchange rates can make or break a steel trade, and with forex volatility in emerging markets expected to continue for the rest of the year, the Asian ferrous markets are likely to see more price fluctuations before the end of 2019.

These five currency pairs should be on your watch-list for the significant influences they could bring to bear on key global steel and ferrous scrap trade flows.

1. US dollar-Chinese yuan
The US dollar-Chinese yuan exchange rate is expected to remain at a “new normal” of more than 7 yuan to $1, market sources have said recently, in light of the continuing US-China trade war.

The yuan depreciated to 7.1417 yuan to $1 on August 26 from 6.7414 yuan to $1 on May 1 - before which the Chinese currency had a relatively stable exchange rate with the dollar - with the Chinese central bank expected to allow it to continue to depreciate, to cushion the effects of the trade war with the United States.

The economic battle between the two global powers ramped up a notch after US President Donald Trump imposed more tariffs on $550 billion-worth of Chinese goods, after China said it would impose additional tariffs at 5-10% on US-origin imports, including steel and vehicles.

The weakening yuan has made Chinese steel exports more competitive, with China-origin hot-rolled coil (HRC) continuing to dominate the Southeast Asian import markets alongside Indian coils.

Fastmarkets’ steel HRC index, export, fob main port China, was $469.06 per tonne fob on August 26, down from a year-to-date peak of $538.25 per tonne on March 19.

Import prices in the key Vietnamese market have tracked the falls. Fastmarkets’ price assessment for steel HRC, import, cfr Vietnam - which mainly looks at Chinese 2-3mm re-rolling-grade SAE1006 HRC and equivalent products sold into Vietnam - was $470-475 per tonne cfr on August 26, down from $550-555 per tonne on March 11.

China-origin rebar has also regained full competitiveness in the Singapore rebar import market, and is now being offered at similar prices to Indian and Turkish materials, which had been the most economically priced in previous weeks.

Fastmarkets’ steel reinforcing bar (rebar) index, export, fob China main port, was $471.88 per tonne on August 26, down from a year-to-date peak of $540.25 per tonne on April 23.

The weekly price assessment for steel reinforcing bar (rebar) import, cfr Singapore - which mainly looks at cargoes sold into Singapore on a theoretical weight basis - was $475 per tonne on August 26, down from $500-515 per tonne on February 18.

Further depreciation of the Chinese yuan will cause more price falls in the ferrous complex, with both buyers and sellers negotiating at lower levels.

2. Japanese yen-South Korean Won
Politico-economic tensions between Japan and South Korea are at their highest to date after Japan imposed broad new trade restrictions on South Korea in early July, including export controls and the removal of preferential trade status. The South Korean Won fell steeply to 11.5363 Won to ¥1 on August 26 from 10.7205 Won to ¥1 on July 1, when Japan said it would restrict the export of key chemicals to its neighbor.

South Korea has rescinded Japan’s status as a preferred trading partner and has stepped up radiation checks on Japan-origin scrap, delaying customs clearances and causing an oversupply of Japanese scrap in the market.

“Shindachi scrap has been offered to Vietnam at lower prices than plate and structural [P&S] scrap, indicating that demand from South Korea is so bad that what used to command a premium is now being offered at a discount to the rest of Asia,” a trader in Vietnam told Fastmarkets.

Shindachi was offered at $320 per tonne cfr Vietnam in the week ended August 23, compared with $325 per tonne cfr Vietnam for P&S scrap.

South Korean buyers are enjoying a buyers’ market, looking to purchase only on an as-needed basis, and waiting for favorable offers before purchasing any spot cargoes. The August Kanto Tetsugen tender also closed at an average price of ¥27,714 ($262) per tonne on August 9, down by ¥346 per tonne from the July auction.

Continued forex volatility between the yen and the Won will cause disruptions to ferrous trade flows in Asia, if steel and scrap from the two countries must be rerouted to other parts of the region.

3. US dollar-Indian rupee
The Indian rupee continues to slide against the US dollar in the face of capital outflows from India, and tracking the falls in values of major regional currencies such as the Chinese yuan. Sharp falls started in the second week of July - when the rupee rose to its strongest against the dollar - and are continuing.

The Indian rupee closed at 71.9651 rupees to $1 on August 26, compared with 68.4779 rupees to $1 on July 11.

The weak rupee and bearish domestic steel demand have caused Indian steelmakers to offload volumes to other parts of the world, setting price floors in Asia for finished products such as HRC, billet, rebar and slab in recent weeks.

Indian billet has been sold to key Southeast Asian markets at $425-430 per tonne cfr. This was below the assessment on August 26 for steel billet, import, cfr Southeast Asia, at $435-445 per tonne, and $5-10 per tonne less than for Russian materials. Meanwhile, Indian slab has been sold to Southeast Asian buyers at $425-430 per tonne cfr.

Indian HRC is almost always the most favored option for Vietnamese buyers because of its competitive prices, which undercut those for similar materials from China. Market sources singled out automotive demand as plunging year-on-year, exacerbated by the monsoon rains.

Indian rebar has also been competitive in the key Singapore import market, against materials of Chinese, Turkish and Qatari origin.

4. US dollar-Turkish lira
The volatility of the Turkish lira continues much as it did last year, and the currency’s value has gone down by as much as 9% this year. The selloff of the Turkish lira amid an investor flight from risky currencies has exacerbated the bearishness in the Turkish steel markets.

Its latest bout of weakness started in early August, causing the lira to fall to TRY5.7855 to $1 on August 26 from TRY5.5046 to $1 on August 8. The lowest rate for the year-to-date was TRY6.1801 to $1 on May 9.

Billet and rebar offers have been falling quickly in recent weeks, with offer prices for Turkish steel to Asia trending downward while Turkish steel mills struggled to find demand in their domestic markets. Major Turkish steel mills have lowered their rebar offers to $440-445 per tonne fob this week from $445-450 per tonne fob last week.

Scrap purchasing by Turkish steel mills has also been limited in recent weeks due to the poor demand in the downstream markets, with scrap buyers looking for only limited quantities of material.

Fastmarkets’ daily index for steel scrap, HMS 1&2 (80:20 mix), US origin, cfr Turkey, was $281.32 per tonne on August 23, down from a year-to-date peak of $333.17 per tonne on February 9. The US East Coast price for steel scrap, HMS 1&2 (80:20), export index, fob New York, fell to $269 per tonne fob on August 21 from a year-to-date peak of $315 per tonne fob on February 13.

This has caused other scrap prices to trend downward as well, given that US sellers now have ample inventory to offer to other spot markets in Asia.

Fastmarkets’ daily price assessment for containerized cargoes of steel scrap, HMS 1&2 (80:20 mix), US material import, cfr main port Taiwan, fell to $260-265 per tonne on August 27, down by $5-7 per tonne day on day due to ample offers of ferrous scrap from sellers.

5. Pound sterling-euro
The sterling-euro currency pair has been more stable this week, but that does not mean it will remain so in the weeks to come. The pound has been steadily losing value against the euro for much of this year, falling to £0.9076 to €1 on August 26 from a year-to-date peak of £0.8549 to €1 on May 4.

Sterling was tading at £0.8143 to $1 on August 26, while the euro was trading at €0.8978 to $1 on the same day.

The new prime minister in the UK, Boris Johnson, is still angling for a deal with the EU for the country to leave the union (“Brexit”), with the threat of a no-deal Brexit being enacted on October 31.

The European steel market is also in the doldrums on thin demand caused by economic woes. The resignation of Italian prime minister Giuseppe Conte has led to political parties in the country scrambling to form a new government, and further muddying the conditions for ArcelorMittal while it attempts to conclude its purchase of steelmaker Ilva, after the takeover was postponed by Italian authorities until September 15.

Buyers are questioning increases in offers by steelmakers in Europe, especially because of the thin demand and an expected short-lived recovery in demand in September.

Fastmarkets’ prices for HRC in Northern and Southern Europe have trended downward steadily over the course of this year.

The weekly price assessment for steel HRC, domestic, exw Northern Europe, was €465-480 ($518-535) per tonne on August 21, down from €510-530 per tonne on February 20, while the corresponding weekly price assessment for steel HRC, domestic, exw Southern Europe, was €435-460 per tonne on August 21, down from €485-510 per tonne on February 27.
 

Paul Lim

paul.lim@fastmarkets.com

Published

Paul Lim

August 28, 2019

06:45 GMT

Singapore