FOCUS: Pandemic sees domestic scrap prices disconnect from international market

The Covid-19 pandemic has resulted in a shortage of ferrous scrap in many key supply locations, provoking a 21% rise in international scrap prices in just 12 days from April 3 to April 15. But despite this, domestic prices in many areas were settled lower in April’s monthly negotiations.

Prices on the international market have been on a rollercoaster ride over recent weeks.
The price of steel scrap, HMS 1&2 (80:20 mix), North Europe origin, cfr Turkey, was $265.53 on March 17. But three significant price drops between then and April 2 lowered the price to $200.98 per tonne, rattling the global markets with a $64 per tonne drop in fewer than 12 days.
From the start of April, prices jumped upward again in a similarly sharp movement, to $252.08 per tonne on April 14.
Turkey, the largest scrap importer, usually sets the trend for global scrap price movements, but the Covid-19 pandemic has affected countries around the globe.
Following the implementation of lockdown measures in various nations, steelmaking, construction sites, infrastructure projects and automotive producers have reduced production or suspended it entirely, which has led to demand falling off a cliff-edge, as well as hugely reduced generation and collection of scrap.
UK yards remain closed
The UK has been in lockdown since March 23 and now has had more than 148,000 cases of the disease, according to the World Health Organization.
Many British scrapyards have closed and sent their employees home, including companies such as Sims and EMR, which closed sites and reduced scrap intake from March 27. Domestic steel producers such as British Steel and Tata Steel adjusted their production levels downward due to the drop in demand.
Because of this, at the start of April, some UK monthly scrap prices were settled at a loss of £40-60 ($49-74) per tonne, although by mid-April some reported closing down by only £20-30 per tonne.
There were also reports that yards had no scrap left to sell, but continued to sell material they did not have, in the hope that generation of scrap would revive in time to deliver the promised cargo.
There were indications that some UK yards were looking to reopen and some automotive manufacturers were piloting restarts, but it will take several weeks, if not months, for scrap stocks in the country to rebuild. The country has not yet relaxed its lockdown and the proposed date of May 7 could be discarded.
US sellers look to exports
In the United States market, a similar trend has emerged during April, with market participants either taking on heavy discounts of as much as $50 per gross ton across obsolete grades in various regions in the domestic monthly settlements, or choosing not to trade on speculation that the heavily reduced availability of scrap would lead to a rebound in the months ahead.
Higher US export prices angered some domestic scrap dealers, which faced lower prices despite limited inventory, while unfavorable offers by domestic mills sent others to the sidelines. The US sent six cargoes to Turkey during April while prices rose, Fastmarkets understands.
One market participant said that there was a complete disconnect between the US and international scrap markets. The domestic US market generally gets higher prices than the export market, so for export prices to be so much higher than those in the US is rare.
It was reported that many scrapyards had closed or were reporting that inflow volumes had dropped by 50-80%. Scrapyards have been furloughing staff and idling assets for a month.
ArcelorMittal in March led a big wave of capacity cuts in North America when it hot-idled the No4 furnace at its Indiana Harbor steel facility outside Chicago. It has also hot-idled the No3 furnace at its Dofasco subsidiary in Hamilton, Ontario.
These moves were in addition to plans to “blow down” the C6 blast furnace at its flat-rolled steel mill in Cleveland due to lower automotive demand.
As a result of the pandemic, US crude steel production has fallen to a four-year low.
While market chatter has already emerged that domestic US steel mills would like to reduce scrap prices again in May, due to shrinking order books and falling finished steel prices, scrap dealers were adamant that the market would move sideways at worst because of the low supply.
But the market was now showing signs that some assets were moving toward modest restarts, while quietly some deals were reported to have been made at March price levels for No1 busheling.
EU mills reduce scrap intake
In Europe, domestic prices revealed a similar picture in the middle of April, following long lockdowns in countries such as Italy and Spain. Many steelmakers have closed since Italy began its lockdown on March 9, and Spain did likewise on March 30, with both periods subsequently extended.
The recovery of ferrous scrap prices in Turkey has not had a positive effect on domestic raw material prices in Italy and Germany, because reduced demand has offset the effects of rising international prices, market sources said.
Fastmarkets’ monthly price assessment for steel scrap, No E3 (old thick steel scrap), domestic, delivered mill, Germany, was €230-235 ($249-254) per tonne on April 16, down by €10-30 per tonne month on month from €240-265 per tonne in mid-March.
One steelmaker was reported to have agreed a deal at €195-200 per tonne delivered early in April, when Turkish ferrous scrap prices were declining. By the middle of April, however, German scrap suppliers had started to demand higher domestic prices in line with the recovery of the international market.
Scrap collection has been low due to the pandemic, market sources said.
“Collection of new scrap collapsed due to stoppages of automotive companies. Old scrap collection decreased due to lockdowns and slowdowns in all kinds of activities,” a German trader said.
A large number of European automotive manufacturers have temporarily halted operations to help prevent the spread of Covid-19.
The positive effect of the combination of higher international scrap prices and limited availability in Germany has, however, been offset by the negative consequences of poor demand.
German steelmakers have been “operating at a capacity utilization rate of about 30% at best,” a Northern European steelmaker said.
A number of European producers have cut output in their attempt to balance lower demand and supply in March. Some producers have resumed operations at a low rate in April.
The Italian steel sector will see a gradual revival next month, with lockdown restrictions to be eased from May 4. Construction, the key industry for electric-arc furnace-equipped long steel producers, will also resume in May.
In April, domestic prices for ferrous scrap also dropped in Italy due to the fall in demand from steel production cuts. Despite the initial expectations of market participants, the recovery in international scrap prices did not result in a rise in domestic prices.
Fastmarkets’ monthly price assessment for steel scrap, No E3 (old thick scrap), domestic, delivered mill, Italy, was €205-215 per tonne on April 9, down by €15 per tonne month on month from €220-230 per tonne in mid-March.
As a result, domestic scrap prices recovered by about €10 per tonne last week and market participants expected to see a similar rise in the last week of April.
In the meantime, domestic prices in Spain have recovered by about €20-25 per tonne month on month, according to market participants. Demand for scrap has been better in Spain compared with other countries, sources said.
Market participants had no clear outlook for price development in Europe. The price trend will depend on the extent of lockdowns in different European countries, the capacity utilization rates at steel mills and the workload of scrap collectors, they said.
Some market sources, however, believed that because steelmakers have slowly started to return to operation, demand for ferrous scrap will improve. This, combined with rising prices in Turkey, might support a recovery of European prices for the raw material.
With lockdown restrictions being eased in Spain and Italy, construction sites have seen more activity and automotive producers have announced dates for restarts. Mills have moved toward restarts and were sourcing raw materials, increasing the shortage of scrap and supporting domestic scrap prices.
But production levels for some have been below 50% and demand levels still remained weak, so scrap requirements may be lower than expected.
Turkey starting to struggle
Turkish mills were only able to accept higher scrap prices in recent weeks because they have had enough demand to raise their long steel prices, according to one US trader.
“The saving grace [for scrap sellers] is that Turkish rebar demand has been good. I hope and pray that this continues,” he said earlier in April, adding that Israel was one of the countries that has been booking tonnages from Turkey over the past month.
Turkey has increased its rebar exports to locations in Asia and the Middle East in recent years. Exports to Yemen totaled 1,032,054 tonnes in 2019, up by 29.1% from 799,287 tonnes in 2018, according to ISSB data. Singapore took 700,721 tonnes of Turkish rebar in 2019, up from 498,632 tonnes the year before, a 40.5% increase.
But steel market conditions in Turkey have weakened as April has progressed. Indeed, while European countries moved to remove their lockdowns, Turkey has begun to introduce stricter measures, with current estimates of coronavirus cases in the nation of around 110,000.
Measures introduced at the start of April restricted movement for the young and elderly but, as case numbers grew, further lockdown measures to control the spread were implemented. These included a 48-hour curfew on the weekends and a four-day lockdown linked to a recent public holiday in 31 provinces, which affected three-quarters of Turkey’s population.
Several steel mills in the country reduced output, while some halted production. This added to the closure of automotive producers in the country, tightening supply.
Despite a period of relative stability over the past 10 days, mills were struggling to sell rebar to their local markets due to the higher prices resulting from the rise in scrap costs and a weakening Turkish lira. They were also struggling to export long steel products due to the pandemic.
The recently introduced measures linked to the outbreak have hurt demand for finished steel products, which could lead to a further reduction of output at mills and knock-on to market sentiment, and therefore scrap prices.
The Turkish lira continued to lose ground against the US dollar because of the pandemic, declining to 6.99 lira to $1 on April 27, compared with 6.72 lira to $1 two weeks earlier, according to Oanda.com.
A stronger dollar usually leads to a rise in domestic rebar prices since Turkish steel mills buy most of their raw materials in US dollar transactions and sell their finished goods for lira.
Prices for rebar in Turkey have moved upward, with Fastmarkets’ price assessment for steel reinforcing bar (rebar), domestic, exw Turkey, averaging 3,214 lira per tonne in April to date, up from 3,089 lira per tonne in March.
“Suppliers collected scrap at low costs, when the prices hit $200-210 per tonne, [and] they are now trying to turn that material into cash,” a market participant said.
“We raised our rebar offers for local buyers because of the weakening lira and rising scrap costs. But demand is weakening every other day,” a Turkish mill source said.
The construction sector has also been heavily affected, which has reduced the demand for local steel products and has seen permissions for new construction being delayed, as well as a drop in house sales.
“I think the market will remain weak in the short term. Scrap prices went down sharply because of the Covid-19 outbreak, which reduced demand from the mills. But they rebounded quickly, because the scrap supply was significantly reduced after automotive factories and scrapyards closed,” a market source said said.
“These quick changes in the market were mostly because of low market activity. We can expect to see even lower prices for scrap and rebar in the coming months, because a recovery is very unlikely,” he added.
While Turkey may source its scrap material from western countries, following the imposition of Section 232 import duties by the US and the subsequent similar imposition of European import quotas, Turkey has increased its exports of finished steel products to Asia in recent years.
This was clear in the 65% year-on-year decrease of shipments sent to the US, down to 107,929 tonnes in 2019, from 308,326 tonnes in 2018.
Turkey used up its full European import quota for rebar of 316,614 tonnes long before the July 2020 renewal date, with countries such as Germany reporting volumes down year-on-year by 67.8% and Italy by 48.9%.
The global markets will no doubt continue their tussle over limited scrap supply and lower demand, while various countries emerge from their lockdowns and return to work. But others will be tackling their outbreaks for a while longer.
 

Cem Turken

cturken@fastmarkets.com

Maria Tanatar

maria.tanatar@fastmarkets.com

Lee Allen

lee.allen@fastmarkets.com

Carrie Bone

carrie.bone@fastmarkets.com

Published

Cem Turken

Maria Tanatar

Lee Allen

Carrie Bone

April 27, 2020

19:38 GMT

London, Mugla, Pittsburgh, Singapore