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- Ferrous scrap consumption rates of Chinese integrated mills appear to have declined this year on a per-tonne basis. This year has seen the ratio of pig iron to steel output tighten, leaving increasingly less room for scrap consumption. Over the first four months of 2020, the pig iron-to-steel ratio has been above the prior-year level, indicating increasing utilization of hot metal/pig iron in the crude steel production mix in January-April, typically in place of ferrous scrap. Apart from generally diminished price-attractiveness of scrap versus other feedstock options over the past years, this trend also reflects tight scrap supply observed in the market in recent months, particularly in the first quarter of this year amid the Covid-19 outbreak.
- Mills have returned to relatively normal working levels following sharp drops earlier in the year, with China's blast furnaces and electric-arc furnaces (EAFs) operating above 90% and 75% capacity respectively since mid-April. This suggests that there is little room left for more scrap consumers to return to the market, with EAFs having only some space to raise operating rates further. We expect therefore that scrap prices will trend downward as scrap supply continues to improve.
- The Chinese scrap market has already been relatively isolated from global price trends with both exports and imports being almost non-existent. In the rest of the world, lately prices also appear to have decoupled from the Turkish import scrap market, which traditionally has been a leading benchmark for international ferrous scrap and iron metallics markets. In particular, European local scrap markets are more likely to be guided by domestic dynamics in the near term, which we expect is partly attributed to the easing of the Covid-related lockdown restrictions.
- Similar dynamics are observed in the United States, where measures to mitigate the spread of Covid-19 caused a drop in scrap supply, especially for prime grades, supporting prices. Automotive production – a major generating activity for prime scrap – was forecast to fall by 41.5% year on year in the second quarter. The outlook for scrap prices is stable-to-up in the near term, as reduced demand meets tight supply. Scrap consumption has also weakened, with mills cutting capacity utilization significantly. But buyers will be relieved as many automotive plants have begun to restart operations, which should begin to ease prime scrap supply tightness.
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