China: Chances of Scrap Price Cuts are Limited

Recent price drops may lead to better demand for China's domestic steel scrap, thus limiting the room for further price declines, even though China's domestic steel prices are still under downward pressure amid global steel market uncertainties when the spread of COVID-19 has yet been under control, market sources agreed with Mysteel's prediction.

Bearishness has prevailed in China's steel and scrap market, and scrap price has been weak after the Chinese New Year holiday, "but we should not lose hope, as recent scrap price drops have widened the price spread between rebar and scrap, which may encourage more electric-arc-furnace (EAF) producers to resume operations and blast furnace (BF) mills to use more scrap, and in turn helping to stabilize scrap price," a Shanghai-based steel analyst said.

As of April 7, China's steel scrap price index decreased to its nearly 21-month low of Yuan 2,262.3/MT (USD 323.2/MT), or down Yuan 227.2/MT on month, compared with a Yuan 8/MT decline over the period to Yuan 3,592/MT for China's national HRB400 20MM dia rebar price, though the latter was at its one-month low level too. Both include the 13% VAT.

Scrap price decline to be limited in April on better demand

As of April 3, the price spread between rebar and scrap had widened to Yuan 1,260.9/MT up by Yuan 217.6/MT from the record low on March 10, and the price spread between pig iron and steel scrap in East China also enlarged to Yuan 74/MT compared with a Yuan 20/MT difference in late February, which has indeed encouraged EAF producers to ramp up their steel output, according to Mysteel's survey.

"One month ago, we were so close to the break-even or and lossmaking, but now we have a margin of Yuan 150-200/MT," an official from an EAF mill in East China's Anhui province shared happily.

Mysteel's regular tracking showed that as of April 2, the capacity utilization rate of the 53 independent EAF producers across China under surged by 39.6 percentage points on month to 47.14%, and the daily steel scrap consumption among 61 steel producers including both BF and EAF mills increased by 57.7% on month to 2,485 MT/day.

Higher consumption may not lead to any price recovery in the near term, though, as China's domestic steel prices are still under pressure amid all the uncertainties in the domestic and global economies.

Besides, the supply may grow further if the China Association of Metalscrap Utilization (CAMU) can convince the central government to spare the imported steel scrap from restriction, enabling the Chinese steel mills to have access to imported scrap, which may indirectly impose pressure on iron ore prices, and scrap price has been closely co-relating to the primary steelmaking raw material price all along, Mysteel Global understands.

China's steel scrap price suffered in Q1 on slower demand recovery

In the first quarter, China's steel scrap price had been under greater pressure, with the national scrap price down Yuan 171.4/MT in total by the end of March from December 31, partially due to the fact that supply outgrew the demand from the domestic steel mills and the panic delivery from the suppliers to steel mills on price declines, which further dampened the scrap price in turn, Mysteel noted.

As of April 3, the operational rate of steel scrap collecting and recycling enterprises qualified by China's Ministry of Industry and Information Technology had returned to 87%, up 66 percentage points from early February, and daily scrap deliveries to the 61 steel mills under Mysteel's survey averaged 3,442 MT/d, up 143% on month or 13.7% on year.

As a result, total steel scrap stocks at the 61 EAF and BF steel mills increased for the fifth week over March 5 - April 2 by another 15.8% on week to 2.5 MnT.

On the other hand, China's steel demand has only started reviving since mid- or late March because of the impact of the COVID-19, and it will take quite some time to consume the high inventories at both the Chinese steel mills and trading houses as many BF mills had been operating as per normal even during the lockdown period in China.

Scrap feeds into blast furnaces and converters of China's 129 integrated mills under Mysteel's regular survey, however, fell to 11.25% on average for March, down 3 percentage points on year, as the steel mills had been staying away from the comparatively more expensive scrap and been focusing on bringing down steelmaking cost by blending different grades and forms of iron ore, Mysteel Global noted.

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.