China looms large for Japan's scrap industry

Last week's news that within this year, China could release long-awaited national guidelines relating to steel scrap standards - and the possibility that this may see present restrictions on scrap imports being eased - attracted great attention in Japan, though the feeling is rather mixed from sellers and buyers.

Trading sources in Tokyo welcomed the prospect of a new customer for Japan-origin steel scrap, and right on Japan's doorstep. But scrap consumers, especially the Japanese electric arc furnace steelmakers, expressed concern that large volumes of scrap leaving Japan might reduce availability domestically and prices might surge as a result.

Japan's steel scrap exports may change fundamentally with China

"These days, China is buying only a tiny volume of scrap from Japan, and how we can grow this business in future is something very exciting," a second scrap trader in Tokyo said.

Currently, China's scrap import volume is determined by monthly quotas awarded by a state-supported organization via auction. In its allocation in September, China awarded quotas for ferrous scrap totalling just 2,610 tonnes and granted no quotas in August, as Mysteel Global reported.

While the Japanese traders might be excited at the prospect of China's huge market for ferrous scrap opening wider, Japanese mini-mills are very concerned, given the massive influence China has in global markets for steel raw materials such as iron ore.

"We are afraid that Japanese scrap prices will be impacted by strong demand from China," a procurement official with a mini-mill in Osaka admitted. "It may result in us having to pay more for our scrap - to make sure we have enough supply locally. That could force us to raise product prices higher to ensure there is an adequate metal spread in the future," he warned.

Japanese mini-mills are currently paying Yen 26,000-27,000/tonne ($247-256/t) to secure H2 grade scrap, but the mini-mill official suggested that were the Chinese market to open wider to Japanese scrap imports, the H2 price might exceed Yen 30,000/t.

Currently, about 80% of the domestically-produced ferrous scrap in Japan is consumed internally by mini-mills. Data from the Japan Iron and Steel Recycling Institute (JISRI) for fiscal 2019 (ending March 2020) showed that steel scrap handling volume in Japan totalled 25.67 million tonnes, down 11.3% on year, while crude steel output by domestic mini-mills reached 23.53 million tonnes, down 9.6% on year.

For several decades, Japan, once a massive importer of ferrous scrap (mostly from the US), has been a net exporter of scrap - with South Korea traditionally being the largest buyer, but this is changing, which is why Beijing's new regulations governing the industry in China are being closely monitored in Japan.

Industry grouping the China Association of Metalscrap Utilization (CAMU) and related governing bodies such as the Ministry of Ecology and Environment and the Ministry of Industry and Information Technology have been working closely on specifying and standardizing domestic steel scrap supplies and the guidelines of the industry's qualification and development.

Standardizing and coding domestically-produced steel scrap will greatly facilitate steel scrap quality checks and trading, and may allow China to relax restrictions on the country's steel scrap imports, CAMU vice chairman, Li Shubin, commented recently. When the new regulations will be announced remains unclear but Chinese sources of indicate they may be released by end-December this year, as Mysteel Global reported.

The Japanese steel export markets quietly changing

Any move that opens China's vast potential market to more foreign scrap would delight Japanese scrap collectors and traders who in recent years have been trying to develop new scrap customers abroad, especially when South Korea is seen as becoming a large scrap exporter, not an importer.

One reason why South Korea is the largest buyer of Japanese scrap is its close proximity to Japan, as its major EAF production hubs such as Incheon near Seoul and Dangjin, some 100 kms south, are less than a week's sailing from Japan's main export dispatch ports on Tokyo Bay.

Being close to Japan has also meant that when exporting to South Korea, the cargoes are generally around 2,000 or 3,000 tonnes and Japanese shippers can use small sized tramp vessels. When delivering scrap cargoes to customers further abroad at 10,000 and 15,000 tonnes in one delivery, traders usually use larger-sized carriers for delivery fee merit, according to scrap traders in Tokyo.

For example, currently the freight charge for shipping 5,000 tonnes of heavy scrap to Vietnam in a small vessel is about $30/tonne but for a larger cargo of around 10,000 tonnes, the charge is lower at around $24-25/t.

For years, the Japanese traders were unable to export in large volumes, and Korean ports were unable to receive large vessels carrying scrap either. This is changing with the Japanese traders having become aggressive exporting scrap to Bangladesh as buyers there have started receiving bulk scrap, and at the same time, more Japanese traders have gained access to larger sized vessels and expanded loading facilities.

For 2019, Japan exported 7.66 million tonnes of ferrous scrap, up 3.4% on year, within which heavy scrap (including Japan's H2 grade) totalled 4.02 million tonnes, up 8.8% on year, followed by Shindachi (new cut) grade, at 1.55 million tonnes, up 14.9%, and though smaller at just 672,000 tonnes, Japan's shredded scrap exports soared by 52.7% on year, according to JISRI.

By country, the largest recipient of all three grades combined was still South Korea, which took 3.18 million tonnes last year, down 5.8% on year, while the volume to Bangladesh rocketed by 283.2% on year despite that the total was merely 318,202 tonnes, according to the Trade Statistics of Japan.

"I'm confident that scrap exports to Bangladesh will grow further, but if China enters the Japanese scrap market sphere, it will be a boon, as China is closer, making it easier to deliver and to arrange smaller-sized vessels like those to South Korea," a Tokyo-based trader predicted. Japan's overall scrap export volume may not rise, but the destinations will be changed largely, he added.

Japan's ferrous scrap export and share by destination for the calendar year of 2019

(Heavy scrap, Shindachi, Shredded, unit: tonnes)

Source: Trade Statistics of Japan

Sales of Japanese ferrous scrap to Bangladesh have already expanded further so far in 2020, with exports during January-August totalling 475,946 tonnes, already higher than the total during all of last year. Bangladesh's export share during the eight months also rose to 9.3% from 5.1% for full year 2019, while shipments to South Korea during January-August at about 1.5 million tonnes saw Korea's share drop to 29.3% from 51% in 2019, according to the government statistics.

Significantly too, Japanese scrap exports to Malaysia - though not large in volume - rocketed in 2019. Trading sources explained that the China-invested integrated mill in Kuantan in East Malaysia, Alliance Steel, has started buying Japanese scrap for its melt and this business is expected to continue, as the 3.5 million tonnes/year steel mill was commissioned in mid-2019.

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