India: Ferrous scrap prices hit 10-year high. Will prices rise further?

Ferrous scrap prices in India have hit a 10-year high, not just due to prevailing positive sentiments in the semis and finished steel markets after the gradual lifting of COVID-related regional lockdowns in Q1 FY'22. Other factors driving the rally in the domestic scrap market are the fast-rising prices of substitutes such as sponge iron and tightness in scrap availability, SteelMint notes. Importantly, the ongoing coal crisis and resultant rally in seaborne prices have triggered the rally in domestic sponge iron prices, while power shortage in the country threatens to impact production at different levels.
Prices on a roll

SteelMint assessed melting scrap (end cutting material) prices at INR 42,200/tonne (t) DAP Mandi Gobindgarh on 16 Oct'21 - an increase of INR 4,800/t month-on-month.

One reason why domestic scrap prices have risen surprisingly fast is the rally in the sponge iron market. Scrap and sponge iron are the main feed materials for steelmaking in the induction furnace (IF). While sponge iron accounts for 25% of India's crude steel production, ferrous scrap has a share of 17% in overall crude steel production. Prices of sponge iron in key Raipur market have risen by nearly 20%, m-o-m, to INR 35,500/t. As per SteelMint reports, Raipur sponge prices were lower than INR 30,000/t a month back.

Coal challenge

Sponge iron is facing the challenge of rising South African imported and domestic coal prices. In fact, sponge iron manufacturers are heard being unable to lift domestic coal for the past two months due to priority being given to the power sector by state-owned Coal India Ltd. (CIL) in terms of supply.

Import prices of South African RBI (6000 NAR) grade coal have risen to $260/t from $176/t a month ago, as per CoalMint data.

As sponge iron prices are trading at all-time highs, furnaces in north, west and south India have raised their scrap feed as the landed cost of sponge iron is quite at par with domestic scrap prices, SteelMint notes. Also, the yield is higher in case of scrap (90-95%) against around 85% in sponge iron.

Scrap generation to rise?

The other key reason for rising scrap prices is the lower domestic generation of ferrous scrap. The global semi-conductor shortage has impacted automobile production. A few auto majors have announced cuts in production volume and leading manufacturers such as Maruti Suzuki and Mahandra & Mahindra Ltd. reported decline in sales in Sep over Aug.

SteelMint estimates that ferrous scrap generation dropped 20-30% in the Aug-Sep period. Moreover, the region-based lockdowns in Q1 FY'22 lowered the overall pace of domestic scrap auctions from dismantled plants.

Meanwhile, India's scrap imports have trended on the lower side. Notably, scrap imports have been showing a downtrend for the last few months. Aug imports dropped to 0.28 mn t, while Jul levels were at 0.31 mn t, as per SteelMint data.

However, scrap import offers to India continue to rise and market sentiments are currently bullish due to good demand and rising prices in Turkey.

Feed for BF

It deserves mention that the integrated steel mills in the country are raising the scrap feed ratio in their blast furnaces in an effort to control carbon emissions.

SteelMint reported earlier that Tata Steel has started sourcing high-quality domestic scrap for its steel operations, mainly for the company's flagship Jamshedpur plant. The steel major is sourcing end-cutting scrap and the preference is for high-carbon blooms and rail.

Outlook

So, the current differential between domestic sponge iron and ferrous scrap prices create room for further rise in scrap prices. Moreover, rising prices may also boost domestic scrap output and faster generation of obsolete scrap. High prices should be an incentive for generation of more household scrap.

However, on the other hand, the deepening power crisis in India may force high power-consuming IF and EAF steelmakers to cut back on production. It could have a negative effect on ferrous scrap prices, though.

In effect, scrap prices will depend on how the sponge iron mills operate, i.e. whether declining coal inventories force sponge producers to scale back production. Sponge producers may not have a way out as more and more domestic coal is channelled to the power sector, while import prices remain high.

One key aspect we need to factor in is the rise in power prices on prevailing supply crunch. If state governments buy power from private utilities at a high price due to the prevailing shortage, power-intensive units of steel production would need to pay higher to buy power, which will naturally raise their cost of production per tonne.

So, scrap prices are expected to rise due to the impact on sponge iron production and increase in scrap sourcing, as a result. In addition, the narrowing margin between domestic sponge iron and scrap prices has created space for a further rise in scrap prices. We anticipate, therefore, that prices could rise further.