India's ferrous scrap imports decline over 15% in Jan-Aug'24. Know why?

• Red Sea crisis elevates freights, delays delivery
  
  
• Cheaper sponge competes with overseas material
  
  
• Steel demand may improve in Q3, support scrap
  
  

Morning Brief: India's ferrous scrap imports declined by around 18% to 5.61 million tonnes (mnt) over January-August, 2024 (8MCY'24) compared to 6.82 mnt recorded in the corresponding period last year (CPLY), reveals BigMint data.

Grade-wise imports

Amongst all the grades, HMS led with over 2,926,352 tonnes (t) but this was a drop of 14% compared to 3,409,628 t in CPLY. Busheling showed the steepest decline of 53% at 71,759 t (151,498 t).

Factors that dragged down imports

Red Sea issue raises freights: The Red Sea crisis, which shows no signs of abating since it started in October last year, has taken a toll on cargo movement. Several ships were attacked with the onset of the strikes last year which have been forcing vessels to avoid the Suez Canal and take a longer route around the Cape of Good Hope. Sources inform that the tonne per mile has increased by 8% which technically means ship utilisation has gone up 8%, increasing bunker usage. Secondly, the lead time has also gone up. Scrap consignments which earlier used to take 30-40 days are now reaching India's coasts after 55-60 days. Both factors have pushed up freights, resultantly making cargoes costlier.

Freights on 20-ft containers full loaded on the UK-to Indian west coast hovered at $975/t in the pre-Red Sea crisis period but had shot up to $2,100/t and are currently ruling at $1,650/t.

Landed cost of imports higher than domestic scrap: The escalated freights helped to keep the tags of imported scrap inflated compared to domestic material, making the former unviable for Indian buyers. In fact, except for a couple of months, imports so far this year have been consistently costlier compared to domestic scrap. For instance, average landed prices of imports in the first eight months of this calendar worked out to INR 35,659/t ($426/t) in rupee parity whereas HMS 80:20 was at INR 33,925/t ($405/t), lower by INR 1,734/t ($21/t), obviously drawing buyers to the latter. Imported prices also rose on container shortage. Consequently, domestic scrap consumption increased to nearly 17 mnt in these eight months compared to around 14 mnt in CPLY.

Cheaper sponge iron competes with imported scrap: Prices of sponge iron, another competing raw material, showed a drop, giving imported scrap a run for its money. Induction furnace mills increased sponge iron in their feed because of their cost effectiveness compared to imported scrap and also due to increased sponge supplies. India's sponge iron production saw an addition of 3 mnt y-o-y to 35 mnt during January-August 2024 amid an increase in sponge capacity additions in central and eastern India. Data shows that average prices of imported scrap were higher compared to sponge in the January-August period. For instance, if imported scrap averaged INR 35,659/t ($426/t) in this period then sponge was at a lower INR 26,856/t ($321/t) as per BigMint data.

Falling finished long steel demand: One key reason for lower scrap imports was the drop in demand for Indian finished long steels. This resulted in significant production cuts across India, including the induction furnace segment that primarily uses scrap as feed. Low sales led to liquidity drying up, and consequently both local scrap and sponge prices fell, the latter also affected by falling iron ore prices. In the initial part of the year, buyers were cautious ahead of the general elections. Subsequently, monsoons set in, dampening demand and prices.

Outlook

Raised freights may increase pressure on fresh UK deals, but this may be supported by pent-up demand in the third quarter.

Sources inform that steel demand may be better in Q3 compared to the previous quarters because of pent-up post-monsoon demand and festive spending on consumer durables. This, in turn, may positively impact imported scrap procurements.