Morning brief: India's scrap import drops 13% in 2021,but strong rebound likely

• India's ferrous scrap imports drop 13% y-o-y in 2021
  
  
• Lower imports from UK, USA drag down overall volumes
  
  
• Higher global prices, increased domestic availability also led to lower volumes
  
  
• Imports may bounce back due to higher sponge iron prices
  
  

India's ferrous scrap imports dropped to a six-year low in 2021, reveals data maintained with SteelMint. The volumes dropped 13% to 3.78 million tonnes (mnt) last calendar against 4.33 mnt in 2020. The highest volumes arrived from the UAE, at 1.07 mnt, up 43% y-o-y. However, share of other traditional destinations like the UK and USA saw substantial drop.

Last calendar's imports are 25% lower than average monthly volumes of 4.74 mnt of the last five years.

It was mainly the sharp drop from UK and USA that dragged down overall volumes. For instance, shipments from UK saw a 49% y-o-y decline in 2021 while those from USA dropped 40%. Volumes from Dubai, although up a substantial 43%, actually remained stable at 1.07 mnt. The y-o-y rise was on account of the low base of 0.75 mnt in 2020.

What factors led to a record drop in scrap imports?

• Global scrap more expensive: Global scrap prices consistently remained higher than domestic. Dubai-origin HMS 1&2 (80:20) average prices in rupee terms, with freight etc added, comes to over INR 36,000/t while domestic DAP Mumbai prices of HMS 80:20 averaged INR 33,500/t.
  
  
• Container shortage impact: Dubai volumes were more or less stable over the last five years at around 1 mnt. Dubai is the first source country for Indian buyers because of its geographical proximity. The lead time between bookings and delivery to user-end plant varies from 20-30 days, depending on locations within India.
  
  

On the other hand, the delivery time from UK and USA is 45-60 days. A longer lead time, coupled with the shortage in containers, pushed up prices and kept supply uncertain. Consequently, buyers avoided UK and USA and fell back on UAE imports or used more of sponge iron. From pre-Covid levels of $35-40/t, bulk freight had hit record highs of $105/t in Jul-Aug'21.

• Higher domestic scrap availability in India: Last calendar saw an overhang from 2020 when Covid restrictions had led to lesser scrap generation and auctions. These got spilled over into 2021, resulting in more domestic scrap availability. For instance, last calendar saw higher domestic scrap consumption at around 23 mnt against 17-18 mnt in 2020.
  
  
• Global-domestic steel price disparities: A key reason for the sharp drop lies in the disparity between global and domestic steel prices which made imports unfeasible. For instance, average domestic Indian origin induction furnace route billet prices hovered at INR 41,500/t ($560/t levels) whereas CIS exports averaged $610/t. Obviously, domestic billets were more viable.
  
  

Outlook
Ferrous scrap import volumes will possibly jump back to 4.5-5 mnt levels, propelled by a few factors.

First, current global scrap prices are still high compared to domestic. For instance, prices from Europe are touching as high as INR 44,021/t ($587/t). Those from Dubai are at INR 40,638/t ($542/t). The yield here ranges from 94-96%. In comparison, domestic prices are hovering at INR 39,521/t ($527/t) and INR 41,907/t ($559/t).

Landed prices from Europe are thus still not viable for Indian buyers. But there is not much difference between Dubai imports and domestic which Indian buyers may be willing to pay and not burn a hole in their pocket.

"Domestic scrap prices are still the lowest. Sponge iron prices, at over INR 43,000/t and 80% yield, are not viable," said a source. It may be noted sponge iron units are highly power intensive and thus are sensitive to their coal costs. Rising thermal coal prices are pushing up sponge iron rates.

Even though Europe imports do not look feasible, the case is strong for India's ferrous scrap imports to rise, as long as sponge stays unviable and it is more economical to use domestic scrap - with the ferrous yield much higher at 94-97% - to make one tonne of steel. Even imported prices from Dubai look better than sponge as feed.

Secondly, buyers may accept the slightly elevated Dubai imports since prices of steel in India would stay on the higher side. Steel prices are likely to stay high due to the raw material cost push and a better demand season unfolding at present.

Thirdly, even if buyers are willing to pay for domestic scrap, India's generation is limited to 25-30 mnt at present and the need gap will have to be plugged by imports.