2018 Steel Success Strategies: Reversing the metallics crisis

2018 Steel Success Strategies: Reversing the metallics crisis

Panelists discuss the factors affecting the supply and demand of raw materials used in steel production.

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July 2, 2018

Thorsten Schier, North American Steel & Ferrous Editor, American Metal Market, began the Steel Success Strategies conference session Scrap, Ore and Coke: Is the Crisis in Metallics Reversible by noting the inflationary raw material environment affecting the steelmaking sector. The subsequent speakers, which included David D. Hodory, vice president of marketing and communications for the David J. Joseph Co. (DJJ), Cincinnati; Mark Shujun Ma, chairman and CEO of Ark of China; Ted O’Brien, capital markets and marketing at Xcoal Energy & Resources, Latrobe, Pennsylvania; and Joseph Poveromo, president of Raw Materials & Ironmaking Global Consulting, Bethlehem, Pennsylvania, provided additional insight on the factors influencing the environment for raw materials.

Hodory said that as electric arc furnace (EAF) steel production has grown, so has DJJ. While the company is a subsidiary of Nucor, a Charlotte, North Carolina-based EAF steelmaker, he added that DJJ has “a significant customer book that is not Nucor.”

DJJ operates 12 scrap metal brokerage offices, including one in Hong Kong; 58 recycling yards across the USA, including 16 auto shredders; a full-service railcar leasing and finance group along with dismantling and asset disposal services; and 11 self-service auto parts retail stores.

The company has $2 billion in assets and minimal debt, Hodory added.

He referred to DJJ as the largest monthly scrap buyer in the U.S., the largest importer of scrap vessels in the United States and the largest importer of merchant pig iron in the world at more than 2 million gross tons in 2017.

Regarding scrap pricing and availability, he said obsolete scrap supply is elastic, meaning supply increases in response to higher prices. However, Hodory said scrap demand currently is running a bit lower than it did in 2008, which he added explained the lower prices being seen for ferrous scrap.

Prime scrap, on the other hand, tends to be almost entirely inelastic, he said, meaning supply is not altered in relation to price.

The current scrap reservoir is a function of historic steel consumption, Hodory said, adding that the scrap reservoir should increase according to current prospects and be sufficient to meet domestic demand.

Increased prime scrap imports, pig iron imports and direct-reduced iron (DRI) imports and production have compressed the prime to obsolete scrap spread in last five to eight years, he added.

Current steel to scrap spreads are near, though below, the peak seen in 2008, Hodory said, with lower 2018 scrap prices being a function of lower domestic and export demand versus 2008.

Regarding China’s growing generation of ferrous scrap, Hodory said, “We are still a modest number of years away before China becomes net exporter of scrap.” He also cited the country’s 40 percent tariff on ferrous scrap exports as a hindrance to increased exports out of China. “It’s seen as a precious natural resource for them,” Hodory added.

Ma of Ark of China, an industrial internet integrated online-to-offline (O2O) commerce platform, discussed the graphite electrode market, noting graphite electrodes are a kind of strategic rare energy used in the EAF steelmaking process that are “different from scrap.”

Ma’s other company, CIMM, located in the Liaoning province, is a manufacturer of graphite electrodes.

He said prices for graphite electrodes shot up suddenly in the second half of 2017 because half of China’s production was shut off by Chinese government for environmental reasons.

Additionally, further tightening in supply may result from the forecasted increase in graphite electrode demand in China, Ma said, as the Chinese government removes induction furnace production of steel in favor of EAF production. He said 30 million to 50 million tons per year of long steel production capacity at induction furnaces have been removed since the start of 2018.

Ma said 248 million tons of steel will be made in China using EAFs, which are 100 percent dependent on graphite electrodes. However, this material may not be readily available in light of the problems facing the graphite electrode industry in China. These problems include insufficient effective production capacity, raw material shortages and import difficulties, too many small poor-quality producers and too few quality suppliers and few reliable international players, he said.

Ma said CIMM is looking to create an open global ecosystem for graphite electrode production.

Ted O’Brien of XCoal said the price of coking coal has increased 113 percent over the last two years compared with the previous two years, selling for an average of nearly $197 per metric ton between July 2016 and June 2018 compared with an average price of roughly $92 per metric ton between July 2014 and June 2016 freight on board Australia.

He added, “Supply hasn’t reacted as quickly as we would have expected,” noting that exports of coking coal grew by only 11 percent in the first quarter of 2018.

Coking coal supply is unable to keep up with strong pig iron production growth, O’Brien said, adding that economic growth is driving strong pig iron production in most countries reliant on coking coal imports. Total pig iron output grew 30 million metric tons from 2015 to 2017, but coking coal supply from the four largest exporters (Australia, U.S., Canada and Russia) was flat over that same period, he added.

Despite elevated prices for coking coal, O’Brien said, the spread between Tier 1 and Tier 2 coking coal is reverting toward long-term averages. Supply tightness initially was concentrated in premium grades of coking coal but is now evident in lower grades as well, he added.

O’Brien concluded by saying the coking coal market is well-supported by supply/demand balance, with global supply remaining tight for 12 months but with the pricing environment incentivizing new supply. He added that U.S. buyers face “stiff competition” from a strong export market, with U.S. coking coal supply remaining well below the prior cycle peak. Quality degradation and reserve depletion will push the cost curve higher and keep the highest grades of coking coal in tight supply globally. Finally, O’Brien said, the growing list of geopolitical uncertainties and their threat to global steel demand and pricing are a concerning backdrop.

Poveromo said iron ore fines still set the benchmark price for iron ore as sintering is still the global process of choice.

Iron ore fines pricing will be driven lower by decreased blast furnace production in China and a continued oversupply of fines, he said. Replacement capacity will be needed in light of mine depletion, and the Big Three—Rio Tinto, BHP, Vale—will idle their higher cost capacity.

Global pellet premiums increased sharply in 2017-2018, Poveromo said, citing the ongoing Samarco shutdown, increased steel production and a lack of new pellet projects. Additionally, the DRI pellet premium also is increasing with the introduction of new DRI plants, improved demand in the MENA (Middle East North Africa) region and supply constraints such as Samarco’s shutdown.

Poveromo projected that pellet premiums would drop with supply additions courtesy of the Vale restarts and new plants coming online.

Regarding the NAFTA (North American Free Trade Agreement) market, he said iron ore pellet supply and demand were in balance. However, new/restarted USA pellet capacity will increase supply by 10 million tons per year, with the oversupply relieved by new DRI/HBI plants, restarted blast furnaces and exports to Asia and Europe.

Steel Success Strategies XXXIII was organized by New York City-based AMM and World Steel Dynamics, Englewood Cliffs, New Jersey, June 25-27 in New York City.