Under considerable pressure

Market Reports - Ferrous

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March 4, 2015

Responsible for half the world’s output in recent years, China’s steel industry now affects global scrap prices even though it is far down the list in terms of global trade for the secondary commodity.

Government data has been slow to reveal it, but China’s steel sector has been considered to be in an overcapacity situation for at least two years while its demand for steel (structural steel in particular) seems to be waning. The effects on the steel sectors in some other nations have been clear, and a ripple effect may have been a major factor in steep ferrous scrap price drops in North America in February.

At the Metals Recycling Association of India (MRAI) meeting in Mumbai in early February, several presenters referred to the difficulties in the Indian steel industry caused in part by low-cost imports of semi-finished steel coming from China.

Adding to the problem for India’s steelmakers and iron foundries is a 2.5% to 5% import duty on ferrous scrap that contributes to higher domestic steelmaking costs while, due in part to inter-governmental free trade agreements, there is no import duty on semi-finished steel shipped in from China and some other nations.

Venkatesan Subramanian, a New Delhi-based analyst for research firm Frost & Sullivan, characterized the Indian foundry sector as “facing a severe threat” because of the import duties. Subramanian, who conducted a study of the metals production sector commissioned by MRAI, said in the steel sector the import duty “has resulted in a higher cost for (domestically made) semis and finished goods in our country.”

India’s largest steelmaker is suffering from the import tide, with Tata Steel reporting in early February that its revenue slumped by 8% and its net profits by more than 60% in the fourth quarter of 2014 compared to the same period in 2013. “Domestic steel prices witnessed further deterioration due to the continued softening of global steel prices coupled with significant imports from China and Russia,” remarked Tata Steel Managing Director T.V. Narendran.

Although China is typically no more than the fourth largest buyer of ferrous scrap from the United States, its retreat from the market is negatively affecting scrap recyclers in the Pacific Coast region of the U.S.

Figures collected by the United States Geological Survey (USGS) show that China received more than 1 million tonnes of ferrous scrap from the U.S. in the first 10 months of 2013. In the comparable period in 2014, that figure dropped to 649,000 tonnes.

Also speaking at the MRAI event, Doug Kramer, the current chairman of the Institute of Scrap Recycling Industries Inc. (ISRI) and president of Los Angeles-based scrap firm Kramer Metals Inc., commented that scrap dealers in the Pacific Coast region have been severely affected by the dwindling export markets.

From 2003 to 2011, scrap exports “tripled in volume,” Kramer said, referring to the active export markets for both ferrous and nonferrous scrap, particularly to China.

Those volumes have been diminishing in each of the previous three years, and 2015 is not getting off to an encouraging start, Kramer noted. He described the U.S. Pacific Coast market as being beset by several woes, including a port workers’ slowdown that has resulted in terminals that are “beyond congestion.”

Kramer noted that “India bucked the trend” in 2014 with its demand for U.S. scrap, despite its import duty schedule. In the first 11 months of the year, while overall global demand for U.S. ferrous scrap was down, India brought in 7% more scrap by volume than it had in the previous year.
 

 

One thing likely to bring East Asian buyers back into the ferrous scrap market is lower prices, and in the U.S. those were in effect in mid-February. A report from American Metal Market indicates buyers from China and South Korea came into the U.S. market in February to make bulk cargo purchases after several straight months of declining prices.

In Europe, several factors are contributing to suppressed ferrous scrap prices, including the beleaguered state of western and southern European economies; a drive by Turkey to collect more of its own scrap domestically; and the lower cost of finished steel globally (caused in large part by China’s excess capacity and low production costs).

“Iron ore and energy prices are driving down steel prices in China, and it seems that there is no price bottom at all,” says Ruggero Alocci of Genoa, Italy-based trading firm Alocci Rappresentanze Industriali. “As a consequence, an increasing number of mills, trading companies and steel chain operators [in China are] going bankrupt.”

January 2015 purchases of iron ore may provide an early indicator of China’s likely steel production decline this year. According to China’s General Administration of Customs agency, the nation’s iron ore imports in January fell to 78.57 tonnes, down from 86.85 million tonnes the previous month and 86.83 million tonnes in January 2014.

Additional analysis of the ferrous scrap market can be found in the feature article “A slow start,” beginning on page 30 of this issue.