30-05-2016

Analysis: Low iron ore, billet threatens steel trade shifts as scrap holds

IRS

Steel operating metrics globally are swinging wildly, with low iron ore prices and relatively supported scrap prices indicating potential changes in trade flows of steel products and utilization rates.

China’s domestic rebar mill margin has been in the red since May 19 and last at a $17.98/mt indicative loss Thursday, S&P Global Platts MVS data showed.

Export spot Chinese rebar prices were $29/mt higher Thursday, leading to a potential $11/mt mill margin for exports to those able to tap the market.

Just a month earlier, the MVS domestic rebar margins peaked at $138.33/mt, with record Chinese steel output in April. The MVS data is calculated using current steel prices and raw materials values with a four-week lag.

The worry is steel prices may go lower while iron ore and metallurgical coal prices may not make a sufficient difference to support margins.

“I expect now we will enter a seasonally soft period, and prices will be weak. In September we may start to see some light at the end of the tunnel,” a trader at a European company said.

SCRAP STRENGTH

The elephant in the room may well be ferrous scrap.

Turkish import deals are yet to find willing counterparties after three weeks with no confirmed spot deals.

While tradable scrap values have been assessed lower over the past weeks, the absence of deals and strong US domestic demand has led to uncertainty. Scrap pricing may still look grossly high for buyers confronted with iron ore-backed long steels.

With the Turkish scrap to iron ore ratio Thursday at 3.8:1 iron ore, adjusted for equivalent iron content, this is up from April’s average of 3.1:1 and values closer to 2.6:1 in the first two months of 2016.

Firm bids offers pushed down TSI’s HMS 80/20 scrap assessment earlier this week. On Thursday it was stable at $283/mt CFR Turkey, down from a peak of $326/mt CFR in early May.

As export rebar prices in Turkey have plunged 12.3% since May 9, while Black Sea billets dropped almost 16% over the same time, the indicative re-rolling margin has swelled.

The rebar and Black Sea billet spread has doubled to over $100/mt since mid-March, stoking demand for re-rollers and ammunition for scrap buyers able to cut back and procure billet.

The Platts TSI rebar scrap margin has slipped to $162/mt from April’s average of $151.45/mt, while still over $20/mt higher than margins in the first two months of 2016.

IRON ORE OUTLOOK

The outlook for iron ore after a correction this week of around 11% in delivered China prices may be leading to expectations of more competitive billet rolled from blast furnace-fed works.

Buyers for billet are still waiting to book new tonnages, with a further correction anticipated on scrap as a rapid drop in Chinese billet export prices is taking hold.

The decision hinges on price differences with timings and tying up capital for rival Chinese material.

If Chinese billet falls another $10 to $290-$300/mt CFR Turkey, then mills may book from China and will have material arriving in September, long after Ramadan and the European summer ready for fourth-quarter rebar sales.

Traders were said to still hold ample billet stocks so they will be able to deliver some prompt shipments to fill any gaps, and Commonwealth of Independent States mills might be able to sell for prompt shipment at higher prices to those needing material to tide them over.

Platts Turkey ARC indexes, which track price relationships for scrap, rebar and billets, showed billet continuing to price well below its peers, based on historic trading relationships.

The Turkey ARC Billet 30-day index fell again to minus 5.66% relative strength on Thursday.

The Turkey ARC Rebar 30-day index rose to 5.07% from 4.01% on Wednesday. The degree over or below zero shows each commodity’s price deviation from the 30-day average price relationship for the three product groups.

The relative strength of scrap might turn down very quickly if prices dive, with sources saying there are expectations scrap may soon settle into a $220-250/mt CFR Turkey range.

Sellers in the US and the Baltic are offering $280/mt CFR. The midpoint of the given range at $235/mt CFR would lead scrap-to-iron ore at $50/mt back to the 3.1:1 ratio.

Source: Platts

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