Posted on 23 Jun 2021
Chinese imports of pig iron and other ferrous scrap substitutes edged up in May, the first sequential increase in half a year, but volumes remained at late-2019 lows.
Combined imports of basic pig iron (BPI), direct reduced iron (DRI) and hot briquetted iron (HBI) rose by 15pc to 314,398 metric tonnes (t) in May from April, according to Chinese customs data. This was the first month-to-month increase in volumes heading into China since November 2020 but follows 20-month lows set in April. Imports of all three metallics declined by 41pc when compared to the 535,962t recorded in May 2020.
China's January-May imports totaled 2.2mn t, down by 17pc from the same time in 2020.
The world's largest steelmaker had significantly ramped up consumption of iron metallics over much of 2020, setting record highs of 9mn t of imports for the year and surpassing the US as the largest seaborne consumer for the first time since 2009.
But this trend has faded for several months as a combination of factors essentially removed the economic viability of imports over domestic production.
High freight costs have widely cut into margins for importers of not just iron metallics but also ferrous scrap. Argus-assessed freight rates for 50,000-70,000t vessels from the Black Sea to New Orleans more than doubled to $41.50/t on 18 June. Chinese customers pay roughly an additional $10-15/t on average from the Black Sea with an equal or slightly wider spread when buying from Brazil. One supplier highlighted as much as a $50/t freight differential when offering to US consumers compared to China.
Multiple suppliers also noted the lack of consistency in China's appetite made them less willing to commit to small- and medium-sized sales and more interested in one-off sales greater than 50,000-70,000t, whereas US buyers bid regularly on 30,000-50,000t lots.
At the same time, US demand has rebounded in early 2021, offering suppliers a premium outlet for iron metallics instead.
Led by rebounding production, shifted melt mixes and wide margins, the US raised its imports of BPI, DRI and HBI by 6pc to 2.36mn t over the first four months of 2021, according to US Commerce data. Imports have risen over this period despite an 85pc drop in exports of HBI from Corpus Christi, Texas, home to Voestalpine's plant, and the addition of Cleveland-Cliff's new 2mn t/yr HBI plant in Toledo, Ohio. This comparison is expected to expand further as cuts to US imports in 2020 deepened over the middle of last year as Covid-19 restrictions hit steel production. Black Sea, Brazilian, and even Indian seaborne sellers have been keen to tap into US demand, in turn.
Semiconductor shortages have forced US automakers to lower production, leading to less prime scrap generation. Difficulties in securing prime scrap prompted US steel mills to cut the prime scrap share in their melt mixes and offset the difference with a greater blend of obsolete scrap and iron metallics.
But perhaps the biggest weight on Chinese demand has been tightening margins. Domestic BPI prices in China were assessed at $643-658/t on 18 June, a $19/t average discount to the current New Orleans price. Chinese consumers have in fact bid in the seaborne trade as low as $630-640/t recently as well, in part to offset import costs. These margins compare to a roughly $80/t premium China held over the US at the same time last year and over much of 2020. US buying has been enabled by high relative #1 busheling prices and a widening of hot-rolled coil (HRC) margins to $1,181/t from $218/t at the same time last year.
Still, multiple market participants surveyed by Argus did not expect China's departure from the seaborne metallics trade to last long-term.
First, China is setting more ambitious carbon dioxide reduction goals, which support iron metallics consumption over iron ore. These blast furnace policies also incentivize shifting toward electric arc furnace (EAF) mills that will require some external source of iron metallics to operate.
Second, market participants widely forecast that not only HRC but also BPI, DRI and HBI prices will come off their current highs as production catches up with demand. This effort has been solidified in many minds as Chinese authorities made public plans to crackdown on iron ore and other fast-rising commodity prices. Lower prices are expected to generate increased interest from Chinese buyers, who consistently play domestic HRC and BPI markets against the seaborne trade, while also pressuring US mill margins back toward more typical levels.
Source:Argus
