Posted on 28 Oct 2022
China still needs to import many more trial deep-sea bulk cargoes of ferrous scrap to become a major market for global exporters, despite the successful completion this month of the first deep-sea import trade to the country.
Chinese custom authorities at Caofeidian, a major deep-sea port in Tangshan of north China's Hebei province, last week cleared the country's first imported deep-sea ferrous scrap cargo since stringent new scrap import standards came into effect in 2021. And a second cargo arrived at the same port on 23 October from the UK, according to vessel-tracking data analysed by Argus.
The re-opening of the Chinese deep-sea import market potentially gives suppliers and buyers an additional option and a new arbitrage market. Chinese buyers in the past year were only able to import small 3,000-5,000t bulk cargoes from Japan, which were not even sufficient to support a single day of consumption at larger mills. The ability to import deep-sea scrap should broaden Chinese steelmakers' scrap supplier pool, particularly for mills located closer to the coast as inland transportations could be costly in China.
Many scrap suppliers have been eager over the past few years to explore new opportunities outside of the bellwether Turkish market, such as south Asia and southeast Asia.
But many market participants this week said China is still a long way from becoming a viable regular export destination for deep-sea scrap, despite its significance in the global ferrous sector.
One barrier to sales to China is long lead times between trade and delivery. The lead time for the first deep-sea trade was about four months, with Argus first reporting the sale on 21 June. Lead times for deep-sea sales to Turkey are typically between four to eight weeks, while short-sea sales from Japan to China are typically around four weeks.
A longer lead time means greater risk and larger financial costs for both buyer and seller.
The Argus daily cfr Turkey assessment moved in a range of over $90/t between mid-June to mid-October, meaning that in the most extreme case, the value of a 50,000t cargo with a four-month lead time could have differed by more than $4.5mn between when the sale was agreed and the cargo was delivered. If currency fluctuation is included, the difference is even larger as both the British pound and Chinese yuan have been volatile against the US dollar throughout this year.
Several Chinese buyers said any sales involving such a long lead time would still be very risky even with very precise, and likely also very costly, hedging. And the risk for scrap suppliers is likely even greater as most deep-sea suppliers do not regularly engage in hedging.
"The risk [associated with such large volume purchases], the cost to hedge, or even the ability to hedge large volumes, mean that most Chinese companies would not be able to facilitate these types of deals," one Chinese buyer told Argus in June after a UK cargo was heard to have been sold.
In addition, a long lead time may lead to greater cash flow pressure and typically incurs larger costs if financing is required.
Some market participants also questioned the linearity of quality inspection standards at different Chinese ports. Several added that the inspection procedures may also differ from port to port. The safer way to guarantee their scrap can clear customs is most likely for suppliers to send multiple trial cargoes in containers before eventually sending a bulk cargo.
The expectations that Chinese customs will not permit imports of HMS material — the most common seaborne scrap grade — may also dent some suppliers' appetite to sell bulk cargoes to China. Most seaborne scrap suppliers are unlikely to be capable of putting together a full 50,000t bulk cargo comprising only higher-grade obsolete scrap such as shred, bonus and P&S, or prime grade scrap, on a frequent basis in addition to sales to current regular customers.
Additionally, most deep-sea cargoes that consist of only higher-grade scrap are traded at a premium relative to cargoes that also include HMS 1/2. And it is uncertain if Chinese buyers will be willing to pay a premium over other deep-sea buyers, particularly as Chinese domestic scrap this year has mostly traded at a discount compared with many other markets.
"In a nutshell, we will need to see more cargoes traded and cleared, ideally in a short period of window, to give us confidence that the new system is functioning in a way that we anticipated," one Chinese trading firm said. "We will also have to look at the delivery time, because it is limiting any arbitrage opportunity and window."
Source:Argus Media
