Posted on 23 Feb 2024
Some ferrous market participants have long called to scrap "new iron ore" because of its increasing usage in lower carbon intensity steelmaking and potential threat to iron ore in the future.
But Turkish scrap is currently much more highly correlated with Chinese hot-rolled coil compared to Chinese iron ore, despite the latter being the primary input for the world's largest steel consuming and producing region. Just 9.5pc of Chinese steel is produced via electric arc furnace, according to Worldsteel trade association data.
Since the start of 2023 the straight correlation between Chinese iron ore import prices and HRC export prices has been a meagre 25pc, implying little relationship. Even lagged for the lead time from purchasing the raw material to consumption, the correlation is still below 45pc.
That lower correlation encourages direct hedging of fob China HRC as opposed to hedging steel via raw materials: the LME's fob China HRC contract saw volumes jump over 89pc in January compared to the October-December 2023 monthly average volume.
The straight correlation between Turkish scrap imports and Chinese HRC exports over the same period is 80pc, much higher than for iron ore.
There are a number of reasons for the tighter relationship between scrap and HRC. China imports made up more than a third of Turkish HRC imports in 2023, selling over 1.6mn t into the country, up sharply from just over 562,000t the previous year.
Last year 8.4pc of all China's HRC exports went to Turkey, with only Vietnam taking more. China was aggressive in terms of HRC exports last year. Overall it sold almost 24mn t of HRC into overseas markets, even higher than 2015, when its total steel exports surpassed 112mn t and the price of steel anywhere in the world was effectively the Chinese price plus freight. This aggressiveness affected all markets, including Europe, where Asian sellers gained significant import share from their Turkish counterparts.
Turkish mills regularly flex between scrap, semi-finished products and to some extent finished steel, depending on price competitiveness. For example, where the price of scrap is too high, they may opt for slab or, if workable, HRC. Sources suggest Chinese HRC has been purchased in Turkey, and transformed into hot-dip galvanised coil before being sold into the EU.
When entering the scrap market, the price of steel in China, which clearly has a strong influence on the global market, helps Turkish mills gauge value for their purchasing.
At the same time, some suggest iron ore is trading out of line with fundamentals, given its tight supply base — scrap supply is much more fragmented — and the impact of Chinese government policy. Where the government wants to bolster gross domestic product figures, increased industrial production remains a key policy lever given the difficulty of shifting to become a consumer-led economy. Iron ore is also impacted very heavily by macroeconomic news, given how dependent on finances it has become, whereas scrap is more driven by steel supply and demand.
Blast furnace and basic oxygen furnace-based producers in parts of the world have also ramped up their scrap charge to help lower their carbon footprint for certain consumers that want greener products, such as European carmakers. Even some integrated producers in Asia have nearly doubled their charge for this reason, according to supply- and buy-side sources.
Iron ore losing relevance?
Source:Argus Media
