Ferrous Scrap: Winners & Losers if China lifts import ban
The recent recategorization of China’s ferrous scrap imports into closer alignment with domestic specifications should see import restrictions lifted by mid-to-late next year.
Following the release of these draft guidelines on China’s iron and steel scrap import classifications, we take a closer look at the potential “Winners” and “Losers” of import substitution opportunities.
Who was affected by the original ferrous scrap import ban?
China introduced restrictions on scrap metal imports from 1st July 2019, after Beijing had informed the World Trade Organization (WTO) two years earlier it would ban arrivals of solid waste.
Since that time, Chinese ferrous scrap import volumes have virtually fallen to zero as sweeping restrictions have taken no prisoners – despite ferrous scrap’s “green” recyclable reputation.
In the five years prior, China imported an average of 2.14Mt of ferrous scrap per annum; 81.3% of which originated from Japan and 6.7% from the USA.
What are the similarities between the Global Financial Crisis and COVID-19?
During the last black swan event, decimated global steel consumption & production (ex-China) resulted in the availability of large volumes of secondary raw materials and semi-finished steel.
With China mostly unscathed by the Global Financial Crisis (GFC), traders were relatively well-positioned to benefit from the material arbitrage opportunities for these cargoes.
At the peak of the Global Financial Crisis (GFC) in 2009, China imported 13.7Mt of ferrous scrap, 3.6Mt of merchant pig iron, 1.8Mt of DRI/HBI, and 3.7Mt of steel billets.
While there are some nuances between the GFC and COVID-19 years, the material impact on trade flows has not been too dissimilar.
According to the latest trade data (September 2020), China has so far imported 12.7Mt of steel billets, 3.9Mt of merchant pig iron, and 2.6Mt of DRI/HBI through 2020.
Unsurprisingly, Chinese buyers and traders have procured significantly greater volumes of steel billets in the absence of eligible ferrous scrap imports.
Who are the likely “Winners”?
Without doubt, major Japanese ferrous scrap exporters would benefit from the easing of restrictions given its proximity to China and the significant arbitrage that currently exists.
Based on the latest domestic data, Chinese Heavy Melt Scrap #1 prices traded at around CNY2,900/t or US$439/t (incl. 13% VAT) delivered to mill basis in early November.
We estimate equivalent Japanese-origin scrap grades cleared through Chinese customs would be priced at CNY2,274/t or US$344/t on the same basis.
This would create a hypothetical arbitrage of approximately CNY628/t or US$95/t.
While US-origin material is presently priced at almost parity to Japanese scrap on a FOB basis, we calculate costlier freight rates put US material at a US$10/mt disadvantage.
Nevertheless, significant arbitrage opportunities would exist to make even some north European origin (UK, Germany, and the Netherlands) viable.
Who are the potential “Losers”?
Should China’s ferrous scrap import restrictions be loosened next year, we would expect a large proportion of steel billet imports to be displaced.
China imported 2.7Mt, 2.4Mt, and 1.6Mt of Russian, Indian and Vietnamese-origin billet respectively through the first nine months of 2020.
We believe Chinese mills would most likely import cost-competitive ferrous scrap to meet their melting requirements and produce their own billets.
Buyers will be incentivized to cut out the “middleman” of billet supply and procure ferrous scrap from the same exporters (Japan, USA, UK) shipping to Indian and Vietnamese steel producers.
While not all Russian-origin billet will be substituted, scrap exporters there would become eligible to compete with their semi-finished steel comrades.
The “Winners” are unlikely to change come this time next year, thought the potential “Losers” may see some variances based on the competitiveness of their input costs.
Risks to “Winners”:
- Protracted delays in implementing recategorization of China’s ferrous scrap imports will result in slower substitution away from billet.
- Expeditious recovery in ex-China steel output and ferrous scrap demand could trade away arbitrage sooner.
Risks to “Losers”:
- Swift implementation of China’s ferrous scrap import recategorization will substitute billet imports quicker.
- Prolonged recovery in ex-China steel output and ferrous scrap consumption will sustain material arbitrage.