China ferrous scrap imports: white knight or opportunist?

Ferrous Scrap

China initially introduced restrictions on scrap metal imports in July 2019 after Beijing had informed the World Trade Organization two years prior it would prohibit arrivals of solid waste.

In that time, Chinese ferrous scrap import volumes virtually fell to zero as sweeping solid-waste import restrictions took no prisoners – despite ferrous scrap’s green recyclable reputation.

In the five years before the import ban, China had been a relatively modest player in the Asia-Pacific ferrous scrap trade; only buying when opportunities arose.

The country imported an average of 2.14Mt of ferrous scrap per annum between 2014-2018; 81.3% originating from Japan.

Since the introduction of the ban in July 2019, the China Association of Metalscrap Utilization (CAMU), representing local steel mills, petitioned Beijing to permit steel scrap imports.

CAMU’s lobbying noticeably picked up pace through 2020, as decimated, COVID-19 afflicted rest of the world scrap consumption created a material arbitrage opportunity for coastal Chinese smelters.

If not ferrous scrap imports, what else?

The ineligibility of importing ferrous scrap prompted buyers to procure alternative sources of competitively priced iron units to feed last year’s insatiable domestic hunger for steel.

As a result, China imported 16.2Mt of steel billets, 5.6Mt of pig iron, and 3.5Mt of DRI/HBI in 2020 in the absence of access to the seaborne scrap trade.

China’s reclassification of ferrous scrap import categories late last year created rampant conjecture, on the timing of the ban terminating and the consequential impact on trade flows.

Speculation on the scale of import volumes was also fuelled by China warning Australia, in the face of escalating political tensions, it would diversify its supply of steelmaking raw materials.

Combined, this put bulk ferrous scrap suppliers on high-alert that China could once again become a viable export destination, and potentially import significant volumes last seen in 2009.

Many market participants pointed to the last black swan event of the Global Financial Crisis (GFC) as a template for potential Chinese ferrous scrap import penetration.

At the peak of the Global Financial Crisis, China imported 13.7Mt of ferrous scrap, 3.6Mt of merchant pig iron, 1.8Mt of DRI/HBI, and 3.7Mt of steel billets.

Is the lifting of the import ban too little too late?

While China’s State Administration for Market Regulation expeditiously terminated the import ban on 1st January 2021, Navigate Commodities believes this is too little too late.

At its height, the theoretical arbitrage between Chinese heavy melt scrap and indicative customs-cleared import prices of Japanese-origin material of similar grade reached US$120/t in May 2020.

Despite the lingering of COVID-19 in key steel-consuming nations (ex-China), steel production and ferrous scrap consumption rates have rebounded from the lows seen in 1H 2020.

Recovering rest of the world scrap demand traded away this arbitrage by the end of last year, putting indicative Chinese import prices at a premium to domestic scrap grades.

More recently, international ferrous scrap benchmarks have ebbed from their December 2020 peaks, reopening a US$50/t discount to China’s onshore material in February 2021.

Opportunistic buyers have stepped back in from celebrating Lunar New Year festivities to pick up the odd attractively priced bulk Japanese ferrous scrap cargo.

For 2021, we forecast China’s steel and raw materials demand will remain on par with volumes recorded last year with central government-driven legislation aimed at increasing scrap use.

Will termination of the import ban lead to a boon of ferrous scrap imports?

We do not believe China will suddenly transform into the “White Knight” that overseas ferrous scrap suppliers expect to drive new double-digit million-tonne demand growth this year.

Navigate Commodities anticipates the majority of China’s steel scrap consumption growth will be met by increasing domestic recycling capacity.

For example, China’s Ministry of Industry & Information Technology permissioned 101 new steel scrap recycling enterprises in January 2021, bringing total authorised entities to 478 nationwide.

Domestic recyclers operating with the government’s approval also bring preferential benefits, such as value-added tax rebates of up to 30%, further incentivizing local capacity growth.

We estimate Chinese steel producers consumed an estimated 218Mt of ferrous scrap in 2020, while CAMU has set expectations at 300Mt per year from a reservoir of 13Bt by 2030.

Consumption growth of 80Mt within ten years is highly feasible, especially considering the more conducive legislative operating environment for new recycling facilities.

To put this in context, total global intercountry ferrous scrap trade last year totalled approximately 83.6Mt.

Who will lose from the termination of the import ban?

There is a little doubt that the termination of the ferrous scrap import ban will displace a large proportion of China’s steel billet imports this year.

We also expect China’s absolute import volumes of “supplementary” iron metallics (pig iron, DRI/HBI) and semi-finished products (steel billets) to decline over the next two to three years.

A tighter global steel supply-demand balance, driven by recovering rest of the world steel consumption, will result in narrower arbitrages between domestic and import prices.

For example, China imported 3.2Mt, 2.8Mt, and 2.3Mt of extremely low-priced Russian, Indian, and Vietnamese billets due to COVID-19 afflicted ex-China steel consumption last year.

Instead, we believe coastal Chinese mills will intermittently import cost-competitive ferrous scrap, as and when an arbitrage opportunity arises, to meet melting requirements and produce their own billets.

Who will win from the termination of the import ban? And by how much?

Buyers will be more inclined to cut out the “middleman” of billet supply and procure steel scrap from the same exporters (Japan and USA) shipping to Indian and Vietnamese billet producers.

That said, a naturally tighter global ferrous scrap supply-demand balance in 2021 will also limit the frequency of material arbitrage opportunities for Chinese importers before it gets traded away.

Like the aftermath of the Global Financial Crisis (2010-2013), we anticipate traders will dip in & out when an opportunity arises.

Therefore, we forecast China is more likely to import 4-6Mt of ferrous scrap per annum, far below the 10-15Mt touted by market participants.

Source: MiningJournal

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