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Asia’s steel and scrap markets are recovering from the broad economic impact of Covid-19. Following a turbulent second quarter, steel and scrap prices are rising fast and there is a real possibility of a market correction before demand and prices begin to rise steadily again in 2021.
But that’s not the whole story. Growing demand in Asia’s domestic markets will face structural changes in the supply of steel and scrap – and that combination promises to create significant dynamism, both inside and outside Asia, and across all grades.
There are six forces combining to reshape the market:
While these changes can be predicted at a high level, the reality is that they are likely to be un-orchestrated, uncoordinated and unpredictable in terms of their exact timing and varying in terms of their impact on specific markets and prices.
Steel and scrap markets have rebounded from Covid-19 lows – prices have made significant gains recently, suggesting there may well have to be a slight price correction to rebalance supply and demand. Even with a correction, however, the market is set to pick up steam as government stimulus packages boost the global economic rebound.
But that’s not the whole story. The different grades and materials within the steel and scrap market are likely to experience significant volatility when diverse market forces hit at the same time. Together, the macro-economic and steel-specific dynamics will combine to create volatility for global steel and scrap markets.
This report looks at six key forces and their expected impact on both Asian and global steel and scrap markets.
1. Asia leads the Covid-19 recovery, driving up commodity demand
Asian economies are the first to rebound from the worst economic impacts of Covid-19 and are set to return to – and in some cases, exceed – pre-Covid-19 rates of economic growth.
For example, according to China’s National Bureau of Statistics (NBS), industrial profits for October were up 28.2% year-on-year thanks to improved domestic consumption and external demand. China’s official manufacturing Purchasing Managers’ Index (PMI) for November came in at 52.1 – the highest in more than three years and better than October’s official reading of 51.4. We expect that level of growth to be repeated across Asia, with strong demand in Southeast Asia leading to increased offers from Chinese, Russian and Indian mills, creating upside risks for our seaborne HRC price forecasts.
2. Stimulus packages add more fuel for growth in domestic markets
On top of organic economic growth, Asian countries are likely to enact further economic stimulus plans to accelerate the post-Covid-19 recovery and compete in global markets. These stimulus packages are varied in nature but with a common thread relevant to steel in that they will trigger further construction activity through residential and commercial buildings and associated infrastructure. Stimulus packages also have the potential to create greater discretionary income that will accelerate consumer demand.The Indonesian government, for instance, is planning infrastructure spending of US$423 billion through to 2025, including the construction of a smart, eco-friendly capital city. Similarly, the Philippines’ construction industry is expected to grow at an average rate of 8.3% to US$75.1 billion, in part due to the country’s ‘Build, Build, Build’ program.
Wide-scale economic growth and the continued expansion of the middle classes across the region should also drive up residential and commercial construction activity, compounding the effect of stimulus packages. Activity and overall infrastructure growth will continue to expand in key economic centers across Asia. In Japan, construction sector activity in the current quarter is forecast to rise by 2.6%.
3. Automotive and expected electric vehicle growth
Prior to the pandemic, the global automotive market had been gradually shrinking in recent years, with car sales under pressure from stalling urban growth and changing consumer attitudes towards car ownership and transport.
But economic growth and the rise of the middle classes kept Asia demand relatively strong for both heavy steel trucks and consumer EVs.
India’s motor vehicle production, which collapsed in April-May, has since recovered, rising year-on-year by 9.2% in September and 31.9% in October.
The key area to watch is not overall growth, however, but EV growth, with the global market share of EVs growing significantly from just 6% in 2020 to 15% in 2025. Demand for lightweight, high quality electrical steel used in the construction of EVs will rise in tandem.
4. Reopening of China’s ferrous scrap import markets
China reopened its ferrous scrap import market in January 2021, driving up demand for scrap from Japan and the US West Coast in particular. The impact will not be limited to an increase in demand and price pressure, however. The reopening of Chinese ferrous scrap markets will have a substitutive effect across Asia. This can be seen in the net impact of closing the ferrous scrap market while demand for steel rose: the decline in demand for ferrous scrap was immediately offset by significant growth in demand for merchant pig iron (MPI), hot-briquetted iron (HBI) and billet.Coupled with expected growing domestic demand for steel across Asia, this will lead to a significant shift in the mix of imports to China and a subsequent shift in the mix across Asia’s steel trade.
5. Green steel and growth in electric arc furnace (EAF) capacity
The global drive for carbon neutrality will combine with China’s ‘Blue Sky Protect Campaign’ to increase EAF capacity in China and Asia. This will grow overall steel capacity and fuel the demand for premium over obsolete domestic ferrous scrap.
Expect to see continued moderate growth in Blast Furnace (BF) steelmaking globally, however, with countries such as Indonesia and Vietnam responding to demand for alternative metals.
6. Brexit and Biden: changing trade policies and practices
North America, specifically the US, is already seeing a rise in steel demand and prices – and is adding capacity over the next few years to address further expected increases as well as to diversify its steel-making capacity to be more scrap based. Today, Turkey is the biggest scrap importer by far, but the gap between it and other key players has narrowed in recent years and is likely to shrink further in 2021 as demand for scrap rises in other markets.
Changes in Asian steel markets will add to this dynamic in several ways. Ferrous scrap demand will pull from the US West Coast to drive up demand and prices, as particularly Chinese steelmaking becomes more electric arc furnace-based, and the rise of raw material prices will complicate steelmakers’ margin strategies.
On top of the impact from Asia, a key dynamic to watch is how an expectation for more multinational engagement translates to trade relations broadly, and any changes to the 232 tariffs specifically.
Economic growth and the reopening of China’s ferrous scrap import markets will have a broad and, in some cases, an acute impact on the Asian steel and scrap market, the steel and scrap industries generally, and trade flows overall.The impact of ferrous scrap across Asia
The sheer scale of China’s demand for scrap imports will tighten availability for ferrous scrap supplies across Asia. Markets such as South Korea and Taiwan may be compelled to shift import demand from ferrous scrap to alternative metals.Prices will rise sharply as trade flows adjust to demand from China, and then settle back to more moderate increases as the markets rebalance.
The impact on alternative metals across Asia
The shift in the mix of China’s demand for imports will also affect alternative metals markets across Asia – including MPI, HBI, and billet. The reduction in Chinese demand for alternative metals will offset an increase in demand from other Asian countries, which should put downward pressure on prices. Expect that pressure to be short-lived, however, as overall downstream demand better supports moderate price increases over time.
China domestic scrap
In 2019, Chinese domestic scrap prices were decoupled from global scrap prices due to the closing of the ferrous scrap import market. That will change.
The restart of import trade flows is likely to bring China’s local price closer to parity with international prices such as the Chicago and Turkish heavy melting steel (HMS) prices.
The changes originating in the Asian market will ripple across North American, Europe, and the Middle East, with downstream growth and changes in the ferrous scrap market affecting trade flows globally.
Impact on North America
North America, specifically the US, is already seeing a rise in steel demand and prices – and is adding capacity over the next few years to address further expected increases as well as to diversify its steel-making capacity to be more scrap based.
Changes in Asian steel markets will add to this dynamic in several ways. Ferrous scrap demand will pull from the US West Coast to drive up demand and prices, as particularly Chinese steelmaking becomes more electric arc furnace-based, and the rise of raw material prices will complicate steelmakers’ margin strategies. On top of the impact from Asia, a key dynamic to watch is how an expectation for more multinational engagement translates to trade relations broadly, and any changes to the 232 tariffs specifically.Impact to EuropeThe strengthening trade relationships between the EU and Asia will continue, and relations between a post-Brexit UK and Asia may also grow stronger, fortifying steel and scrap trade relationships.
There has even been recent Chinese investment in the UK steel industry, with China’s Jingye Steel taking over British Steel in March 2020.
In regard to the future of the EU’s steel scrap trade, we are closely monitoring the progress of European Commission attempts to modify its Waste Shipment Regulation, which currently governs the scrap export rules from the bloc. The EU wants to increase internal consumption of its self-generated secondary raw materials as part of the ‘Circular Economy’ vision. The EU also wishes to avoid the export of unprocessed waste products.
If the EU does decide to regulate against steel scrap exports, the UK is unlikely to be covered and could continue to export its metal scrap.
Impact on the Middle East
There are two dynamics that are critical to watch for in 2021 in the Middle East, which will be discussed at the Middle East Iron and Steel conference in December. First, the region’s steel and iron markets are dependent on ambitious construction projects, which are in sharp focus given the downward pressure on oil demand and prices. As construction is forecast to revive strongly next year following the 2020 decline, and other industrial applications are also expected to support steel demand, steel producers may be able to improve their margin opportunities.
The expected growth in Asian steel and scrap markets will not be straightforward – nor will its impact be limited to Asia. While macro-economic growth will drive up demand in domestic markets across Asia, the reopening of China’s ferrous scrap import market will have a sharp and substitutive impact on supply. Countries starved of ferrous scrap will revive their interest in alternative metals, and this shift promises to create significant changes to supply-demand balances, prices, trading relationships and margin potential. The effects will begin in Asia, extending across the globe as markets adjust and rebalance to the new supply-demand realities.
Although it’s possible to predict these changes at a high-level, the reality is that these changes are un-orchestrated, unpredictable in terms of timing, and varying in terms of impact on specific markets and prices.
The market advantage will go to those that can see the bigger picture, while still being able to drill down to the specifics of each news event and relevant price; to those that can understand the interrelationship and interplay between all geographies and all grades of raw materials.