Chinese Scrap: Forewarned is Forearmed!

John Harris is the former director of raw materials for ArcelorMittal. Currently, he is a consultant and speaker on global metallics, and he will be a speaker at this year’s SMU Steel Summit Conference at the end of August. Mr. Harris and Philip Hoffman of Hoffman Iron & Steel have been conducting a friendly debate about the future of the Chinese scrap markets. Specifically, there is broad interest in the budding ferrous scrap collection in China and what this scrap will mean for world prices.

Steel Market Update published articles on Thursday, June 29, 2017 (Ferrous Scrap: Sideways in July?) and then again in Sunday’s issue, July 2, 2017 (Article Prompts Response on Chinese Scrap).

John Harris had the following to say in his most recent communication with Steel Market Update:

I read Philip’s [Hoffman] excellent comments on Asian scrap markets and concur with most of his observations. I offer you the following personal opinions and comments:

It is my opinion that China currently has a scrap surplus in the range of 100 million metric tons per year. Approximately 50 M mt/year of prime scrap is available just from their steelmaking and coil processing operations. This does not include available obsolete scrap, which could easily be in the same 50 M mt/year range. See justification as follows:

In the BIR (Bureau of International Recycling) May 2017 publication, the following China Statistics were reported:

2016 crude steel production                     808 M mt
BOF Production                                         94.8%
EAF production                                          5.2%
Total Scrap Used                                       90.1 M mt (includes home and purchased scrap)

WSO (World Steel Org) reports that China produces approximately 50% flat products (coils) from their BOF operations. In my experience that represents a scrap yield loss from steelmaking to finished product of approximately 140 M mt.

1st 10% from steelmaking whether its Flat or Long production (808 X 10% = 80.8 M mt)

2nd 15% to 40% from coil processing to finished product depending on final products (404 X 15% = 60 M mt)

I totally agree that China’s scrap recycling industry is in its very early stages of development. Nevertheless, China has very quickly developed its steel industry from 100 M mt/year in 2000 to over 1 B mt capacity today. It took Japan over 40 years to create their 100+ M mt/year steel industry. I actually witnessed a steel plant being build in China’s Hunan Province in nine months from empty field to steel billets. Don’t be surprised to see their scrap recycling industry develop very quickly over the next year. At this year’s ISRI conference, there were many Chinese companies with booths displaying their scrap recycling equipment and competing directly with established equipment suppliers.

The BIR publication also stated the following for the world in 2016.
Total steel scrap used                             560 M mt
Home scrap                                             195 M mt
Purchased scrap                                      365 M mt (130 M mt prime, 235 M mt obsolete)

What do you really think would happen to the scrap price if China introduced another 100 M mt  or 15% more to the global scrap pool?

Forewarned is Forearmed; I stand by my #1HMS $100/mt Alert!

Before the Chinese steel expansion created the paradigm shift in 2004, the #1HMS scrap prices were consistently under $130/mt in NAFTA. For example, 2000 to 2002 — <$100/mt; 2002 to 2004 — < $130/mt. And then China started buying large volumes of scrap, 5 M mt/year, along with huge volumes of iron ore and coal. We saw #1HMS scrap prices drop to $100/mt in fall 2008 after the financial collapse. In the fall of 2015, we also saw scrap prices in the $150 range.

As was pointed out, China also recognizes their dilemma with scrap and are attempting to rectify it through decreasing liquid iron percentages and adding more scrap in their charge mix. Unfortunately, the operating parameters of BOFs have limits for scrap volumes. Maximizing scrap could address approximately 50% of their prime scrap surplus, but will not address the building reservoir of obsolete scrap.

Further, we have seen many countries go from scrap consumers to scrap exporters just as China is doing. In the mid 1980s, Japan was a 4 M mt/year importer, and by 2004 they were a 4.5 M mt/year exporter and got as high as 10 M mt/year of exports. Likewise, both NAFTA & EU28 are net scrap exports with 13 M mt and 17 M mt, respectively in 2016. Shortly, S. Korea will join the exporter status. Do you really think scrap prices can stay over $200/mt with this trend?

You will be able to listen to John Harris at our SMU Steel Summit Conference. To learn more about our program, costs and how to register, go to www.SteelMarketUpdate.com/events/steel-summit.