Page 55 from: April 2005

M A R K E T A N A L Y S I S

Pig and sponge iron prices have
fallen to a much lesser extent than
scrap over recent months but are
now expected to rise materially due
to the explosion in iron ore prices.
Steel mills will have to reconsider
their mix of raw materials and there
could well be a reverse of the scrap
price decline witnessed in the first
two months of the year.

In early March, Chinese steel-
makers appeared to be making new
and active enquiries for US ferrous
scrap. Their interest has centred on
shredded scrap, which is easy to un-
load, contains little in the way of
contamination, and carries no dan-
ger of explosions such as those suf-
fered in India last year. Recent of-
fers from the USA have been bullish
at beyond US$ 300 per tonne cif for
shredded and some US$ 10-15 less
for HMS I. Exporters who sold HMS
I in January/February for US$ 270
per tonne c&f Asia may be regret-
ting their actions now.

Freight rates remain high today,
but the value of the US dollar in rela-
tion to the Euro continues to be low.

The US Composite scrap price –
the average weekly price for scrap
delivered to mills in Chicago,
Philadelphia and Pittsburgh – fell to
US$ 193.17 per long tonne (equiva-
lent to around US$ 191 per metric
tonne) for the first week of March;
this compares to US$ 231.50 a year
ago. The differential between the
two benchmark qualities in the USA
– namely HMS I and new automobile
bundles – is now US$ 57 per tonne as
against US$ 157 over the July 2004
to February 2005 period.

Competing commodities

Iron ore prices are a major factor
in the world economy and have be-
come the issue of the day. Take a
look at the following figures: well
over one billion tonnes of iron ore is
produced each year and close to 600
million tonnes was shipped overseas
in 2004, some 70 million tonnes more
than in the previous year. This
equates to 6000 movements by bulk
carriers capable of carrying a cargo
of 100 000 tonnes. Assuming such
vessels can make six trips per an-
num, then we are talking about 1000
of these massive carriers on the wa-
ter at any one time. And one should

add in the fact that around one third
to half of these vessels carry coal
overseas. Brazil and Australia are
the main exporters of iron ore, both
having shipped around 220 million
tonnes last year. China alone import-
ed 208 million tonnes of iron ore,
which is nearly double the 2002 fig-
ure of 111 million tonnes. This has
led to unprecedented increases in
ocean freight rates and multiple im-
pacts on the global logistics industry.

South Korea’s steel giant Posco has
calculated that the 71.5% rise in 2005
iron ore prices brings the average val-
ue of this commodity to US$ 39.50 per
tonne, up from around US$ 23 last
year. The company says it will pass on
this rise in full through steel sales,
which boils down to an increase of
14%. In Europe, it is calculated that
the iron ore price rise translates into
a steel increase of € 25 per tonne
(US$ 33).

Posco also says it is paying 116%
more for its coking coal year on
year. Integrated mills are being
squeezed from every direction, it
would seem.

Steel

Steel mills all over the world have
reported record profits for 2004 and
Arcelor’s Chief Executive Officer Guy
Dollé suggested in early February
that 2005 would also bring healthy

returns. However, the unexpectedly
large increase in iron ore prices
makes the situation somewhat less
certain. Furthermore, it is question-
able whether steelmakers realise
that steel prices have increased far

Recycling International • April 2005 55

Iron ore: one man’s death is another man’s breath

China’s demand for scrap could climb in 2005

The steep rise in iron ore prices
is undoubtedly good news for the
mining companies, bad news for
the integrated steel mills, mixed
news for the mini-mills with their
scrap-dependent electric arc fur-
naces (EAFs) and perhaps good
news for the scrap sector.

To explain further, integrated
steel mills operate a dual melting
system, making iron in blast fur-
naces from ore plus coking coal and
subsequently mixing the liquid iron
from these huge and costly blast fur-
naces with purchased and own
scrap in basic oxygen furnaces
(BOFs) using a ratio of roughly
85:15. These mills are unlikely to be
able to pass on far higher ore prices
in full to their customers. Buyers in
the automotive industry, for exam-
ple, will probably react by explain-
ing that they cannot pass on higher
steel prices to customers with whom
they have already entered into long-
term, fixed-price contracts.

Recent developments could well
please the mini-mills, whose EAFs
produce some 34% of the world’s

steel. A decade ago, there was little
competition between integrated
mills and the mini-mills as the for-
mer focused on flat steel while the
latter made only long construction
steel. Mini-mills have also managed
to make flat steel products in the
recent past but cannot use ore in its
pure form as a raw material;
instead, they depend on an input of
80-100% scrap, the balance being
ore-derived pig iron or sponge
(DRI/HBI) iron. Thus, lower scrap
prices improve their competitiveness
in relation to the large integrated
mills since only their generally low
intake of pig and sponge iron – typi-
cally 0-20% – will cost them more.

In 2004, the scrap price nearly
doubled but iron ore values
increased by only 19%. The mini-
mills, and especially those in USA,
immediately switched to using far
more pig and sponge iron, mainly
imported via New Orleans and
transported up the Mississippi
River to the mini-mills along its
shore. Last November, a record 0.8
million tonnes of pig iron from

Brazil and other countries was
imported via New Orleans but this
tonnage will be materially lower in
the months to come.

This switch to competing com-
modities was viewed with regret by
the scrap trade. In conjunction with
several other factors, this has led to
a steep fall in scrap prices over the
last four months. US factory bun-
dles dropped by no less than US$
200 per tonne in those four months.
Never before was such a heavy fall
seen in such a short space of time.

It is already apparent that mini-
mills and also integrated mills will
have to increase their scrap pur-
chases. It is, of course, anomalous
that the price of two raw materials
– ore and HBI/DRI – should experi-
ence a price explosion at the same
time as their main competitor –
scrap – suffers a price plunge.

Thus, scrap prices are likely to
rise unless the mills succeed in
passing on ore/sponge purchase
price increases in full to their cus-
tomers. Even so, they will have to
consider using more scrap again.

Interesting but sometimes con-
flicting figures relating to Chinese
ferrous scrap demand were given
at the China International Metal
Recycling Forum in Guangzhou.

Wu Jianchang from the China
Iron and Steel Association predict-
ed that scrap imports would jump
by around 27% this year to 13 mil-
lion tonnes, having reached 10.2
million tonnes in 2004 and 9.3 mil-
lion tonnes in 2003. He believed
total ferrous scrap demand would
advance by around 10% this year
from 51 million tonnes to 55.2 mil-
lion tonnes.

However, his colleague Liu
Leiyun told the meeting that he
expected imports to decline to

10 million tonnes. This figure
includes 4 million tonnes from ‘bor-
der trade’ with CIS countries via
harbours in Siberia, and with South
Korea. A maximum of 2 million
tonnes would come from the USA
compared to 2.97 million tonnes
last year and 3.15 million tonnes in
2003, while Japan was expected to
supply around 1.5 million tonnes
this year.

According to Mr Liu, last year’s
average price for imported scrap
was US$ 194.80 per tonne and this
was sold locally for, on average,
US$ 264.90. Scrap consumption
grew only 1% due to a higher input
of ‘hot’ iron from blast furnaces, he
noted in conclusion.