Page 47 from: July / August 2005

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

dwindled to below US$ 200 cfr in the
previous month.

Seeking too much
compensation

Virtually all large steel mills have
been desperately trying to find com-
pensation for the explosion in iron
ore, coking coal and oil prices in the
first half of this year, especially as
the steel market confounded the ex-
pectations of all the major steel pro-
ducers by falling rather than rising
in early 2005. Initially, mills in the
USA and Western Europe in partic-
ular attempted to repair their loss of
margin by imposing sky-high ‘scrap
surcharges’ on their steel sales; but
when the scrap market began to
tumble in the first quarter, various
steel mills hurriedly changed their
tactics and swapped the appellation
‘scrap surcharges’ for ‘raw material
surcharges’. These surcharges were
as high as US$ 175 on every tonne
of steel offered in January and were
only grudgingly accepted by stock-
ists and consumers such as those in
the automobile industry.

In the second quarter, the next
move by mills in the Western and
Eastern world was to pretend that
they were not interested in buying
scrap, with the result that prices fell
on a weekly basis. Some scrap
traders saw this as a worldwide con-
spiracy to achieve lower scrap prices,
but this seems unlikely.

Finally, it became clear during
the course of the second quarter that
the steel market was not recovering
but, on the contrary, was declining
still further due to falling demand
and over-production in China and
elsewhere. As a result, these scrap
surcharges were cut in half and,
more recently, the two main US mini-
mills – Nucor and SDI – have an-
nounced that they will refrain from
imposing scrap surcharges on August
deliveries. In Europe however,
Arcelor and Peine Salzgitter doubled
surchargers for August deliveries.

Panic among mills

Panic has been particularly appar-
ent among Turkish, Spanish and Ital-
ian mills given that their stocks had
dwindled in the expectation that steel
production would have to be curtailed
and that scrap traders would sell at
any price. But the scrap industry has
grown accustomed to the game of
squeezing the price of their product;
contrary to virtually all other raw
materials used in steel production,
scrap is a short-term commodity and
traders had earned enough in 2004 to
sweat it out. So on this occasion the
scrap trade said: ‘Here and no further
– we will hold our sales until the price
has improved markedly, which we ex-
pect it to do at the end of the usual
summer lull.’

In addition to all this, the Ukraine,
Russia and Kazakhstan were curtail-
ing their exports of scrap following
the dramatic fall in domestic collec-
tion volumes. Meanwhile, Italy faced
scrap import stagnation due to an-
other slug of incomprehensible envi-
ronmental measures from its local
authorities who adopted a strict in-
terpretation of an obscure Italian law
which designates scrap as a (haz-
ardous) waste, thereby virtually
blocking sea-borne imports of scrap.
Italy is the world’s fifth largest scrap
importer on around 6 million tonnes
per annum and this situation meant
that the group of mini-mills around
Brescia faced a substantial scrap
shortage. A ship carrying 9000
tonnes was refused permission to un-
load at the port of Marghera on the
Adriatic Sea and had to be re-routed
to Slovenia. Italy had to resort to
southern Germany for its scrap but
the rail route from Bavaria via

Switzerland is very expensive. The
scrap price in that part of Germany
subsequently rose by no less than
€ 50 (US$ 60) in the space of a few
days at the end of June, dragging the
EU price level along with it.

In the final week of June, Turkey
ventured to buy larger volumes of
scrap (over 1 million tonnes, it was
rumoured) from the USA, Western
Europe and CIS countries, paying
around US$ 215 cfr Turkish port or
around US$ 30 per tonne above the
price of a few weeks earlier. This con-
verted to an 80/20 HMS I/II scrap
price of US$ 190 fob for EU shippers
facing a freight rate of around US$ 20
per tonne. However, once the Turks
realised they had bought too much,
too fast and at too-high a price, they
withdrew from the market and the
price fell back to around US$ 180 fob.
However, there was a US$ 15 up-
ward correction at the end of July.

In the Far East, China and South
Korea also showed some renewed in-
terest in buying scrap at around
US$ 245 cfr. However, with freight
rates of around US$ 70 per tonne
from the US East Coast and West-
ern Europe, these regions were – and
still are – unable to compete with US
West Coast shippers. It should be re-
membered that China, the world’s
second-largest scrap importer after
Turkey, sources around a third of its
scrap requirements from Russia and
Kazakhstan, and about a fifth each
from the USA and Japan. This
leaves only 25% to be supplied by all
other countries combined and little
of this comes from Europe nowadays.

Competing commodities

As mentioned above, prices of pig
iron and HBI did not follow the up-
ward trend in scrap prices during the
early days of July. As a consequence,
the market witnessed the disappear-
ance of the familiar US$ 40-50 per
tonne gap between these primary
and secondary commodities. But
then, also in early July, Brazilian
and other pig iron producers simply
refused to sell at these low prices of
around US$ 205 cfr New Orleans
since this meant they were losing
money given steep increases in iron
ore and energy costs since the start of
this year. Their next step was an an-
nouncement to curtail production of

pig iron by no less than 70%; and at
almost the same moment, the Chi-
nese government announced it was
to implement a 20% duty on all ex-
ports of pig iron from August 1.
These two factors turned the market
around, with pig iron and HBI prices
then rising broadly in line with scrap
values. DRI – which is lower in quali-
ty than its briquetted form HBI and
more difficult to transport overseas
given that reaction with water can
lead to fires in vessel holds – achieved
only a slight increase to around US$
200 delivered.

Of course, this upward price ad-
justment among iron ore-derived
commodities, pig and HBI was good
news for the scrap trade since it
could now be sure that higher prices
for its product would be generally ac-
cepted worldwide.

Steel

The scrap trade can derive more
good news from the evident bottom-
ing-out of steel prices which have
been in gradual decline since the
start of the year. Scrap prices im-
proved because it became apparent
that steel prices would fall no fur-
ther; and steel prices – especially
those of scrap-derived long products
– improved when it became clear
that scrap traders would refuse to
sell any more product at prices they
considered to be unreasonable. This
was perhaps a chicken-and-egg sit-
uation, but it worked in favour of
both steel and scrap prices.

Prices of the majority of steel prod-
ucts stabilised during early July fol-
lowing the heavy falls sustained dur-
ing the first half of 2005. Some long
products – such as electric arc fur-
naces’ typical output of wire rod, re-

Recycling International • July/August 2005 47