India: Will imported scrap demand improve on rising sponge prices?

There is considerable buzz in the Indian ferrous scrap market, both imported and domestic, because of rising sponge iron prices.

“There is demand for scrap in the domestic market which is pushing up prices,” an industry insider told SteelMint.

It may be mentioned that scrap imports have been showing a downtrend for the last few months. Aug’21 scrap imports dropped to 0.28 mn t while July’s levels were at 0.31 mn t as per SteelMint’s data. Imports were showing a downtrend because of high prices and sluggish domestic demand. Imported shredded prices in containers rose to $495/t, CFR Nhava Sheva in Jan-Jul’21 against $285/t in CPLY.

Reasons for expected higher imported scrap demand

• Rising sponge iron prices: Prices of sponge iron have been heading north, pushed by skyrocketing thermal coal prices. From Sept’21 end, prices of P-DRI, exw-Bellary (FeM 80%) have moved up from less than INR 29,500/t levels to over INR 32,000/t. Prices rose sharply to INR 33,700/t in Bellary on 01 Oct’21. The prices have rallied by around INR 4,000/t in the month of Sept’21.
• The sponge units are starved of coal. They consume 40-45 mn t of thermal coal annually of which 10-15 mn t comprise domestic. Around 20 mn t are imported from South Africa and the rest is bought from the spot market through traders and auctions. However, most of these plants have shifted to domestic coal over the past 2-3 months because of surging imported prices. RB2 rates have spurted from monthly average $84/t FOB in May’21 to $170/t FOB levels. But domestic coal is hard to get at present since Coal India is diverting almost the entire quantum towards the power sector which is facing critically low stocks.
• Lower scrap generation: There has been a drop in automobile production because of the chip shortage. Certain major producers had announced cut in production volumes. As per SteelMint’s estimates, ferrous scrap generation dropped by around 20-30% in Aug-Sept’21. Also, lockdown woes in Q1 FY’22 lowered the pace of domestic scrap auctions from dismantled plants.
• Rise in scrap consumption: Because of high coking coal prices, mills are opting for scrap. India’s import prices of the Australian HCC 64-mid vol have trebled from monthly average $100/t CNF in Aug’20 $364/t CNF in Sept’21. The benchmark Australian premium HCC shot up from $122/t CNF India in Aug’20 to $420/t CNF levels in end Sept’21. Primary mills are opting for scrap instead of iron ore, while induction furnaces and electric arc furnaces are using scrap instead of sponge iron.

Outlook

Demand for imported scrap will remain active till Jan’22-end. “The market will remain very active over the next four months. The peak season for the Indian scrap market is October-January,” said a trade source.

The Indian imported scrap market reported active trade deals since the past few days. Various deals of UAE-origin HMS 1 were at $470-475/t CFR basis towards mid-week and then at $485/t CFR Nhava Sheva.

Domestic prices are likely to remain firm too because a steel demand uptick is expected in the short term, which would increase demand for scrap.

However, orders placed for auto scrap in particular take a month or two to get delivered for melting. So, the impact of the loss in scrap generation will be felt 2-3 months down the line.

Globally, scrap prices are inching up because steel making using via the BF-BoF route has become expensive (owing to higher coking coal prices).

Sponge contributes 25-30 % of India’s crude steel production whereas scrap contributes around 15-20%. Since sponge has a higher share, scrap prices are bound to get impacted.