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The dynamics of scrap in SE Asia

Feb 03, 2020 | 06:00 AM |


Multiple factors are bearing on the dynamics of ferrous scrap markets in southeast Asia, which scrap trader Hoffman Iron & Steel is looking to as a key area of growth for its business. Paul Lim asked CEO Philip Hoffman about the outlook for the region

“There’s a lot going on in Southeast Asia, such as expanding electric-arc furnace (EAF) and Induction Furnace (IF) capacities in Vietnam and other IF capacity sent from China to countries such as Indonesia and the Philippines, so there has been and will continue to be an increase in demand for ferrous scrap in the near term,” Philip Hoffman,CEO of ferrous scrap trader
Hoffman Iron & Steel told Fastmarkets MB.

Vietnam imported 5.65 million tonnes of ferrous scrap in 2018, up by 19.6% year on year as a result of capacity expansions in the country, notably at EAF-based steel mills such as Vina Kyoei Steel (VKS), POSCO and Tung Ho Steel Vietnam, and IF-based mill Anh
Hung Tuong Steel.

Chinese sellers have also sent dismantled IFs to be rebuilt in Southeast Asia after the Chinese government shut down illegally run IFs in the country amid an ongoing drive to cut excess capacity and increase the quality of finished steel for the country’s domestic markets.

Hoffman Iron & Steel is capitalizing on the new opportunities by partnering with major Japanese scrapyard Shimabun Corporation to expand its sales volumes in Malaysia, Indonesia, Thailand, Vietnam and  Bangladesh from 2019 onwards. “Japanese scrap has a strong position in the market and some  mills prefer Japanese scrap compared with other imported scrap. While there are different Japanese exporters and producers with varying qualities of product, Shimabun Corporation has a good mix of high-quality scrap, including heavy melting scrap (HMS) 1&2, shredded and Shindachi scrap,” Hoffman said.

Their scrap processing facilities and export material also sit on top of concrete, which reduces the dirt and dust on the ferrous scrap, thereby reducing the number of claims a trader may face from buyers unhappy with the quality of scrap received. “In addition, while ferrous scrap from other origins such as Hong Kong may be cheaper, they need more processing such as additional cutting,” Hoffman said.

Shimabun Corporation produces about 200,000 tonnes of ferrous scrap a month, or an estimated 2.4-3 million tonnes per year, through scrap processing facilities at Kobe, Kure and Kagawa, and storage facilities at Hyogo, Chiba, Kanagawa, Fukui, Kyoto and
Kagawa and Yokohama Port.

Competition from BF mills

While some market observers may expect the new demand for scrap to support prices in the near-term, the increasing emergence of blast furnace (BF)-based steelmakers in the region will also put a cap on downstream finished steel prices. New BF-based long steel production capacities include Pomina Steel Corp in Vung Tau, Vietnam, Gunung Garuda in Cikarang, Indonesia, and Formosa Ha Tinh Steel Corp in Ha Tinh Vietnam, which is gradually increasing its steel production. There are plans for more integrated BF-based steel mills in Malaysia and Indonesia.

“There is equal pressure on the finished steel side by BF-based operators,” said Hoffman. He noted that Vietnam’s Formosa Ha Tinh Steel Corp and Hoa Phat Group are supplying billet in the domestic Vietnam market at very economical prices to compete with EAF-based producers such as VKS, Tung Ho and An Hung Tuong Steel. “They are also exporting long steel products to the Philippines,” Hoffman said.

“While the new BF-based capacities may not be all that significant in the overall production numbers, these new capacities will
still have an impact on the Asian ferrous scrap markets and put a cap on scrap prices,” he said.

Possible new investments

Hoffman Iron & Steel is optimistic about growth in the region and plans to continue very much focusing on the Southeast Asian markets despite the twin challenges of competitive iron-ore based hot metal costs and weak demand from downstream finished steel markets. It has studied setting up its own new scrap processing capacity in light of the growing opportunities it sees in the region and is investing in scrap equipment and a new yard in Southeast Asia, due to be running by the end of February. “There is big potential for this [and] we already know the Asian markets very well,” Hoffman said.

On top of the new partnership with Shimabun Corporation, Hoffman Iron & Steel is also continuing to expand its current business of moving US-origin scrap to the region by increasing the quantity of its US-origin scrap exports to other countries and diversify the number of Asian destinations to which it can move ferrous scrap cargoes.

“We know the Asian scrap business very well; we know the quality of scrap from suppliers and we supervise the loading and discharge of ferrous scrap cargoes personally. We don’t simply just pick up the phone and try to make deals, and that’s why Shimabun gave us the new business,” Hoffman said.

Bangladesh is another big market the company wants to focus on. “Bangladesh is increasing its steel capacity with at least one new steel mill and existing mills that are expanding. The country is also paying high prices for ferrous scrap now because of logistical complications shippers face, for example, the possibility of demurrage and opaque payment terms. So, it is quite good business for traders,” he said.

China’s impact

China is unlikely to have an immediate impact on ferrous scrap trade flows in the mid-term, Hoffman said, because of its ongoing drive to “modernize” its scrap markets. For example, in 2017 significant tonnages of Chinese scrap was being sold on the black
market into Vietnam and other countries, but the Chinese government soon got wind of the tax-avoidance scheme and arrested over 100 Chinese sellers and traders.

“China is developing its ferrous scrap markets to be more modernized and market-driven and the Chinese government considers scrap metal a strategic raw material, so I don’t see China exporting significant amounts of scrap in the near term,” Hoffman said.
There is also ample room for BF-based steel mills in China to increase the amount of scrap they can feed into their furnaces. “There can be at least a 5% more increase in ferrous scrap usage in the short term from the current 15%, depending on which part of China you are looking at,” Hoffman said.

The new policy rulings of replacing BFs with EAFs will ensure that China continues to consume ferrous scrap, with the Chinese government likely to consider it a strategic material and limit exports. “What’s more, China wants to move up the supply value chain and export value-added products, and employ more people in doing so, instead of exporting raw materials,” Hoffman continued.

However, ongoing trade tensions, as well as multiple trade defenses faced by both steel exporting and importing countries, continue to cast a bearish pall on the global economy and steel markets. “And with more steel capacity coming to Southeast Asia, there will likely be more trade defenses coming to keep Chinese steel imports out, so I foresee more duties on China-origin steel in the coming years,” Hoffman said.

Indonesian regulations

New regulations in Indonesia on ferrous scrap are another influence over the region’s markets. Confirmed by the Indonesian government, they stipulate that ferrous scrap imports must be shipped directly from the exporting country. While transshipments are allowed, the seals on containers must not be broken at transit ports. The threshold on impurities has also been increased to 2%, according to market sources. Sellers must also have registered subsidiaries in countries where the ferrous scrap originates from.

The new regulations also mean that some companies will have to scramble to register subsidiaries in the countries where their ferrous scrap supply originates from.“There may be Asian trading companies without subsidiaries in the United States, or Indian trading companies which do not have subsidiaries in Japan. They may have to jump through hoops to get themselves registered quickly,” Hoffman said.

In the meantime, market shares may shift in favor of companies that are already registered entities with the Indonesian ministry of trade and have a handle on their own scrap supply. “Certainly, these companies will see an increase in market share. In fact, trading has already resumed and sellers have started closing deals, especially as the IF-based steelmakers in Indonesia need high-quality scrap to melt,” Hoffman said.

Clawing back market share by others who are late to attain the new regulatory standards may be achieved by offering sweeter financing deals compared with competitors. “There’s still a way to attract customers even if you are late getting back into the game. Some trading companies allow their customers to pay on a telegraphic transfer basis, which is more attractive compared to repayment terms on an letter of credit basis,” Hoffman said.

The outlook for the Indonesian scrap and steel market continues to be fluid, especially for the second half of 2019. “No one knows how the situation will pan out, but it is likely that the regular buying volumes will resume eventually. There’s no way the Indonesian steel mills, especially the IF-based ones, will be able to stay away from buying imported scrap,” Hoffman said.

The stable demand from the downstream steelmaking industry will also support prices for imported material. “China is unlikely to export large quantities in 2020, especially as China is continuing to clamp down on capacity expansions. So, Indonesian steelmakers will continue to face stable demand from domestic buyers,” Hoffman said.

He cited the example of Indonesia’s plan to shift its capital from Jakarta to East Kalimantan province on Borneo Island. “A good amount of steel will be used in the shifting of the capital, as well as in other infrastructural projects which  are slated to start in the near future, such as improving waste water treatment and flood prevention aqueducts in Jakarta. So steel demand will continue to increase,” Hoffman concluded.

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