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Covid-19 vs '15 crisis: how low can steel go?

Apr 08, 2020 | 10:47 AM | Singapore | Paul Lim

Tags  steel, Covid-19, coronavirus, financial crisis, recession, ferrous scrap, hot-rolled coil, rebar billet

The fate of the steel world continues to hang in the balance: Numerous scrapyards have stopped operating, blast furnaces around the world have halted and aggressive offers by traders for Russian and Indian supply have pushed prices down further.

In the Asian hot-rolled coil market, for example, Russian and Indian material is expected to remain the lowest-priced supply in the spot market for the foreseeable future due to the weak domestic currencies in those countries, which has allowed exporters to offload cargoes at lower prices.

The last major crash in steel and ferrous scrap prices was in 2015-16, when a combination of a China stock market rout, crude oil price plunges, sovereign debt defaults in Europe and the confirmation of Brexit caused commodity prices in the metals and mining sphere to follow suit.

The key difference between the last price crash and the current one is that the 2015 crisis was not grounded in a physical virus outbreak and was largely caused by sentiment in the financial markets.

In 2015, prices recovered strongly within six months, surging past pre-crisis levels quickly in the face of expansionary economic policies by governments. The following year was also when China embarked on a supply-side reform of its steelmaking industry and cut an estimated 150 million tonnes of induction furnace capacity in an effort to control the production of low-quality steel.

Take for example the following key prices:

The steel scrap HMS 1&2 (80:20 mix) US material import, cfr main port Taiwan price more than doubled within six months:
- October 23, 2015: $137.50 per tonne cfr
- April 29, 2016: $290 per tonne cfr

The steel billet import, cfr Southeast Asia price increased by 67.3% within six months:
- December 14, 2015: $246.50 per tonne cfr
- May 2, 2016: $412.50 per tonne cfr

The steel hot-rolled coil index export, fob main port China rose by 83.5%:
- December 4, 2015: $257.50 per tonne fob
- April 22, 2016: $472.50 per tonne fob

The steel reinforcing bar (rebar) index export, fob China main port increased by 66.3%:
- December 18, 2015: $252.50 per tonne fob
- April 29, 2016: $420 per tonne fob

The iron ore 62% Fe fines, cfr Qingdao, price increased by 73.2%.
- December 11, 2015: $38.30 per tonne cfr
- April 22, 2016: $66.33 per tonne cfr

During the financial crisis, steel demand and supply were not changed in a big way structurally versus the current period, where steel mills have shuttered and stopped melting operations for a longer period of time.

The turning point?
Many countries estimate the tide could be turning now, with the number of deaths and infections tapering off in countries such as Italy and the United States and their Covid-19 curves approaching peaks.

But this is not confirmed. Experts believe that asymptomatic cases still linger among the general populations and that subsequent waves of infections could follow.

In Turkey, import prices have surged in the past few days due to shortages of ferrous scrap from key suppliers, the US and Europe. Major ferrous scrapyards have stopped collecting ferrous scrap and halted operations.

This has led to expectations that scrap prices in Asia will no longer continue on a headlong plunge and stabilize going forward.

"I expect that prices will stop falling but only temporarily. Given the state of things around the world, there’s limited demand which will support prices,” a ferrous scrap trader in Japan said on Tuesday April 7.

A short-term rebound in ferrous scrap prices is likely in the books, another ferrous scrap trader in Southeast Asia said.

“Because automotive plants in Japan have shut and some areas of the country are now in a state of emergency, there is difficulty collecting scrap and Japanese scrapyards are raising their offers even as we speak,” the source said on Tuesday.

Eyes on China
A key factor will be whether China continues on the "V-shaped" recovery it has been aiming for.

China has been importing large quantities of semi-finished and finished steel. It has been importing billet and slab from Russia, Vietnam, Indonesia, the Middle East and Brazil, and hot-rolled coil from India and Russia.

It has also bought rebar and wire rod from Malaysia.

"If China is able to return to its usual level of business activity, then prices will be more sustainable. If Chinese economic activity continues to remain weak, then another price fall will surely come," a ferrous scrap trader in Singapore said on Wednesday.

China's official purchasing managers' index (PMI) was at 35.7% in February, down by 14.3 percentage points from January, with the production index at 27.8%, down by 23.5 points, according to the National Bureau of Statistics of China.

The construction business activity index was at 26.6% in February, down by 33.1 points from January.

While the various Chinese economic indices are forecast to increase from March onward, it remains to be seen how much of an increase they can achieve and whether they are sustainable for the rest of 2020.

"The Chinese would be fools to think that their economy can be revived in the rest of 2020 if the rest of the world continues to suffer from the knock-on effects of Covid-19. That's because China exports so many goods and products to the rest of the world, which are still under lockdown, or will take an extended period of time to recover," a steel trader in the Philippines told Fastmarkets.

Unclear outlook
In short, it is not clear whether steel and ferrous scrap prices have bottomed out yet due to the various factors that are expected to continue weighing on economic rebounds.

Once countries push past the coronavirus curve peak, their individual economies will also take time to recover before market confidence sets in again.

Yet it is very clear that price volatility and trading risk remain at the forefront of commodities trading. Market participants in the steel and ferrous scrap industries must continue to innovate and think of new ways to stay ahead, for example, using hedging and using price indices to reduce risk or face having to undergo the same pain cycles every time an unexpected crisis emerges.


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