In this graphic, the price of 80/20 steel scrap delivered to Turkey is compared to the weighted iron ore/coking coal price - with the iron ore price being the delivered price to China and the coking coal price being the Australian export price. (Note: We assume 1.6 tonnes of iron ore and 0.9 tonnes of coking coal per tonne of pig iron.)
As indicated, since this spring the combination of the roughly $75 per tonne decline in steel scrap price delivered to Turkey and the $100 per tonne spike in the coking coal price, notwithstanding about a $6 per tonne drop in the iron ore price delivered to China, has resulted in about a $90 per tonne discount in the steel scrap price relative to the weighted iron ore and coking coal prices.
A discount this substantial last persisted in 2014 when USA steel demand rose about 9% and steel production in China, at 823 million tonnes, was up about 100 million tonnes from 2012. And, the U.S. dollar on a trade-weighted basis at that time was about 10% cheaper.
Given the current steel scrap price discount, Turkish EAF-based steelmakers will turn once again to the making rebar in their steelmaking furnaces, rather than converting it from billet that's purchased from China and Russia. That is, if the Chinese billet price rises due to the increase in the coking coal price.
What came first, the chicken or the egg? Or, what drives the steel scrap price, the supply/demand balance or its relative value?
What may cause the "spread" to diminish? If Chinese steel production falls back as we are forecasting, the major driver will be the drop in the coking coal price.
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