Zouheir Tawil: Ahead of winter, Turkish mills must assume part of the risk

Thursday, 13 December 2012 17:56:47 (GMT+3)   |   Istanbul
       

Zouheir Tawil, director of Tawil Group, has responded to our questions and expressed his views on the current state of the scrap markets.
 
Could you share with us your average business volumes in the markets in which you operate?
 
With the biggest metal recycling network in Romania, Tawil Group exports between 800,000 and 1 million metric tons of ferrous scrap per year. Of this total, 90 percent goes to Turkey, while the remainder is shipped to Greece and Egypt. However, in 2012 the quantity will fall to about 700,000 metric tons due to several reasons, one of which is that the US is selling aggressively to Turkey and Turkey has preferred to buy ex-US and ex-Russia scrap rather than Romanian scrap, as Romanian scrap has remained relatively more expensive. So the current situation forces us to wait for a better market.
 
SteelOrbis Reference Prices indicate that Turkish mills' ex-Black Sea A3 scrap purchase prices were at about $420-435/mt CFR in early December 2011. This year prices are currently at about $370-375/mt CFR levels. So it seems that prices have not recovered after the steep declines that were seen from late May until July. Given that steel producers are suffering greatly from squeezed margins, do you think any increase in scrap prices would be sustainable with the arrival of winter?
 
Our sales price for Turkey was at the average price level of $407/mt CFR from January 1 this year until the end of November. Normally, Romanian A3 scrap is about $15-20/mt cheaper than ex-US HMS I/II 80:20 prices. However, if you compare ex-Black Sea and ex-US average scrap prices, then you will notice that the gap between them is much smaller than it should be. The first reason behind this is that US suppliers are under greater pressure to conclude sales, as they have bigger scrap volumes in hand. Secondly, US suppliers have to load vessels of 40,000 metric tons, while in the Black Sea the contract volume may be as low as 3,000 metric tons for a vessel. Consequently, ex-Black Sea suppliers are able to speculate on prices far more easily as compared to their peers in other markets.
 
Recently, a top executive of a major Turkish mill said that they have lost some of their pricing power in scrap, since they have been keeping their scrap inventories as low as possible as a way of avoiding risks since the last economic crisis. Since the loss of one side is the gain of the other, then you should now have more pricing power. Do you?
 
Today, Turkey has become the Mecca for steel scrap, offers are coming from everywhere in the world and Turkish mills more or less control scrap prices. Especially when the scrap market is softening, suppliers around the world are competing to sell the first cargo.
 
People are always concerned about the squeezed margins of steel mills, but never look at the losses incurred by the scrap industry. Scrap yards are also a part of an industry with operating costs, salaries and various expenses. But the difference between a steel mill and a scrap yard is that a steel mill may well stop its purchases any time, while a scrap yard cannot.
 
As lower scrap prices normally mean less scrap collection and in turn tighter availability, do you think scrap yards have prepared themselves for the winter? What is your outlook for scrap collection during the first quarter of 2013?
 
Beginning from December and until mid-February, scrap collection is halved in the best-case scenario. Steel mills are concerned to have sufficient scrap inventories and the scrap suppliers are always uncertain as to whether they should sell in December or  wait for a better market in January, as in the last 10 years November and December have always been the best two months of the year in particular.
 
What should be a reasonable price level for December and January in your opinion?
 
If they can replace their stock in wintertime, I think a fair price today should be between $390-410/mt CFR Turkey. Otherwise, suppliers would prefer to wait. Italian and German steel mills are increasing their scrap purchase prices by about €15-20/mt since generally in Europe stocks are very low today and scrap yards are empty. Ahead of the winter, Turkish mills also have to assume a part of the risk.
 
After the world economic crisis in 2008, scrap prices even plummeted below $200/mt CFR and then stayed mostly below $300/mt CFR during 2009. So do you think this is the lowest base price possible for scrap?
 
If we take a general example, in the period between 1990 and 2000 the price of crude oil per barrel was around $16-20, while scrap prices were between $80/mt and $100/mt. In 2008, scrap prices exceeded $700/mt, while the price of crude oil rose above $130. With the start of the economic crisis, the price of crude dropped down to $30 and scrap prices plummeted to $150/mt. But I believe that the bottom scrap price this year was around $360/mt CFR Turkey.

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