A boom of imports of steel and raw materials, including basic pig iron (BPI), in China in 2020, has supported the global price trend and made major exporters more dependent on China. From 2021, the situation may change.
China’s scrap imports to revive by end of 2021
No more solid waste import applications will be accepted or approved by China’s Ministry of Ecology and Environment (MEE) as of 2021 with steel scrap as an exemption, according to official announcement in mid-2020. Only the recycling steel materials that meet the criterion could be imported and will not be subject to the quota limit, so import of ferrous scrap is expected to revive from next year as at the moment the quota for it is critically low. At the same time, market players do not think the scrap import will restart from early 2021 as the standardization system and all the process will be finished later and the imports will likely resume by the end of 2021.
The scrap imports in China in the years of 2014, 2015, 2016, 2017, 2018 and 2019 amounted to 2.56 million mt, 2.33 million mt, 2.16 million mt, 2.32 million mt, 1.34 million mt and 180,000 mt, respectively, indicating sharp drop from 2018. There is no evidence that scrap imports will quickly rebound to the level of around 2 million mt, sources told SteelOrbis.
Nevertheless, this change in import restrictions may visibly change the situation in China and the global basic pig iron (BPI) market. At the moment, average domestic scrap prices for HMS scrap in China are at RMB 2,720-2,725/mt ($400-401/mt) ex-warehouse including 13 percent VAT, which is approximately $100/mt higher than international prices or by more than $50/mt above them if to exclude VAT. Having no other choices but to purchase domestic scrap, customers in China have supported such a high price level and have started to import basic pig iron actively since the end of 2019 year.
BPI imports to China surge this year
Average monthly BPI imports to China in 2019 was around 82,000 mt, according to SteelOrbis calculations based on customs data, but it has been growing steadily from the first quarter and reached 647,627 mt in June, the highest monthly volume available for this year at the moment. In March-July 2020, total imports of BPI to China has reached approximately 1.9 million mt. “For the time being, it will all depend on China, since US buyers are still conservative. New HBI production to come on stream soon and still have sufficient scrap supplies around. The fundamental question will be, if China will deregulate ferrous scrap imports as of 2021 and to which extend this might have an impact on pig iron demand in the short term as a direct result,” a market source told SteelOrbis.
Total pig iron exports from Russia and Ukraine in the first half of 2020 has reached 3.2 million mt with China accounted for more than 15 percent from less than 3 percent in the previous year. In September, the situation started to change, even though China has continued to import BPI, the sentiment has worsened due to a weaker local steel market and not so bright outlook as earlier.
What next?
When the scrap imports resume, imports of pig iron will likely be negatively affected, most sources believe. But the slowdown of imports of BPI has already started, as it has become riskier to import pig iron considering that weaker domestic steel prices and too high local scrap prices, which have already started to go down, have cut profits of customers.
“Buyers are more cautious. We hear of scrap import licences getting released. Today the price China is paying for pig iron is +$100/mt to deep sea scrap. This is because local scrap is too high as imports are banned,” a source told SteelOrbis. “We start to see a lot of resistance from buyers in accepting the new pricing,” he added.
Most market sources believe that domestic scrap prices will fall drastically, when imports resume, which will also impact pricing for pig iron. But this will be effective “only by the end of 2021,” another source said.
There is some uncertainty whether there will be enough scrap available to feed China, but as it is expected that imports will grow gradually, major suppliers may react accordingly.
“I think in the first quarter of 2021 China will still import pig iron, but will be super cautious on pricing,” SteelOrbis learned from one of international trading sources.
Another market source said that he expects China’s pig iron imports will not only be maintained in the first quarter of 2021 year, but rebound to high levels, seen earlier this year, because of sintering and blast furnaces restrictions in the northern part of China and supported by government initiatives to boost steel demand.