Evaluation of Ukrainian domestic scrap market
According to operational data, during the first eleven months of 2007, Ukraine processed about 7.063 million metric tons of scrap, showing a 4.4 percent increase compared to the same period of 2006, and a 1.4 percent increase compared to the same period of 2005.
During the period in question, the volume of scrap consumption by the 12 leading Ukrainian steel mills comprised 6.4 million metric tons - up 3.8 percent compared to the corresponding period of 2006, and up 10.9 percent compared to the corresponding period of 2005. Meanwhile the steel production growth for the given period was five percent compared to same period of 2006 and 11.4 compared to Jan-Nov of 2005.
The negative difference in the rate of growth of scrap consumption and rate of growth of steel production was more or less compensated by the increase in pig iron production during the first eleven months of 2007 by 8.6 percent compared to the corresponding period of 2006, and by 16.3 percent compared to first eleven months of 2005.
Meanwhile, during the given period, an average use of scrap purchased from the market for the production of one metric ton of steel equaled 163.6kg per one metric ton of crude steel, showing a 1.1 percent decrease compared to the data of the corresponding period of 2006 and by 0.5 percent lower than in the first eleven months of 2005.
The above-mentioned data show that the growth in crude steel production in the last three years has been accompanied by increases in both supplies of scrap from the market and in scrap processing capacities at the mills. The latter was possible due to the decrease in billet exports (during the period in question exports of billets from Ukraine decreased by 8.4 percent year on year) and due to the increase in the production of finished long products (by 20.9 percent during the period in question).
In addition, the presence of considerable scrap stocks at the steel mills overshadows the current claims that Ukrainian steelmakers have a problem of scrap undersupply. Thus, with the decrease in scrap supplies of 1.1 percent from Jan-Nov 2007 to Jan-Nov 2006 there is no way the steelmakers could increase their scrap stocks by 20.1 percent. Consequently, the conclusion made by Metalurgprom that Ukrainian steelmakers are currently able to satisfy their scrap needs only by 83 percent is misleading. Meanwhile, the estimate of UAVtormet (UAMB) regarding this point is 93 percent.
The estimates and effects of scrap procurement prices on the growth of scrap consumption volumes is also interesting to see. Thus, with growth in average monthly procurement scrap prices from $180/mt in 2005 to $213/mt in 2006 (or by 18.3 percent) and to $249/mt in 2007 (or by 16.9 percent compared to 2006), the scrap consumption volume rose only by 6.8 percent and 3.8 percent respectively. This means that a sharp hike in the procurement scrap price in the context of scrap scarcity does not solve the problem. To meet the shortage of scrap, a supplier needs time and only if it does not reorient its supplies to priority clients. This also means that claims regarding scrap scarcity in the market are exaggerated.
Features of the scrap procurement policies of Ukrainian steel producers
One of the main features of the Ukrainian scrap market during the current year could be found in the disturbed nature of monthly scrap purchases. Thus, if during January-April, the market saw scrap purchases increase from 400,000 mt/month to 746,000 mt/month, then during May-August, the monthly scrap consumption volume saw a decrease to 528,000mt/month and in the last three months of 2007, a fluctuation of purchase volumes started to be seen: an increase in October to 673,000 mt/month and a decrease in November to 606,300 mt/month.
These uneven scrap purchases during the current year, as well as during the last year, give the impression that the level of procurement prices in the market is established not in accordance with settled yearly policies. It seems that seasonal factors, level of stocks reserves and the existence of the scrap export duty play a valuable role in the establishment of price policies.
Meanwhile, the cancellation of VAT on scrap played a role in price determination policies only in January-February, while later on the issue lost its importance.
The developments of international scrap market have also played a role in the determination of the scrap price in the Ukrainian domestic market.
In addition, the markets' tendencies toward pre-paid purchases of scrap have also positively affected the domestic scrap prices. The comparison of monthly average procurement scrap prices between the Ukrainian and the Turkish steel producers make it possible to conclude the following:
- The average procurement scrap price in Ukraine in 2005 was $180/mt, in 2006 was $213/mt and in 2007 was $249/mt
- The average procurement scrap price in Turkey (Izmir) in 2005 was no less than $241/mt, in 2006 was from $268/mt and in the first eleven months of 2007 was at $340/mt
- The average gap in procurement scrap prices: in 2005- from $61/mt; in 2006-from $57/mt; and in 2007 - from $91/mt
However, if we consider that the real difference of prices for finished steel products produced in these two countries is no more than $15-35/mt, the fact of return of the export VAT to the Ukrainian scrap processors and their lower production costs, then a conclusion about existence of substantial reserves in regards to the determination of scrap prices at the Ukrainian steelmakers can be made.
Scrap exports
According to operational data for the first eleven months of 2007, Ukraine exported 663,000 mt of scrap - down four percent compared to corresponding period of 2006, and down 44.5 percent compared to the corresponding period of 2005.
The geography of exports of Ukrainian scrap has also been changed. The main importers continued to be Turkey (67 percent share), Egypt (24 percent share), Moldova (five percent share) and Slovakia.
During the period in question, 67 firms exported scrap from Ukraine, while the share of two of them, who exported more than 100,000 mt of scrap, comprised 46 percent of all scrap exports. Meanwhile, four of them, each exporting 20,000-100,000 mt of scrap, shared 30 percent of all exports.
Scrap imports
During the first eleven months of 2007, Ukraine imported 10,800 mt of scrap - up 34 percent compared to corresponding period of 2006.
Problems and trends of domestic scrap market development
A statistic dated 01.11.2007 shows that Ukraine has 1,670 subjects licensed to work with scrap. However, the real number is smaller. Together with the decrease in the number of firms which deal with scrap in the market, tendencies toward the enlargement of separate firms have been seen in the market. The leaders in the scrap industry, according to experts, are Ukrlomprom, Prometei, Interpipe, Ukrmet, Keramet, Terrabudinvest, etc.
In the future, the main preconditions for consolidation in the scrap industry will include the decrease of access to easily collected scrap and, thereby, the necessity to invest in sub sectors of scrap processing industries, the need for further processing of scrap; the rise of influence of steelmakers in the scrap industry; the increase in scrap quality and the degree of scrap safety. In addition, the full legalization of the scrap business will also support the consolidation of the market.
The list of unsolved issues:
- Price determination and changing policies, as well as scrap collection are all one sided
- Presence of problem of scrap theft
- Uncertainty regarding VAT on scrap law, the legal effect of which comes to an end on December 31, 2007
Scrap collection and processing perspective and their potential
According to experts from DZI and the Ukrainian Association of Steel Traders, in 2006 the domestic steel consumption in Ukraine increased by 19 percent year on year to 7.5 million metric tons. Meanwhile, the according to the estimates of the Ministry of Industrial Policy, during the current year, steel consumption will increase by 26 percent year on year to 11 million metric tons. The estimates of DZI are more realistic - 9.5-10 million metric tons.
Prospects of scrap market development
International market
According to estimates of Russian and international economists, 2008 will be rather uneasy for metallurgy. The well known problems of the real estate and financial sectors in the USA will negatively affect the international stock markets, and may negatively affect the steel industry.
In addition, the so-called Chinese factor will determine the further development of the steel market in many respects. Expectations do not exclude the possibility that in two years China will supply about 250 million mt of steel to the international market - i.e. occupy one half of international trade.
According to the IISI forecast, in 2007-2008 the steel consumption in the world will increase 6.5 percent in 2006 - 8.8 percent). In particular in Russia in 2007 steel consumption will rise by 25 percent, in 2008 - by 9.5 percent, and in China by 11.4 percent and 11.5 percent respectively in 2007 and 2008.
The increase in steel consumption will be satisfied by both the increase of production at existing production facilities and by the installation of the new ones. Consequently, the price will rise for iron ore (according to experts estimates by 50 percent in 2008), for freight (in 2007 for instance the freight from Australia to China increased by 50 percent), for coking coal and, thereby, for pig iron and metallurgical coke.
Consequently, the production cost will be increased as well (according to estimates of Macquaire Bank by $54-63/mt). This rise in production cost will stimulate an increase of steel prices for instance for HRC in 2007 to $525/mt, in 2008 to $563/mt and in 2009 to $546/mt.
Scrap prices will rise substantially as well.
According to the forecasts of Russian analysts by 2010 the scrap consumption will increase to 30 million against 23 million mt in 2007. However, the volume of scrap collection in Russia will stay at approximately the same level - 31-32 million mt. This situation will lead to doubling of procurement scrap prices to Ruble 14,000/mt and to the change of Russia's status to a net-importer of scrap.
In Turkey by 2010 the volume of steel production will pass the barrier of 35 million mt (against 26 million in 2007). For production of this volume the county will require 30 million mt of scrap (in 2007- 23 million mt, including 17 million mt of imports), including 23 million mt of imported scrap.
In 2008-2009 Poland from being exporter of scrap will become a net importer of scrap. Currently, the volume of the Polish market is about 5.6 million mt a year. However, with the expected increase in steel production capacities, this figure will substantially increase.
According to the estimates of Standard&Poor's, Ukraine has three main risks - inflation, credit boom and a decrease in production, all of which will sooner or later lead to big problems. In 2008, inflation in the country may increase to 16 percent and in 2009 to 17 percent, while prices in the next two years will rise by 1.5-fold - the same as they increased for the last four years.
At the same time, according to several forecasts, in 2006-2011, the production of steel may increase to 46 million metric tons a year and even more. This may lead to negative consequences for the overall Ukrainian economy according to some experts.
Taking into the consideration the fact that the major part of steel production increase will be produced by EAF, the domestic needs in scrap will be sharply increased. However, with the easy forecasts of scrap prices increases, a deficit of this raw material can forecasted as well.
In conclusion, it should be noted that future development of the Ukrainian scrap collecting business will be followed by a process of vertical integration and a consolidation of business, especially because these tendencies show not only international trends but also the desire of local market players, which is supported by changes in the Ukrainian legal base.