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Scrap metal prices rise while almost everything else falls

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World Pipelines,

International scrap metal prices rise despite declining steel prices, but it is in coking coal where the upside risks increase.


Electric resistance welding (ERW)/high-frequency electric resistant welding (HFW) linepipe prices in Europe have undergone a significant price correction amid falling hot-rolled coil (HRC) prices, that have already reached early 2021 price levels. Falling prices in the flat steel segment have been following slow end user demand, notably from the automotive industry. Fundamental inflationary pressure means that prices should not drop much lower, although there is still a possibility of further decline amid seasonally weak summer demand. The decline in flat steel production is expected to continue in July. ArcelorMittal announced the shutdown of two blast furnaces in France and Germany, while Salzgitter postponed the launch of one of its furnaces. Other flat steel manufacturers are operating at reduced capacity and planning longer summer maintenance. The production cuts in the EU may help to balance supply with reduced demand and to strengthen the HRC market, providing support to ERW/HFW linepipe pricing.

In the US ERW linepipe market there was some contraction in pricing following the downtrend in feedstock prices. ERW linepipe offers have been coming out at the level of US$2200 - 2350/NT ex-mill for X52 grade. US HRC prices continue to drop, pulling down ERW linepipe prices. However, the nascent market for carbon capture and storage (CCS) and hydrogen is beginning to grow, bringing better prospects for the ERW linepipe sector. According to estimations, the US will need between 30 000 and 65 000 miles of CO2 pipeline, with just over 5000 miles currently in service, most of which deliver CO2 to oilfields.

Energy steel

Steel prices have continued to fall rapidly over the past week. Hot-rolled coil (HRC) base prices have slipped between 5.9%, in the case of Chinese export, and 12.6% in the US domestic market, both on a daily average basis. Yesterday, assessed prices fell to their lowest levels this year: Chinese prices to US$634/t fob and US domestic prices, which are supported by barriers to Chinese HRC supply, to US$918. European producer prices, which reached a global premium in March amid panic buying at the start of Russia’s invasion of Ukraine, are now trading US$110/t below US assessments, in-line with long-term average discounts that typically account for logistics from the EU. The discount had fallen to as low as US$64/t on Monday 4th, before EU mills cut their prices to compete.

In contrast to the panic buying conditions in March, which saw slab-short plate producers predominantly in Italy and metallics-short US steel producers widen their supply base away from their Black and Baltic Sea suppliers, at great expense, a calm has resumed. But orders from steel consumers are not merely seasonally depressed for the summer as buyers worry about pending recession, and despite the commodity-price decline of late, ongoing, elevated levels of inflation still directly impacted by the war in Ukraine. Fresh news out this week of an enduring and worsening energy crisis to come from Russia are not helping sentiment, particularly as forecasts about coking coal and more relevant metallurgical coke prices used by integrated, predominantly flat-rolled steel producers are increasingly bullish.

Premium coking coal benchmark prices, used by integrated steelmakers and their automotive customers to account for much of their raw material cost changes every quarter, have reportedly recovered most of their losses since late May to hover around US$400/t. Some observers opine that prices could get closer to US$500 by the end of the year, only US$100/t off last year’s ‘energy-crisis’ peak recorded in the Chinese import market. Then, disruptions in China, partially because of Chino-Australian relations, caused perceived shortages and a pricing spike but now, the higher outlook is more to do with Europe and the EU’s relations with Russia. Next month, the EU embargo on Russian coal becomes effective, and with ongoing natural gas supply restrictions from Russia expected to endure, demand for alternative energy including thermal coal with potential knock-on effects on metallurgical coal supply are possible.

For the moment, however, these inflationary fears in Europe seems a little pessimistic. Merchant coke prices continue to ease off course, linked far more securely than iron ore to the performance of steelmakers. In the world’s largest market, the Chinese domestic market, coke prices have fallen below US$400/t before tax to approximately US$370/t delivered Chinese steelmaker while Chinese coke exporters are offering foreign buyers merchant supplies at a US$115/t premium, before delivery, at closer to US$485/t fob today. That’s about US$20/t lower week on week. As coke spreads over coal are clearly far from wide and profitable, resistance to the coal rally should resume in earnest.

Pricing wise, the interesting raw materials story this week is scrap. Though buyers outside of China have a scrap cost advantage, contrasting with coke – international prices are almost invariably cheaper than Chinese supply – scrap prices outside of China are reviving to that same US$400/t level as coal. They are also closing the gap with Chinese scrap, which fell under US$420/t (excluding taxes) yesterday. Net exporting countries, such as the UK, are encountering increasing pressure from local parties to block exports, or at least follow the Chinese policy to make exports at least far more expensive, but it would be surprising if scrap prices could continue to rise amidst a steel price downturn; not least as international margins have fallen hard in recent weeks. While we expect most steel market prices to remain under pressure in the short term, the biggest upside risks remain in China, as the combination of stronger sentiment among manufacturers and below-average margins at steelmakers provide a constructive climate.

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