Steel price spike due to unanticipated rise in demand: S&P Global Platts

Keith Tan said the customs duty exemption announced in Budget 2021 could give India’s national scrap policy a boost by exposing buyers to greater volumes and varieties of scrap from various origins, which would compete with and spur the domestic scrap collection and processing industry.

February 03, 2021 / 05:21 PM IST

The spike in steel prices is due to supply shortages as steelmakers had not expected demand to bounce back so rapidly, Keith Tan, Senior Pricing Manager- Metals at S&P Global Platts told Moneycontrol.

"A part of it (price rise) can also be attributed to a recovery in raw material prices, led by strong demand from countries like China and India,” Tan said.

Based out of Shanghai, Tan currently heads coverage of steel and scrap markets in Asia and is a part of the team that built the benchmark Iron Ore Index in 2010.

The National University of Singapore alumnus said the duty exemption could also give India’s national scrap policy a boost by exposing buyers to greater volumes and varieties of scrap from various origins, which would compete with and spur the domestic scrap collection and processing industry.

Edited excerpt

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Q. Have steel prices come back to pre-COVID level?

Global steel prices exceeded pre-COVID-19 levels sometime during the July-September quarter as a result of a shortage in supply, as steelmakers didn’t anticipate the broad-based recovery in industrial output and infrastructure activity. We’ve seen prices of the hot-rolled coil, which goes into home appliances, machinery and automobiles, reach record highs in China, India and many other parts of the world at the close of 2020, and are only starting to see exuberance dampen down this month.

Q. What is your thought on exemption of ferrous scrap duty in Budget?

Based on current scrap prices in Mumbai, the duty exempt would work out to $9 per ton (Rs 659), which doesn’t sound like much but could be a dealbreaker for Indian buyers if competing destinations in South Asia were bidding at levels close to what Indian buyers are willing to pay. 

The duty’s exemption could also give India’s national scrap policy a boost by exposing buyers to greater volumes and varieties of scrap from various origins, which would compete with and spur the domestic scrap collection and processing industry.

Q. What are the price trends of key raw materials such as coal, iron ore, nickel and scrap iron ore?

Iron Ore

Iron ore prices have tracked those of steel closely, although it’s been on a downward trend over the past two weeks because steelmakers in China are done with pre-Lunar New Year restocking and supply is ample. We’ve not seen any seasonal supply disruptions from cyclones or heavy rains in Australia and Brazil support prices yet, so the overall sentiment has become softer, especially as Chinese authorities last week reiterated their stance to curb steel output in 2021 as part of efforts to cut CO2 emissions.

Coking Coal

The rise in coking coal prices has taken many by surprise, as they’d thought that there would be a surplus due to China’s largely having exited being a buyer of Australian material. But what’s happened is that China’s been sapping up coals of other origins instead, while demand from India, Europe and South America has rebounded strongly due to the rally in steel prices and limited availability of Australian spot cargoes. As margins for flat steel decline and even breach negative territory in certain markets, the fate of coking coal will depend largely on whether steelmakers will begin to cut capacity utilization.      

Ferrous Scrap

We’ve seen global ferrous scrap prices correct downward by 16% since reaching historical highs at the start of the year, tracking the downward trajectory in rebar and iron ore prices. Supply tends to become looser as collection resumes after the winter in the northern hemisphere, although the entry of China as a buyer of ferrous scrap – which they term recycled steel – through the introduction of new industry standards since the start of this year could mean an additional destination able to pick up whatever slack there is in the market. 

Q. What is your take on global capacity utilisation?

It’s a mixed picture, with steelmakers in China and India having bounced back to the 90s in percentage terms, while in Europe, we’re hearing a utilisation rate in the 70s. Mills in the US have been hovering around a rate in the low 70s.  

Q. How much idle capacity is likely to come back so the cost of production becomes favourable?

The recent easing we’ve seen in prices of raw materials like iron ore and scrap has been tied partly to softer steel prices as well, and with steelmaking margins approaching or being already in the red depending on where a mill is located, it might take a period of sustained demand to make mills confident again to rekindle idled capacity.    

Q. Do you think the current uptrend in steel prices is structural in nature or supply-driven? What is the outlook on steel sector?

The rise in steel prices has been brought about by a shortage in supply as producers had not anticipated the return in demand at such a fast pace. Part of it can also be attributed to a recovery in raw material prices, led by strong demand from countries like China and India.

Q. Do you see logistics issues such as port congestion, container availability impacting steel as countries are opening up after COVID shutdown/restriction including the EU and the US?

Steel and its raw materials are mainly shipped using bulk vessels rather than containers, so the lack of containers would only impact steel, and indirectly at that if trade in finished products like home appliances and automobiles is curtailed. 
Sandeep Sinha

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