Written by: Damon Sun, Daido International

The market apparently has no shortage of scrap or raw materials for the time being. Main cause is the lack of finished demand and reduced operating rates in Asia.

My main concerns in order of importance are as follows:

1. Depressed China market on finished goods which has caused Chinese mill buyers to delay contracted iron ore cargoes.

a) Iron Ore -$7/dmt and continued weakening on slack demand.

b) Currently near $140/dmt spot basis with some “analysts” predicting a drop to $120/dmt (if you listen to analysts).

c) It will be interesting to note the future trend on pig iron as a basis for high grade scrap.

2. Fluctuations in Currency Exchange Rates (FX)

a) US$ last 2 weeks has been on a strengthening trend as a safe haven for the Europe/Greece crisis.

b) Major Asian currencies have weakened against US$ - causing current scrap prices to be more expensive

c) Weakened Euro has caused European origin scrap to be cheaper. (Currently last 2 days some weakening in US$) is important to note and follow this trend.

3. Continued depressed finished product prices in Far East and SE Asia, especially into the “summer months” where steel mills will be operating 2 of 3 shifts (nighttime) due to electricity issues.

4. Electricity costs are rising rather dramatically in parts of Asia.

5. Freight costs has been rising on containerized and bulk cargoes. (Note: Schnitzer Steel conference call on margins squeeze).

From a scrap perspective, there is very little “good news” to report as it seems all forward components of scrap pricing seems to be negative. In fact, it’s hard to find any indicators/news to report positively on raw materials right now.

With above being said, I feel Asian markets have at least another $20/mt on the downside over the next 5 weeks before we bottom and see finished demand improving.

Completely non-scientific but finished steel stockists seem to replenish majority supplies over a 3 month cycle.

With the above scenario, this week offers on containerized scrap, has been abundant from all origins into Far East. S.E. Asia tends to be still localized into Europe/Africa/S. America origins. One smaller mill in Asia received over 10KMT offers on HMS containerized this week while their monthly full consumption on imported scrap is roughly 10KMT.

This week pricing into Taiwan is down $10/mt and a further $2.50/mt increase in container freights, so call it a $12.50/mt drop. This is on top of the $20/mt drop over the last 4 weeks. (Total drop from recent highs about $30/mt). Compared to USA domestic drops, I do believe USA domestic pricing will drop more than anticipated.

SE Asia pricing is down $40/mt (mill indicative prices) from the recent highs, for reference.

At this point in time, it’s still about demand side on finished and raw materials. Finished product prices/demand is driving scrap prices and not the other way around. So therefore, if there is a market to sell the material, sell it.

Again, I wish I can find one bit of news to report that would indicate stability and/or upside. I guess a possible saving grace is the Yen in stronger.

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