The current upturn in coking coal and coke prices alongside firming scrap may be improving the prospects for DRI steel mills accessing lower-priced gas on long-term contracts.
Since April, the spread between imported rebar prices in the Persian Gulf against direct reduction iron -- including required iron ore pellets and natural gas -- has been more resilient than the Platts China export rebar to iron ore and coking coal spread.
The regional indicator DRI has performed better than for Turkey rebar against scrap.
Spot premium coking coal prices have surged, increasing by a third since July 1 in seaborne markets, while Chinese domestic coke prices have risen a similar amount, adding to costs for Chinese and other blast furnace mills.
The Platts MVS Chinese domestic rebar mill margin, at $34.58/mt as of Wednesday, may be almost wiped out using current coking coal and iron ore prices, as the metric factors in a four-week lag for raw materials prices to account for processing, inventory and logistics.
Indicative China export rebar margins are a little higher, allowing for more room.
TSI's reference scrap price delivered to Turkey had rebounded around 10% from an early July low, while currently settling $4.50/mt lower than the mid-August peak at $225.50/mt CFR Turkey on Wednesday.
Billet prices have been stable, while the margin available to re-roll semi-finished steel delivered to Turkey into rebar has shrunk, to below $45/mt using Black Sea billets, down from a re-rolling margin in Turkey exceeding $100/mt on June 1, analyzed using Platts and TSI prices.
Only 29% of the rebar-scrap spread in Turkey is available to be captured by re-rollers using imported billets, down from over 50% in May, the data showed.
DRI MARGIN SIZE
The relative size of the indicative Persian Gulf import rebar-DRI spread in July at over $250/mt, calculated using conservative rates of $4/million btu, is far higher than Turkish rebar-scrap's $165/mt average spread last month, allowing for potentially larger cash operating margin.
One regional DRI producer saw gas prices double to more than $3/mbtu, indicating how some plants enjoyed even more competitive rates prior.
However, with rebar import prices in the Middle East falling since July by around $30-35/mt, the outlook for regional producers enjoying ex-works rebar prices at up to $600/mt in May has darkened.
Persian Gulf industry sources highlighted increasing gas prices imposed on steel and other sectors, high regional delivered scrap prices, and the cost of operating and investing in the region with fixed costs from integrated DRI, meltshop and rolling facilities.
While global direct reduction pellet premium remains well supported on tight supply, the cost of iron ore typically used by large mills in China has been on the up too. Platts DR pellet premium was assessed at $42.50/dry mt in August, up $1/dmt from July.
Spot premiums for direct charge lump and blast furnace pellet followed up demand after disruption to domestic Chinese supplies and greater emphasis on cutting pollution and capacity at plants and mines.
The MVS China total iron ore burden cost tracked using a range of iron ore products and applied for calculating steel margins moved up against benchmark IODEX 62% Fe fines, accounting for 99.8% by the end of July, up from a 96.4% ratio to IODEX over two weeks.
Stronger iron ore demand and less ability from global majors to boost output led analysts at Citigroup and Jefferies to increase price forecasts for iron ore traded in the second half of 2016.
DR pellet pricing partly tracks iron ore fines prices, leading increases in iron ore fines costs for integrated mills to be similarly borne by DRI mills. The gap between coke and PCI costs facing Chinese and Black Sea exporters, with gas costs for DR pellet iron reduction a key advantage.
As for scrap, the relationship between scrap and iron ore has been volatile. The ratio, currently just below 2.5 for scrap CFR Turkey over iron ore fines delivered to China on an equivalent iron basis shows scrap, is weaker than the average for the past year.
