The displacement of iron ore with scrap is a real and ongoing phenomenon, according to Morgan Stanley Research.
In a note Tuesday the bank said: "The US economy is probably a reasonable analogy for China's: steel-intensive, with access to local/imported raw materials. That mature/stable industry has evolved over a century; scrap has contributed 50-70% [of crude steel feedstock]."
In comparison, China's blast-furnace dominated steel production currently relies on scrap for 19% of its total iron unit requirements, the bank said. This was up from 8-12% before 2010, when scrap usage rose after a property and infrastructure rebuild in major cities.
The note investigated the recent phenomenon of China exporting ferrous scrap, despite a 40% tariff, and how it happened.
Morgan Stanley, as with a majority of market sources surveyed by S&P Global Platts, suggested China's atypical shipping of scrap overseas resulted from the clampdown on induction furnace production -- CISA recently suggested 119 million mt of outlawed capacity had already been shuttered, with the program scheduled to complete by the middle of the year.
The material IFs had stocked was likely bought by traders at a discount and sold onwards, sources suggest. The sudden availability of this material pushed down Chinese domestic HMS I/II (80:20) prices to below $180/mt last week, allowing them to sell overseas despite the export duty, according to market sources.
If China exporting scrap is a result of the IF crackdown, Morgan Stanley contends it will only be a temporary event lasting weeks or months.
The bank also suggested the belief that the scrap would be mopped up by China's blast furnaces seemed incorrect.
"Dumping this raw material of IF facilities into the open market (& ex-China) may be the more commercial/expeditious option for players of an industry undergoing an aggressive govt-led reform program," the bank said.
Despite being seemingly bearish for the global scrap market, China's exports have had little appetite, aside from crimping Southeast Asian demand for deepsea material. The bellwether Turkish market has been unmoved by the news, with prices actually increasing after a quiet period where the market slid.
Platts assessed Turkish imports of premium deepsea heavy melting scrap I/II (80:20) at $269/mt CFR Friday, up $10 from Monday.
With Southeast Asian blast furnaces unlikely to amend their blends for a finite amount of Chinese scrap, some of the surplus could end up as far afield as Europe and even the US, sources suggest.
