Look ahead - Metal Bulletin · To help answer these questions, we need to look specifically at what drives steel demand. According to Worldsteel, there are seven key end-user industries

Look ahead

Steel market outlook for 2020

Fastmarkets 2January 2020

The global finished steel market in 2020 is set to be weighed down by a continuation of last year’s weaker end-consumption rates, but there are bright spots coming in the longer term, Fastmarkets analysts forecast.

In some ways, 2019 looked very similar to the year before in the world’s steel markets as momentum continued to slow from the supercharged year of 2017.

From an apparent consumption viewpoint, it was clearly another tale of contrasts between the strong and the weak. After 11 months of provisional data, we estimate that Chinese steel demand, on an apparent basis, rose by 6.9% year on year or 52 million tonnes to yet another new record level of 806.3 million tonnes. This was actually a slowdown from the year before when over the same period demand increased by 8.0% or 55.8 million tonnes.

In the rest of the world, meanwhile, apparent consumption continued to disappoint. After rising by just 1.2% or 8.9 million tonnes in the first 11 months of 2018 to 786.4 million, last year turned out to be a rare steel recession outside of China. We estimate that apparent consumption fell by 1.4% year on year to 775.7 million tonnes, a decline of 10.7 million tonnes. For the year as a whole, we predict global steel consumption will have risen by 2.6% last year to a record 1.750 billion tonnes, an increase of 43.8 million tonnes.

While tonnage changes last year were very much in line with the average recorded by the World Steel Association (Worldsteel) over the past decade, the growth rate we predict is well below average. Apparent steel consumption rose by 3.3% per year in the 10 previous years (2008-2018), outpacing the world’s industrial activity, which according to Oxford Economics’ data rose merely 2.8% per year at the same time.

Steel demand drivers If in the past decade, global industry was propelled by steel-containing goods, what does the future bring? Does last year’s rapid slowdown

and first steel recession since 2015 (outside of China) provide a leading indicator?

To help answer these questions, we need to look specifically at what drives steel demand. According to Worldsteel, there are seven key end-user industries on which to base a steel outlook. The first, accounting for 51% of usage, is construction, by far and away the significant user of steel. Mechanical engineering (such as cranes) - at 15% - leads the remaining sectors, which include automotive production (12%); metal goods, such as tools (11%); other transport, such as ships (5%); electrical equipment (generators) and domestic appliances - both 3%.

When we aggregate the economic value of these seven sectors into their shares associated with steel consumption, it is hardly surprising that over time, steel consumption does tend to track the trend in the end-use indicator, which we call steel-weighted industrial production (SWIP). Unsurprisingly, the SWIP slowed down dramatically in 2019, from a growth rate of 2.8% in 2018 to just 1.0% last year. That was the slowest rate of growth since the 2009 financial collapse and less than half the rate achieved in 2015, the last time the steel market contracted.

Looking ahead, demand momentum is predicted to accelerate. This year, the global SWIP will more than double to 2.1%, although that is the same rate recorded in 2015 and is still well below average. Momentum should continue to build, however; the SWIP is forecast to accelerate to an above-average 3.0% in 2021 before peaking at 3.1% in 2022. Thereafter, a deceleration is predicted throughout the decade but industrial activity is in all those years forecast to expand faster than this one, positively supporting steel use.

Although the outlook improves dramatically from next year, we believe momentum in steel this year

Another year of slowing finished steel demand, falling prices before next year’s revival

January 2020 Fastmarkets 3

will slow for a third straight year, weighed down by a more acute deceleration in China. This, in our opinion, will offset the more positive momentum expected in the rest of the world, notably in countries such as Turkey, which are forecast to benefit from a revival in construction output after a two-year depression.

Overall, we predict apparent steel consumption will rise by just 1.9% this year, down from 2.6% in 2019. Traditionally, slower growth in steel consumption has a negative impact on steel prices (see chart) and we believe this trend will continue in 2020.

Taking the example of the Chinese hot-rolled coil (HRC) export price, Fastmarkets recorded a contraction of $75 per tonne fob last year to a level below $500 per tonne on average for the first time since 2016. In line with steel demand changes, in China and for the world at large, Chinese and global steel prices began to revive in 2016 and rose spectacularly in 2017, the year steel demand rose more than 7%; more than twice the historical average.

Given the demand-pull for steel and the fact that global steelmaking capacity was being curtailed at the same time, primarily in China, our spot assessments rose by more than $130 per tonne fob in 2017. Higher prices supported bumper profits at Chinese steelmakers and further gains were recorded in 2018. But demand momentum had already begun to contract by then, so prices began to fall, especially in the second half.

Short-term view Although it is rare for prices to fall over consecutive years - prior to last year, the previous occasion was four years ago - we believe that a further slowdown in steel consumption, albeit not so pronounced as last year, will put more pressure on prices. We forecast Chinese export prices will fall by another 4% - roughly $20 per tonne fob - this year, due to mills seeking to become more competitive overseas and benefit from a modest revival in the rest of the world’s consumption.

Although the big steel-consuming markets are seasonally depressed by winter weather, we anticipate purchasing orders for the stronger spring will materialize in the short term, pulling steel prices higher. This upward trend had already begun before the end of last year in key import markets such as the United States, where prices fell far harder than elsewhere (by more than 25% and $200 per net ton) in 2019, but we expect this trend to spread elsewhere. After rallying into March, we forecast that prices will correct into the second half of the year. Yet with 2021 forecast to be a much stronger year than in the recent past (see chart), we would not be surprised if prices start to revive again later this year in preparation.

This article has been written by our team of analysts at Fastmarkets, who are responsible for arguing our independent view on market developments and forecasting their future performance. nALONA YUNDA, ALISTAIR RAMSAY


What is in store for the steel and scrap markets in 2020? There is a good mix of opportunities and threats in the global ferrous trading environment in 2020, according to five major traders with supply chains out to the far reaches of the world.

China’s volatile policy changes, blooming markets in South Asia, a global trade war and excess steel supply will continue to have significant sway over the ferrous scrap and steel markets.

Five major traders shared their outlooks for the markets – and their best tips to beat them – with Asia steel editor Paul Lim.

What is in store for China, the biggest steel-producing country in the world?

“Policies in China are key - they will continue to affect the global steel markets. While global ferrous scrap prices aren’t directly linked to the Chinese markets, any movements in the Chinese markets will still affect regional prices trends, and hence regional scrap prices. China will carry on importing metallics in 2020 because it continues to be short on ferrous scrap, especially the higher grades. So many opportunities remain for semi-finished and metallic imports into China, including HBI, DRI, billet and slab.”

— a major international trader handling ferrous scrap and steel

“Do not expect 2020 to be as good as 2019 - and we already know how bad 2019 was toward the end of the year. While China could export steel in the first half of 2019, it turned into an importer of steel in the second half. This was a very bad situation for steel traders. China may not export as much steel in 2020 compared with 2019, and watch out for new capacity in Southeast Asia coming up to eat away at Chinese market share.”

— the vice general manager of a major Chinese trading company

“The China steel markets are likely to remain depressed. The majority of the downstream segments are performing poorly, because of the weak economic growth. And together with continual changes in industrial policies, such as lowering pollution and tighter oversight on the steel industry, the Chinese market will not see any significant upticks in demand.”

— the vice general manager of a major Chinese trading company

What is your take on the ferrous markets in 2020?

“Prices of scrap or steel cargoes shipping in January and February will continue to increase. This can be seen from the recent increase in demand for steel billets by China and the Philippines, as buyers restock in light of higher upstream ferrous scrap prices. The need for semi-finished steel and ferrous scrap will also continue to increase for this reason so smaller mills that aren’t already running their meltshops will start running their electric-arc furnaces again, which means they will need more scrap in the short term. What’s a little unclear is what will happen after the Lunar New Year at the end of January... Turkey hasn’t been affecting the Southeast Asian steel markets much because of their high scrap prices and corresponding high offers to the region. So a lot of market sentiment will take direction from China again in the first quarter of 2020.”

— the general manager of a major East Asian trading company

Traders’ top tips to beat the ferrous markets

“There has been a lot of price erosion over the past couple of months in 2019. The steel industry as a whole will remain under pressure, until there’s a rebalancing of global supply and demand. There are limited signs of any upticks in demand, however. Chinese demand will also slow, so 2020 is currently lacking any firm support. There will have to be some cuts in production, before prices stabilize or go on an uptrend.”

— the managing director of an international trading company

what are the growing markets that deserve closer attention from ferrous traders in 2020?

“2020 may see a lot of scrap export activity from Japan, putting pressure on competing supply from the United States. However, Japan has typically not been a containerized scrap exporter, so they need to upgrade their port and logistics facilities. For example, Japan is loading ferrous scrap at a rate of 1,000-2,000 tonnes per day compared with the 3,000-3,500 tpd required by some sellers. Freight and scrap spot prices change very quickly, so such slower loading rates may affect their business.”


“Asia is growing as a whole, especially Vietnam. However, the Malaysian and Indonesian markets aren’t performing that well. There were some expectations that they would increase their demand after their election but it hasn’t happened so far. The one major factor that will drive growth in Asia will be the end of the US-China trade war.”

— a major trader

“Bangladesh is one to look out for, especially with its growing economy. We expect steel consumption in the country to be relatively strong compared with other regions in Asia. And because certain domestic regulations impede the imports of finish steel productions, local steel mills have dominance in that market. So Bangladesh’s scrap requirements will continue to grow and it should be a good market for ferrous scrap. It also doesn’t have plans for domestic scrapyards yet. The markets in India and Pakistan should also continue to grow in the medium term, but they are facing economic headwinds at the moment.”


What is the best way to reduce risk in the current trading environment? Especially against a background of trade wars and currency fluctuations.

“Buyers and sellers should maintain smaller trading volumes and keep short-term shipments. Volatile government policies, such as the ones recently imposed by Indonesia, also pose a significant risk to trading. So another piece of advice is to not increase trading volumes sharply or look to expand market share aggressively in 2020. What’s happening in Indonesia now is technically not enforceable, so there will be a shortage of ferrous scrap from now until the policy firms up.”


“While demand is stable, it is not great - and supply has far outstripped demand. Market participants must take great care not to take on too much risk and to be more conservative in 2020 as prices are very volatile. The best way to handle ferrous markets will be to not buy too much because I still feel prices will remain subdued in a bearish 2020. There’s a lot of supply in Asia now, and more will come in 2020.”

— a major trader

“Stay very versatile and flexible and expect the unexpected. The world is not one where it is possible to make very accurate predictions, so trading strategies have to adapt accordingly. However, market participants can try to increase their acceptance of derivatives trading, where they can trade underlying commodities without the hassle of physical execution or counter-party performance. There are still some obstacles to overcome and it is not easy to trade derivatives, especially as it can be a partial hedge if there are no physical materials indexed against it.”




Demand for rebar is set to recover in Brazil this year, market participants say - and mills have already announced a first round of price increases.

Sources widely forecast steel use to grow in 2020, with long-steel demand poised for a quicker increase than flat-rolled products. The construction sector reversed a five-year freefall in mid-2019; estimates suggest it will grow further this year.

Instituto Aço Brasil, the country’s steel association, expects consumption to reach 21.78 million tonnes in 2020, up by 5.2% from its forecast of 20.71 million tonnes for 2019. Executive president Marco Polo de Mello Lopes said long-steel demand will climb faster than flats usage.

ArcelorMittal and Gerdau, the two rebar market leaders in Brazil, have announced a 12% price increase for January - a move that will be followed by smaller producers such as Simec, Companhia Siderúrgica Nacional (CSN) and Aço Verde do Brasil (AVB), market participants said.

Customers, however, are skeptical about such price increases - or, at least, do not expect them to be implemented right away.

Fastmarkets’ price assessment for steel reinforcing bar (rebar) domestic monthly, delivered Brazil was at 2,220-2,320 Reais ($540-565) per tonne on December 6, unchanged from the previous month but up from 2,165-2,300 Reais per tonne on October 4.

Demand recoveryThe domestic rebar price hit its lowest 2019 level on September 6 at 2,125-2,300 Reais per tonne. Struggling demand and a global price downtrend put local prices under pressure.

According to Aço Brasil data, long-steel use totaled 7.08 million tonnes in the January-October period of 2019, down by 2.5% from 7.26 million tonnes in the corresponding months of 2018.

These figures were 6.7% higher than the 6.63 million tonnes in the same period of 2017, the decade’s lowest. Volumes, however, were still down by 14% from 8.23 million tonnes in the first

10 months of 2015, before an economic crisis hit Brazil.

The country’s gross domestic product (GDP) fell year on year during 11 consecutive quarters until October-December 2016 and has not yet returned to pre-2014 levels. A significant public deficit, coupled with the “Car Wash” federal police investigation, dragged the economy down.

The Car Wash investigation was aimed mostly at state-owned oil company Petrobras and large construction companies such as Odebrecht, Queiroz Galvão, OAS, Camargo Corrêa and Andrade Gutierrez. As a result, the crisis had a big impact on the construction sector.

Brazilian construction GDP decreased for 20 straight quarters until April-June 2019. It is now set to grow by 2% in 2019 and by 3% in 2020, the São Paulo state association of construction companies, Sinduscon-SP, said on December 5.

While flat-rolled steel consumption would have to increase by 11% to regain its all-time peak from 2013, long-steel use would have to grow by 39% to reach its highest-ever level, steelmaker Gerdau said on November 7.

In fact, looking at a 12-month moving total, flat steel consumption fell to its recent lowest level in August 2016, dropping to 10.18 million tonnes. It has since climbed by 22.3% to 12.45 million tonnes (as of October 2019). Long-steel use, on the other hand, hit its recent lowest point at 7.71 million tonnes in August 2017, and has grown by only 7.6% since then, to 8.29 million tonnes.

“While the [long-steel demand] recovery is still in its infancy, we believe these trends are poised to substantially accelerate,” BTG Pactual bank analysts Leonardo Correa and Caio Greiner wrote in a report on November 22. “We are convinced that the revival of construction markets is set to continue for years.”

“We hosted a meeting with Carlos Jorge Loureiro, president of Brazilian steel distributors’ association Inda, and Mr Loureiro has a more positive view for

Brazilian rebar market participants anticipate demand recovery


long steel in 2020, compared with flat steel, as volume growth for the former should be supported by increased residential construction,” Safra bank analysts Conrado Vegner and Victor Chen wrote on November 25.

Full increase still uncertainThe 12% rebar price hike, however, does not seem to be set in stone. A previous attempt in September did not fully materialize and this latest announcement will also depend on global trends.

“Last time a price hike was announced, mills aimed for 7% but only about 3% passed through,” one distributor source said. “I believe about half of this 12% increase will be implemented, and maybe only in February.”

The Brazilian domestic rebar price is dependent on Turkish trends and currency movements. The steelmakers usually tend to sell rebar in the local market at a 10% premium over imports after foreign exchange, duties, taxes and overall costs.

The price premium stood at 3-6% for most of the fourth quarter of 2019, market participants said.

Fastmarkets’ assessment for steel reinforcing bar (rebar) export, fob main port Turkey was $445-450 per tonne on December 27, up from its 2019 low of $395-400 per tonne on October 10.

Foreign exchange rates were also still supportive of higher prices, although the Brazilian Real was stronger than a month earlier. On December 27, $1 was valued at 4.05 Reais, down from 4.25 Reais on November 29 and 4.16 Reais on November 13.

“It is going to depend on Turkish rebar prices and of course currency exchange,” a second distributor source commented. “But the market is much stronger now, and I expect orders to keep growing, even during the weakest season, in December-January.”

“I don’t see how someone would think the hike is unjustified,” one mill source told Fastmarkets. “But the size of it and duration throughout the year remains to be seen.” nRENATO ROSTÁS

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Fastmarkets takes a look at what to watch in the hot-rolled coil market in the United States in 2020 after another year of volatility and surprises in 2019.

After a generally profitable 2018 for the US steel industry, 2019 proved more challenging, with major domestic steel producers posting significant year-on-year losses amid atypical buying and holding patterns.

“I think 2019 is a hangover year from a wildly profitable 2018,” KeyBanc Capital Markets analyst Philip Gibbs told Fastmarkets late last year.

Fastmarkets’ daily steel hot-rolled coil index averaged $30.03 per hundredweight for the period between January and mid-December last year, down from an annual average of $41.37 per cwt in 2018 and also down slightly from 2017’s $31.00-per-cwt average.

The Section 232 tariffs and quotas against steel imports from most countries temporarily created fears about a potential production shortage and led to irregular buying activity. As a result, a great number of hot band buyers entered 2019 holding unusually high inventories, sources said.

“The 232 tariffs psychologically impacted the market to the extent that people were buying or accumulating more metals than they needed out of the fear that they wouldn’t be able to get it,” Gibbs said.

But 2019 demand subsequently proved flat to weak compared with the robust 2018, and the anticipated shortages never came to pass. Hot-band buyers have been reducing excess inventory for most of 2019.

The lack of spot buying resulted in shortened lead times at mills - in some cases to less than a week - which forced mills to sell sometimes at steep discounts to fill their order books quickly.

Those discounts were the main reason mills were able to spur buying activity and push out lead times late in the year. But the extended lead times do not necessarily reflect improved demand, some sources argued. And without strong market fundamentals, buyers said they found higher prices less convincing.

Following several rounds of mill price increase announcements, the HRC index jumped by more than 20% between late October and mid-December.

The index stood at $28.22 per cwt on December 13, compared with a three-and-a-half-year low at $23.15 per cwt on October 24.

In the wake of earlier price increases announced in January-February and June-July of this year, hot band prices briefly rallied before falling to new lows.

Some sources concluded that this type of market price cycle typically lasts around eight weeks and decided to stay on the sidelines for that long when prices were rebounding because they believed prices were “doomed” to go down again.

“Everybody is figuring out the game now, and the game is this mini-cycle that goes quickly,” one Gulf Coast service center source said. “We all know the mills will start selling. If they don’t have an order book, they will start discounting the price again. And we see how quickly that goes to the bottom.”

For 2020, buyers booked less contract business to increase their exposure to the spot market, according to both mill and buyer sources. This is likely to increase volatility in the market.

Fastmarkets’ daily steel HRC index, fob US mill was calculated at $28.99 per cwt ($579.80 per ton) on Thursday January 2, unchanged from the last assessment on Tuesday December 31 and down only modestly from $29.03 per cwt on Monday December 30.

“We’ll see who blinks first,” one mill source said of whether mills would again discount prices to fill their order books or buyers would accept higher prices to fill their inventories. “A lot has to do with buyer perception. If they perceive the mills books are tight and demand is getting better, they will support the increase. If they believe they don’t need to buy now because lead times remain short, then the best we can hope is that we set a bottom.”

DemandWhile trade concerns remain, market fundamentals are and should continue to be the main drivers of price changes, according to both industry experts and market participants.

Factors driving the US hot-rolled coil market


“The thing needed to turn steel around would be infrastructure spending or [an] increase in either oil and gas or automotive,” one Mid-Atlantic service center source said, commenting on steel demand in 2019.

Sources shared mixed demand forecasts for 2020. Some expect major end-user sectors including oil and gas, automotive, agriculture and manufacturing to improve from 2019, but others predict further softness.

The US rig count has fallen by roughly 25% year on year, according to Baker Hughes, while the number of drilled-but-uncompleted wells (DUCs) has set record highs this year, according to the US Energy Information Administration.

On the automotive front, some warned about any lagging impact from the United Automotive Workers union strike at General Motors facilities in the US, which took place over six weeks in September and October.

“The GM strike had a pretty large ripple effect through the economy,” Gibbs said during the interview with Fastmarkets. “It didn’t just affect our automotive OEM [original equipment manufacturer] customers [but] the entire chain that feeds into that. That was a long strike.”

Still, Gibbs did predict some strength in the non-residential construction sector, as well as the industrial and appliance markets.

“You put everything together and you’ve kind of got a stable year for [steel] demand,” Gibbs said.

SupplyAfter domestic steel producers announced several sheet expansions in 2018, boosting US flat-rolled capacity by up to 16.5 million short tons per year through 2022, concerns about overcapacity emerged.

“We would welcome some announcement and some rationalization of capacity because until that happens, the prices are [going to] continue to drop,” one Midwest service center source said. “It doesn’t matter what the cost is until you stop producing, the prices are [going] lower.”

One steelmaker in particular has taken action to adjust its output: U.S. Steel.

The integrated steel producer announced on December 6 that it will take a 48-day outage at the No4 blast furnace at its Gary Works in northwest Indiana in the second quarter of 2020. The company previously idled the B2 blast furnace at its Great Lakes Works and a blast furnace at its Gary Works facility.

Market participants have been speculating for months about the potential for additional idlings by the Pittsburgh-based steel producer at its Great Lakes Works or Granite City facilities - especially after U.S. Steel acquired a 49.9% stake in Big River Steel in October, giving the company more exposure to the electric-arc furnace (EAF) production process.

“[U.S. Steel] wants to own Big River Steel, the entirety of it. That’s their number one priority,” Gibbs said. “And they’ve also told you that they’re not making any reinvestment in Granite City and Great Lakes. So I don’t think it’s unreasonable to suspect that those assets will be diminished over time as they focus on Big River, Gary Works and Mon Valley.”

Trade, 2020 electionOnce again, trade decisions made by US President Donald Trump are expected to be a major factor affecting HRC prices in 2020, sources said.

“One of the reasons President Trump became the president was because he was attuned to the issues and challenges facing manufacturing in general, and steel in particular,” Thomas Gibson, president and chief executive officer of American Iron and Steel Institute, said. “He talks about steel all the time.”

Indeed, on December 2, Trump announced via Twitter that the US would restore Section 232 tariffs against steel and aluminium imports from Brazil and Argentina.

While an executive order has not followed Trump’s tweet, those duties could squeeze domestic supplies of slab, push US flat-rolled steel prices higher and create headaches for US slab re-rollers, analysts and market participants said.

At the same time, the US presidential election in November 2020 is something of a wild card for the steel market as a whole, not just for HRC, according to sources.

“Typically, what happens is there’s a lot of uncertainty in election years where a lot of people hold off on making big capital decisions... because you don’t know what the landscape is going to look like until basically after November’s over,” Gibbs said. “People are going to be talking about [election-related news and debates] versus talking about running [their] business until [the election] is over.”

Still, an election year could push members of the Republican and Democratic parties to address some issues related to the steel industry - such as infrastructure.

“If we get past [the] impeachment [inquiry of Trump] early in the year, I’m hopeful that maybe the Congress will look at the transportation [policy] as a deliverable that they can bring home,” Gibson said.

Still, while developments ahead of the election will affect the market, Gibbs does not expect the result of the election to make any major waves in the domestic steel industry.

“A Democrat who ends up winning the nomination for the Democratic Party is probably going to be very sympathetic to the views of the industry as well and is going to have to compete with President Trump in those very same [steel intensive] states,” he explained. “So, we don’t see potential large changes in the overall environment of the government support for the steel industry.” nMUYAO SHEN


NominateToday

The deadline to nominate is February 15, 2020

Which award could your company take home?

NEW

NEW

NEW

NEW

NEW

Visit www.fastmarkets.com/steel-nominationsfor more information and to nominate

#FastmarketsSteelWeek #FastmarketsGlobalAwards

l Best Innovation – Product

l Best Innovation – Process

l Best Mergers & Acquisitions

l Best Operational Improvements

l Technology Provider of the Year

l Financial Services Provider of the Year

l Legal Services Provider of the Year

l Information Technology Services (including enterprise and manufacturing software) Provider of the Year

l Environmental Responsibility/Stewardship (including energy conservation or delivery)

l Logistics/Transportation Provider of the Year

l Scrap Company of the Year – Large: North America: (revenue greater than $250 million USD)

l Scrap Company of the Year – Small to Midsize: North America: (revenue than $250 million USD)

l Scrap Company of the Year: EMEA

l Scrap Company of the Year: Asia

l Tube and Pipe Producer of the Year

l Service Center of the Year –Large (revenue greater than $500 million USD)

l Service Center of the Year – Small to Midsize (revenue less than $500 million USD)

l Raw Materials/Consumables Provider of the Year

l Production/Processors/Fabricators

l Steel Producer of the Year: Americas

l Steel Producer of the Year: EMEA

l Steel Producer of the Year: Asia

l Ferro-alloy Company of the Year

l Energy Provider of the Year

l Workforce Diversity Champion

l Automotive Supplier of the Year

l Ferrous Futures Trading Company of the Year

l Exchange Company of the Year – Ferrous

NEW

http://www.fastmarkets.com/steel-nominations


This year could look similar to 2019 on the merger and acquisitions front in the United States steel industry, with long products likely to be busier than flat products, according to analysts.

“People will get to doing deals [in 2020] much like [last] year - very selectively and where the strategic fit is right and they can bring some synergies to the table. I think that’s what is really going to drive deals. People want to continue to show growth,” Vince Pappalardo, managing director of investment bank Brown Gibbons Lang & Company, told Fastmarkets late in 2019.

More clarity on the political and trade front could boost the number of deals.

“I think things will pick up again as we get a better idea on where we expect the election to go and where the tariffs are expected to go,” Pappalardo added. “There’s a little bit of a hindrance on what the landscape is going to look like [this] year, so it’s a little trickier to predict [this] year’s activity. I believe it will be a strong M&A market.”

An increasing shift to electric-arc furnace (EAF) steelmaking should be another feature of 2020.

“What we’ve seen by way of consolidation is a clear embodiment of the material shift in the steelmaking operating footprint placed to take shape over the next five years, specifically consolidating the blast furnace footprint and more EAF production capacity that is poised to come online in the early part of this upcoming decade,” Tyler Kenyon, vice president equity research analyst covering the metals and mining sector at Cowen & Co, said.

U.S. Steel (USS) plans to idle indefinitely “a significant portion” of its Great Lakes Works near Detroit, it said on December 19; Canadian steelmaker Stelco intends to take down its Lake Erie blast furnace in April 2020 for a full reline, it said on December 17.

“Everyone is trying to reposition themselves. It appears to be consolidation, for sure, but I think it’s just industry repositioning as the respective players respond to the investments that are being made,” KeyBanc analyst Philip Gibbs told Fastmarkets.

While there were two major buys in the long products sector in 2019 - Nucor acquiring Century Tube and Liberty Steel buying Johnstown Wire

Technologies - smaller companies also made acquisitions to bolster their capabilities and expand into new markets.

“There could be some more consolidation on the long products side but I don’t sense that there will be a whole lot more M&A activity on the sheet side,” Kenyon said.

Listed below are 10 major steel mergers and acquisitions that were announced last year alongside some possibilities for 2020. They include consolidation on the integrated mills side and integrated steelmakers investing in EAF assets as well as service centers and steel mills moving further downstream via value-added businesses.

AK Steel merges with Cleveland-CliffsThe companies announced a $1.1 billion all-stock merger on December 3 that is set to close in the first half of 2020. Iron ore miner Cleveland-Cliffs will own steel mills for the first time in its 172-year history. There are also plans to produce pig iron at the closed Ashland Works facility in Kentucky.

“We see the deal creating a more viable and competitive steelmaking enterprise, preserving LT pellet offtake for [Cliffs] and potentially tightening North American merchant pellet supply,” Cowen analyst Tyler Kenyon said in a research note.

USS seals the deal on Big River SteelIn October 2019, USS completed a $700 million deal for a 49.9% stake in Arkansas mini-mill Big River Steel. USS retains a call option to acquire the remaining 50.1% within the next four years.

According to USS president and chief executive officer David Burritt, the company intends to fully acquire Big River Steel within the next four years.

Olympic Steel acquisitionsOlympic Steel kicked off 2019 with acquiring assets of Ohio-based McCullough Industries, which specializes in branded self-dumping hoppers made

US M&A activity to mirror 2019


of carbon and stainless steel, used for construction, food service and landscaping industries. In August, Olympic Steel acquired certain assets related to the manufacture of the EZ-Dumper hydraulic dump inserts, which are sold through a network of 100 dealers across the US and Canada.

Nucor buys Century Tube and TrueCore In April 2019, Nucor acquired the assets of Century Tube, a privately held maker of welded mechanical tubing for the automotive industry. Century Tube is a 280,000-square-foot mill on 33 acres in Madison, Indiana, that produces carbon steel tubing for auto applications along other mechanical and structural tubing.

Nucor Tubular Products will invest $27.2 million to increase production and finishing at its welded mill in Alabama. More recently, the company snapped up South Carolina-based insulated metal panel manufacturing company TrueCore for an undisclosed sum.

Liberty Steel acquires Johnstown Wire Tech In June 2019, Liberty Steel USA acquired the largest North American producer of value-added carbon and alloy wire, Johnstown Wire Technologies. Also in the company’s effort to capture a larger portion of the wire rod market in the US, it appointed Tim Dillon as senior vice president of sales and marketing. Dillon has specialized in long products and held positions with US Steel, GS Industries and Georgetown Steel.

Most recently, Liberty Steel is slated to buy Bayou Steel for $28 million - it was named the preferred buyer at an auction held on December 18 to purchase the Louisiana-based mill and its assets. Still, it is not clear whether Liberty will restart the mill. Bayou Steel’s filed for chapter 11 bankruptcy in early October and its operations include an 800,000-tpy meltshop at its Louisiana facility and a rolling mill in Harriman, Tennessee, which produces steel beams, merchant bar, reinforcing bar and other structural steel products.

Russel Metals acquires City PipeOntario-based Russel Metals acquired all outstanding shares of City Pipe & Supply for $160 million in August last year. This deal was part of efforts to expand sales of pipe, valves and fittings in the oil and gas regions in the US. City Pipe is based in Texas and operates in the Permian, Eagle Ford, Granite Wash, Barnett and Haynesville basins. In 2018, City Pipe & Supply moved into a larger warehouse and pipe yard at its Permian home base. The expanded facility enabled the company to make a bigger push into the upstream pipe market.

O’Neal Industries acquires tubemakerAlabama-based O’Neal Industries bought G&L Manufacturing, gaining two facilities that produce small-diameter welded tubing made of stainless steel, nickel alloys and titanium. G&L is headquartered in Tennessee and runs a second facility in Colorado. In 2017, O’Neal merged four affiliates to form a new division called United Performance Metals, whose inventory includes stainless steel, nickel alloys, cobalt alloys, titanium, aluminium and alloy steel.

Triple-S Permian Basin plansIn September, Triple-S gained ground in the Permian Basin of West Texas via the acquisition of assets of Shamrock Steel, the largest distributor of structural steel in the Permian where oil and gas production has accelerated. Most recently, the company announced its acquisition of Bushwick Metals to expand its footprint in the Northeast.

Merfish to acquire United Pipe & SteelIn efforts to form the largest master distributor of standard pipe in the US, Merfish Pipe Holdings acquired United Pipe & Steel in February last year. Merfish will add United Pipe’s 12 distribution centers in Massachusetts, Pennsylvania, Ohio, Indiana, Illinois, North Carolina, Texas, Kansas, Alabama, Florida and California to its footprint of five distribution locations. Gerald Merfish called the merger “synergistic” and United Pipe & Steel CEO Greg Leidner said the larger entity “will continue to develop ways to enhance the supply chain for our suppliers and customers.”

Alro Steel expansion plansIn February, Alro Steel purchased certain assets of metals distributor Riverfront Steel, including its 115,000-square-foot facility with all the inventory and equipment in the Ohio location. The company also began construction on a 195,000-square-foot facility in Wisconsin, with a completion date scheduled for early 2020, the company said. Alro acquired a 108,000-square-foot site, said to be a former Central Steel & Wire facility, near Milwaukee. In September, the company also announced it would expand its St. Louis facility by adding 54,180 square feet of space along with a new plasma cutting machine, new bay and additional racking to allow for expanded inventories of plate, sheet, alloys, stainless and more. nELIZABETH RAMANAND


If you ask an executive at your local mill in the United States which way prices will go in 2020, they will probably tell you nowhere but up.

That would not be incorrect. Between late October and the end of last year, US steel mills rolled out four price increases totaling at least $150 per ton ($7.50 per hundredweight). And prices have since risen steadily.

Fastmarkets’ daily steel hot-rolled coil index, fob mill US, for example, averaged $491.40 per ton in October - a three-year low - when the first price increase was announced.

US HRC prices jumped by 6.9% in November to a monthly average of $525.20 per ton and continued to rise into December, in large part due to higher scrap prices that month and in anticipation of additional gains in 2020.

Domestic mills were seeking HRC prices of at least $600 per ton heading into 2020 - a level that, if achieved, would represent a 22.1% gain from the October low.

The big questions are what demand and prices will look like further into this year and will prices have indeed bottomed out.

One big warning sign is that US steel demand growth slowed in the fourth quarter of 2019 compared with the same quarter the previous year in all major end markets, including the construction, automotive and energy sectors, UBS analyst Andreas Bokkenheuser wrote in a December research note.

“We remain cautious on the US steel sector, given the risk that steel prices [will] drop again after the current price hike/restocking process,” he wrote.

Fastmarkets research analysts, meanwhile, are less concerned about the end-user outlook. According to the steel weighted industrial production (SWIP) index they created based on the American Iron and Steel Institute’s end-user breakdown of steel shipments and Oxford Economics’ sector-by-sector industrial forecasts, underlying demand should recover by 1.3% after slipping 0.7% last year. Given their latest estimates that apparent steel consumption fell by a similar speed to their SWIP last year (-0.9%), they also don’t believe the

recent stock build will necessarily thwart prices in the short term, so long as “real” demand revives as expected.

Mind the HRC-scrap gapWith uncertainty about demand and the direction of US steel prices heading into 2020, some market participants questioned whether US HRC prices reached a floor and rebounded in the fourth quarter - a theory supported by mills’ HRC lead times stretching into February - or whether that rebound, like another over the summer, might prove short-lived.

One way of testing whether the market has hit a floor is by examining the spread between the price of US HRC and domestic ferrous scrap over time. The metric is particularly useful because an increasing amount of flat-rolled steel in the US is from electric-arc furnace (EAF) steelmakers, whose primary raw material is ferrous scrap rather than the iron ore used by integrated mills.

Fastmarkets compared average monthly prices for its steel HRC index with the average for the steel scrap No1 busheling, consumer buying price, delivered mill Chicago. Fastmarkets typically lists scrap prices in gross tons but converted these into short tons in this report to make direct comparisons possible.

At a glance, the data suggests that, looking purely at input costs, US prices are not near a floor.

US HRC prices averaged $491.40 per ton in October, down by 11.7% from $556.60 per ton in September and the lowest since they averaged $482.20 per ton in October 2016.

Scrap prices trended in the same direction. They averaged $202.64 per ton in October, down by 15.3% from a September average of $239.29 per ton and the lowest since they reached $188.13 per ton in October 2016.

The result is that the price for HRC exceeded that for No1 busheling by $288.76 per ton in October, not substantially different from the $294.07-per-

US HRC-scrap gap could prove perilous for steel


ton spread observed in October 2016. Those figures suggest that, in recent years, HRC has bottomed when its spread versus scrap narrowed to around $290 per ton.

There is a logic to that figure. The cost to convert scrap to HRC is around $100 per ton in a strong market when capacity utilization is high and $150 per ton in a poor market when capacity utilization is low, industry sources said. Taking the midpoint of those figures - $125 per ton - would leave a respectable metal margin of $165 per ton for flat-rolled EAF mills even during pricing troughs.

But just because it is unlikely that US mini-mills have lost money making steel over the past three years, it does not mean they have not in the more distant past.

Lessons of busts (and booms) pastUS HRC hit a more-than-10-year low in December 2015 - averaging $359 per ton - in a month in which scrap prices averaged $142.86 per ton. HRC that month exceeded busheling by $216.14 per ton. In other words, mills - even EAF steelmakers, which are often perceived to be lower-cost producers than their integrated competitors - recorded significantly narrower metal margins in the wake of the 2014-15 oil price collapse than they did during more recent steel market downturns.

Oil prices are strongly correlated with steel and ferrous scrap prices. And oil prices fell to less than $50 per barrel for much of the first two months of 2015 from more than $100 per barrel in July 2014, according to data from the US Energy Information Administration. One might argue that a collapse of that speed and magnitude is rare. Perhaps, but an even steeper decline in steel prices - perhaps to below the cost of production - is not unheard of, according to a review of Fastmarkets’ HRC and ferrous scrap pricing data.

US HRC prices fell in November 2001 to what has to date proven to be the lowest point of the 21st century following the dot-com bust and the September 11, 2001, attacks on the World Trade Center in New York and the Pentagon in

Washington.

The domestic HRC price averaged $210 per ton that month and the busheling scrap price averaged $73.21 per ton. The result was that HRC exceeded busheling by $136.79 per ton, meaning that mills’ metal margins in late 2001 were squeezed close to, or perhaps below, conversion costs.

It is probably no coincidence that October 2001 saw former industry giant Bethlehem Steel file for Chapter 11 bankruptcy protection. But it is also worth noting that such squeezes do not only happen when demand is poor. They also occur when the market overheats.

Steel prices were near their highest point of this century in August 2008, the month before investment bank Lehman Brothers collapsed, triggering the Great Recession.

US HRC prices averaged $1,068.60 per ton that month and scrap prices averaged $765.73 ton - meaning that finished product, despite its elevated price, exceeded the raw material by $302.87 per ton. That metal margin - in the hottest steel market of this century - was not substantially above those seen in recent downcycles.

The reason for the squeeze at the time might have been the speed at which both HRC and scrap prices rose in 2008. To put that period of steep price escalation into perspective, consider that in January 2008 the HRC price averaged $625.20 per ton, meaning that prime material could have been bought, put into inventory and scrapped for profit a few months later. And indeed some savvy customers did just that.

Now what?So what should an informed steel buyer be on the lookout for in 2020?

Mind the spread between HRC and ferrous scrap. It’s much wider now than in past downturns - meaning that prices, if demand does not improve, could potentially have significant downside. nMICHAEL COWDEN

US HRC-SCRAP PRICE SPREAD($ per short ton)

Source: Fastmarkets

0

200

400

600

800

1,000

1,200 HRC index fob mill USScrap No 1 busheling, consumer buying price, delivered mill Chicago

Jan 2

000

Jan 2

002

Jan 2

004

Jan 2

006

Jan 2

008

Jan 2

010

Jan 2

012

Jan 2

014

Jan 2

016

Jan 2

018

Nov 2

019

Dec 2

015

Oct 2

019


Despite environmental issues being on the agenda, including the announced switch from the basic oxygen furnace (BOF)- to the electric-arc furnace (EAF)-based steelmaking process, profitability has been and will likely remain the key driver for Chinese steelmakers when it comes to choosing steelmaking raw materials, Fastmarkets analysts forecast.

This has been evident in the decoupling of 62% Fe and 65% Fe iron ore prices in recent years, as well as in China’s growing interest in imported iron metallics and semi-finished steel through 2019.

By late 2019, combined monthly imports of iron metallics and semi-finished steel into China reached the highest level in a decade. In November, the total volume was just under 1 million tonnes. This included 203,709 tonnes of merchant pig iron (MPI), 155,764 tonnes of hot-briquetted iron (HBI) and 617,209 tonnes of semi-finished steel, including slab, billet and bloom. That said, the volumes - relatively significant for international markets of merchant metallics and semis - are still tiny compared with China’s iron and steel production volumes.

Total imports were the highest since July 2009; and there are other similarities between 2019 and 2009. Price spreads for semi-finished steel over iron ore have dropped significantly year on year in 2019, making semi-finished steel an attractive option for some Chinese producers. The same situation has been observed in the iron metallics market, as the chart below illustrates.

There were similar trends in both 2009 and 2015. In 2015, however, domestic demand for steel products plummeted in China, pushing steelmakers to export semi-finished steel, despite the 25% export tax at the time. To get around the duty, Chinese exports of billet were misclassified as a type of alloy steel bar in 2015, enabling traders to avoid paying export duties and even qualify for rebates from sales taxes available for higher value finished products. Finished steel producers were not in a position to benefit from lower spreads by importing semis. They

themselves contributed to the narrowing of those spreads by exporting billet.

In 2019, much like a decade ago, price attractiveness of semis, as well as of merchant iron metallics, versus iron ore appears to have been driving the increasing appetite for imports. This implies that China’s appetite for imported semi-finished steel may be a temporary phenomenon and is likely to cool down as price competitiveness versus iron ore fades. We do not believe environmental pressures will trump the economics despite the initial theories of some market participants.

The so called “winter cuts” - when the Chinese government imposes production cuts to improve air quality in northern China from October to March - would appear to have little impact on imports or even production. Capacity utilization rate surveys reveal few reductions at this time of year.

According to Steelhome data, China’s average blast furnace utilization rate averaged 86% in October-December, which is similar to readings since the beginning of 2017. Although rates did come down from over-90% levels recorded earlier in 2019, they remain elevated. What takes place during periods when the winter caps are imposed is not a total output shrinkage, but rather a shift in production to mills in other regions. The overall impact on total Chinese iron and steel production is therefore limited.

Why has China been boosting imports of iron metallics and semi-finished steel?

While metallics and semis imports surged, ferrous scrap imports collapsed last year. In the first 11

Profitability to continue driving feedstock procurement strategies of Chinese steel mills


months of 2019, China imported only 183,042 tonnes of ferrous scrap, compared with 1.34 million tonnes in the corresponding period of 2018, representing an 86% year-on-year decline. In part, the pick-up in iron metallics imports was to replace scrap imports, but we believe the trend is mostly related to the price competitiveness of metallics and semis versus both seaborne iron ore and Chinese domestic heavy steel scrap.

By the end of the year, the market consensus also shifted toward price attractiveness as the main reason for China’s buying interest in importing iron metallics and semi-finished steel.

Expensive scrap challenges BOF-to-EAF shift Although scrap-based steelmaking is being viewed as environmentally-friendly, there are limitations and challenges to it. Firstly, profitability. On a global scale, an average BOF mill had crude steel production costs exceeding those at an average EAF mill in the fourth quarter of 2018 for the first time that decade. The gap widened into 2019, according to our Steel Cost Service, given rising iron ore prices, but a shift toward EAF-based steelmaking might not make sense from the cost point of view if raw materials prices change course.

Chinese BOF-route (integrated) steelmakers are very sensitive to profits in our opinion. This view is evidenced by these steelmakers navigating between lower- and higher-Fe-content iron ores, depending on their order books and margins, despite environment-related restrictions. Scrap prices, which were substantially higher in China than elsewhere in recent years, dropped below hot metal costs only after iron ore prices jumped above $100 in May. Other challenges to the BOF-to-EAF switch include the build-up of residuals in scrap over time that make it less desirable for certain applications, as well as the fact that many BOFs in China are fairly new. This makes justifying investment into new EAFs more difficult.

Operating margins define iron ore procurement strategies Chinese steelmaking margins were squeezed last year but recovered somewhat in the last quarter due to a slight rise in steel prices. As margins rallied so the premium for 65% Fe fines over 62% Fe fines increased. In general, iron ore prices were above our expectations for December, but we are still anticipating a downward price correction this year. A dramatic, by Chinese standards, reduction in industrial activity growth this year, contrary to the strengthening global trend, will negatively affect Chinese steel demand and supply - particularly pig iron production - which poses a downside risk to iron ore demand.

Although iron ore supply can be far more important than demand for price direction at this time of year, as we approach the anniversary of last year’s tragedy in Brazil, falling demand is likely to negatively affect prices.

Vale was forced to halt several mining operations after a tailings dam failure at its Córrego do Feijão mine in Brumadinho on January 25, 2019.

Chinese port stocks remain stubbornly high, at around 130 million tonnes, and high prices could continue to stimulate Chinese iron ore production, which rose strongly last year. Imports of iron ore into China also revived strongly from the second half of last year, which suggests that supply-side competition could intensify if demand fails to outperform.

What’s in store for metallurgical coal? In the near team, and as we have observed over the past few years, Chinese demand for coking coal (and especially so demand for imported material) correlates with iron ore procurement strategies. Those, in turn, are a function of operating margins at steel mills, demand for finished steel products and capacity utilization rates at blast furnaces.

The share of coking coal imports increased with higher demand in China in 2019, as well as in 2017. The share dropped in 2018 when total demand was broadly flat year on year. These changes are related to iron ore buying approaches. Fluctuations in coking coal imports are more dramatic compared with iron ore, because China is less reliant on imported coal but also more reliant on Australia-specific supply, which can be heavily affected by the weather, typically the rains in the first quarter but to some extent the bush fires across New South Wales and Queensland over the fourth quarter 2019 and first quarter 2020. A drop in coal imports in 2018 was accompanied by elevated margins and higher usage of 65% Fe ores (as illustrated by a drawdown from Brazil-origin port stocks), and the opposite occurred in 2019.

Looking further ahead, availability of ferrous scrap in China is expected to increase. Should this put pressure on scrap prices (provided scrap collection

YEAR-ON-YEAR CHANGE IN PRICE SPREADS(% over iron ore)

Source: Fastmarkets

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-60

-20

20

60

100

Semi-finished steelIron metallics

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019


follows suit) and make the secondary raw material more price-attractive compared with hot metal, this would be an additional incentive to increase scrap use at integrated mills and in turn reduce the demand for metallurgical coal. In the near term, the price outlook for comparatively low-priced seaborne metallurgical coal (under $150 per tonne cfr in December 2019 compared with a four-year average of around $180) is strengthened by the fact that mills are encouraged to use lower-grade iron ores, which require more fuel (coal) to remove impurities. Upside risks are also being provided

by the tier 1 coal prices in China, which before tax remain at an elevated premium over $55 per tonne higher than seaborne coal. This contrasts with an average premium $30 per tonne lower. n

This article was written by Fastmarkets analysts, who are responsible for arguing our independent view on market developments and forecasting their future performance.ALONA YUNDA, ALISTAIR RAMSAY

A number of factors came together in the second half of 2019 to create a situation of high volatility in the market for pig iron exports from the Commonwealth of Independent States, which covers almost two-thirds of global exports.

On one hand, weaker prices for finished steel products and scrap put pressure on the pig iron market, while on the other hand suppliers redirected pig iron away from the market for their own use, and a new large consumer, China, joined the market.

Taking into account the rapidly changing trading conditions, Fastmarkets looks into five key factors that are likely to affect the CIS export pig iron market in 2020.

1. Sales volumes will continue to fallOver the first nine month of 2019, the combined pig iron exports from Russia and Ukraine went down by 19.64% to 5.3 million tonnes, compared with 6.6 million tonnes in the corresponding months of 2018, according to data from the International Steel Statistics Bureau (ISSB).

This year, that reduction is expected to continue, Fastmarkets understands.

“The main factor which will affect the market this year is the redirection of merchant pig iron volumes to the internal needs of key suppliers,” one pig iron exporter from the CIS said.

Tula Steel, a partner project of Russian group Industrial Metallurgical Holding (IMH), which runs pig iron producer Tulachermet, came into operation in July 2019.

“Production volumes of merchant pig iron will depend mainly on the market price [in 2020],” a source inside IMH told Fastmarkets. “According to current estimates, our pig iron export volume will be 500,000-600,000 tonnes in 2020, while previously we used to export around 2 million tonnes per year.”

Fastmarkets’ average price assessment for high-manganese pig iron, export, fob main port Black Sea, CIS, was $322.63 per tonne in 2019, dropping from $373.47 per tonne in 2018, because of the soft pricing in the finished steel and scrap markets.

But Tulachermet may restart its blast furnace (BF) No1, with capacity for 1.25 million tpy, and thus increase merchant pig iron availability. The BF was originally halted for an overhaul in late 2008.

Tulachermet currently runs only two similar furnaces – the 643,000-tpy BF No2 and the 1.495 million-tpy BF No3.

“We can relaunch BF1 because at some point we

Five factors the CIS pig iron export market will face


will have to shut down BF2 for maintenance for 6-9 months,” the company source said. “Obviously, we have an option to run with only BF1 and BF3, or with all three furnaces together, or with just one furnace [depending on the market situation].”

Also in Russia, one international trader said that: “Metalloinvest’s pig iron shipments will go down in 2020 because it commissioned two new furnaces in 2019 and now can increase the pig iron content in its own steel-melting.”

Metalloinvest replaced two electric-arc furnaces (EAFs) at its Ural Steel asset with flexible modular furnaces (FMFs) in 2019. FMF No2 was commissioned in March 2019 and FMF No1 in the following September. The combined capacity of the two new furnaces surpasses 2.2 million tpy, which is roughly equal to the steelmaking capacities of the former EAFs.

The furnaces use technology which provides flexibility in the use of hot metal, pig iron, hot briquetted iron (HBI) or steel scrap, and offers the possibility of increasing the percentage of hot metal in the charge to 85%, according to Metalloinvest.

The company did not disclose the percentage of hot metal used in steel melting at Ural Steel before the EAFs were replaced.

Still in Russia, pig iron shipments from Novolipetsk Steel (NLMK) will depend on market fluctuations, according to Grigory Fedorishin, the company’s president and chairman of the management board. “We have excess pig iron capacity. If the market conditions are favorable, we can ship [more] pig iron,” he said.

In January-September last year, NLMK shipped just 257,000 tonnes of pig iron, according to the company’s latest operational report. That was less than half the volume over the corresponding period in 2018, when sales came to 610,000 tonnes.

Meanwhile, in Ukraine, steelmaker Metinvest is planning to cut its pig iron shipments by about 200,000 tonnes this year compared with 2019, the company has said.

Over the first nine months of 2019, Metinvest shipped 1.4 million tonnes of pig iron. This was a drop of 653,000 tonnes (or 32%) compared with the same period in 2018, when shipments totaled 2.1 million tonnes, according to the company’s most recent financial report.

Metinvest completed the initial construction stage of a new continuous casting machine (CCM) at its Ilyich Iron & Steel Works in Mariupol in late 2018, and the equipment was operating at design capacity in 2019.

2. Continued demand in ChinaDemand for imported pig iron increased in China in late September 2019 because of the material’s price competitiveness.

Pig iron imports into China increased to 678,078

tonnes in January-November 2019, from only 92,899 tonnes in the same period of 2018, according to customs data obtained via ISSB and Steelhome.

But the demand growth in China was probably even more impressive, although this was not yet reflected in official statistics because the material arrived late in 2019 or early in 2020. In late October and into November, China bought as much as 500,000 tonnes from the CIS and Brazil, sources have estimated.

“There is a feeling that the Chinese [import pig iron] market will grow further [because of the country’s] ecological initiatives, and it may overtake the United States [in terms of pig iron purchases],” one Russian exporter said. “China will continue to buy pig iron [in 2020], if the price for iron ore is higher than $70-80 per tonne and the pig iron price is more or less the same.”

In the fourth quarter of 2019, when China was actively purchasing pig iron, the average of the index for iron ore 62% Fe fines, cfr Qingdao, was $88.97 per tonne.

This figure was down from $102.03 per tonne in the third quarter, the highest level for five years, but was still well above the annual average for 2018, which was $69.70 per tonne.

Meanwhile, Fastmarkets’ average price assessment for high-manganese pig iron, export, fob main port Black Sea, CIS, was $295.08 per tonne in the fourth quarter of 2019. The freight rate from the Black Sea to China was close to $32-35 per tonne, sources estimated.

3. Effect of upstream, substitute productsThe global pig iron market, and the export market from the CIS in particular, is expected to be strong in the first quarter of 2020. But sources said that it may begin to weaken from the second quarter due to possible price reductions in iron ore, which is the feedstock for making pig iron, and in scrap, which is a relative substitute for pig iron in steel melting.

“We expect that, in the second quarter, a decline in iron ore prices will start, because iron ore is overpriced [compared with steel products] and [major producer] Vale will start to increase its sales,” one international trader said.

“Normally,” another trader said, “the price of scrap is strong over the winter because of lower scrap collection, and starts to reduce in the spring, and that can negatively affect the pig iron market.”

But another source said that he would not consider scrap to be a key factor for the pig iron market because the price trends for upstream products were more important.

“If we talk about upstream products, the prices of coking coal and coke are even more important than the price of iron ore, because they have a larger effect on production costs than iron ore,” he said.


4. Higher demand in the US“One of the main factors that will support the pig iron market in 2020 is that Republicans [the political right wing in the US, and its sympathizers] continue to support the development of the [steel] industry in the US. That has led to investments in new EAF-steelmaking projects in the country,” a source said.

EAF-based steelmakers are the main consumers of imported pig iron in the US.

North Star BlueScope is planning to start a third EAF and to boost melt capacity at its mill in the US state of Ohio by as much as 900,000 tpy by 2021.

Big River Steel intends to add a second EAF, with capacity for 1.5 million tpy, at its Arkansas site by the fourth quarter of 2020. The company is also considering the possibility of building a second flat-steel mill in Texas.

JSW Steel plans to add a second 1.5 million-tpy EAF at its Ohio mill. Details of the project have not yet been fully fleshed out, but the projected start date is in the second half of 2020.

Steel Dynamics Inc plans to build a new EAF-based flat-steel mill in Texas. Construction is expected to begin early this year, with operations to begin in mid-2021. The steelmaking capacity will be around 2.7 million tpy, Fastmarkets understands.

And Nucor plans to double its hot-rolled steel capacity to 3 million tons (or around 2.7 million tonnes) per year, from the current 1.6 million tons, by mid-2021 at its mill in Galattin, Tennessee. To increase HRC output, Nucor will revamp the meltshop and increase steel melting at the site, Fastmarkets understands.

Demand growth is expected to be boosted by further ecological initiatives, “which will lead to higher investment attractiveness into EAF-based steelmaking, especially in the US and China,” a source said.

5. Internal market in the US?The US continued to be the largest consumer of seaborne metallics in 2019, while its domestic market was almost non-existent.

In January-September, the US imported 4.1 million tonnes of pig iron, slightly down year on year from 4.3 million tonnes, according to ISSB. In 2018 in total, imports exceeded 6 million tonnes.

But the situation may change in 2020 because several producers intend to start pig iron and HBI sales to local customers, to substitute for imports.

Canada’s Stelco plans to build a pig iron plant with capacity for 1 million tons per year (around 900,000 tonnes per year) at its Lake Erie Works in Nanticoke, in the Canadian provice of Ontario. But the volume it will supply to the market will be less than that because it will divert only some liquid metal from the blast furnace to the pig iron caster.

The facility is expected to be completed in the second quarter of 2020, with shipments scheduled to begin in the third quarter.

The company is already searching for customers, sources told Fastmarkets.

Cleveland-Cliffs is planning to sell pig iron from the recently purchased AK Ashland Works in the US state of Kentucky. The blast furnace at the site has capacity for 2.3-2.7 million tpy but has been idle since late 2015.

“The steel industry in the US doesn’t feel very healthy at the moment, and pig iron-making projects require massive investment, so it is a question of whether companies will be able to move forward with projects or not,” an international trader said.

“Even if these projects come to fruition,” he added, “the competition with imports will be not so tough as it could be, because the largest merchant pig iron consumers are located in the south [of the US], where imports arrive at ports, while the US pig iron projects are in the west and should find customers there. Otherwise, inland transportation costs will kill the profitability.”

The pig iron suppliers in the CIS, which are responsible for almost three-quarters of imports, will be not be significantly affected if a local market develops in the US, because major pig iron exporters “have much less material to sell now due to our own higher needs,” a supplier from the CIS said.

New Zealand-based Petmin USA is also planning to build a pig iron manufacturing plant in Ohio, which could be operational as early as 2021.

The pig iron capacity of this plant is estimated at 425,000 tpy, although the company has said that it will make high-purity nodular pig iron, which is used by foundries rather than by steelmakers.

Cleveland-Cliffs expects to start commercial production of HBI in the first half of 2020 at its plant in Toledo, Ohio. The facility has capacity for 1.9 million tpy of HBI, but one pig iron buyer in the US has said that the start-up of the asset is likely to have more effect on the prime scrap market than on imports of pig iron. nMARINA SHULGA


A shortage in the global direct-reduction (DR) grade iron-ore pellets market is likely to fade in 2020 and in the longer term amid higher supply, which will meet the growing demand.

Demand to grow furtherDemand for DR pellet will continue to increase this year, with direct-reduced iron (DRI) output expected to grow alongside electric-arc furnace (EAF) steel production. EAFs use DRI as raw material, while DRI requires pellets as feedstock.

The DR pellet demand generated by those DRI plants requires seaborne feedstock.

The International Iron Metallics Association (IIMA) estimated the combined DRI production at those assets to be 32.3 million tonnes last year, up from 28.8 million tonnes in 2018. In 2020, output is expected to grow further to 34.8 million tonnes and reach 45.3 million tonnes by 2025.

Around 1.45 tonnes of DR pellet is used to produce one tonne of DRI, sources said.

Seaborne DR-pellet demand will reach around 49.4 million tonnes in 2020, increasing from 45.8 million tonnes in 2019 and 40.8 million tonnes in 2018, the IIMA estimated. In 2025, demand is projected to reach 64.7 million tonnes as a result of rising DRI output.

Lump ore supply partly meets DRI producers’ demand currently, and is expected to continue to match demand in the future.

The Middle East-North Africa (Mena) region is the key consumer of seaborne DR pellet.

From January to November 2019, global DRI output hit 82.5 million tonnes, according to recent statistics from the World Steel Association (Worldsteel). Around half of this volume was produced in the Mena region, where DRI output was recorded at 40.3 million tonnes.

Over the first 11 months of last year, DRI production in the Mena region rose by 871,471 tonnes - or 2.2% - year on year, compared with growth of 6.49 million tonnes - or 20% - year on year during the same 2018 period.

While Iranian production increased in that period, output declined in most other countries in that

region, excluding Libya where tonnage growth was insignificant.

Iranian DRI production reached 25.6 million tonnes in January-November 2019 - a year-on-year increase of 10% related to higher steel output.

Steel production in Iran, 90% of which is made via EAF, increased by 6.2% or 21.5 million tonnes in the first 11 months of 2019 from 20.3 million tonnes over the same period in 2018, Worldsteel said.

Further DR-pellet demand growth in the Mena region is expected, though mainly in Algeria, Fastmarkets understands. Currently, there are only two DRI units in Algeria, and each has a capacity of 2.5 million tonnes per year.

Algerian Qatari Steel (AQS) expects to start its own DRI-production plant in the first quarter of 2020 and will source pellets from external suppliers.

Tosyali Algeria also runs a DRI unit but supplies its feed via its own pelletizing plant.

“If Algeria remains stable and the government keeps supporting the local industry by selling natural gas at low prices, there is the concrete possibility of having new plants in Algeria for DRI/hot-briquetted iron [HBI] production in the mid-term,” according to international engineering company Paul Wurth, part of the SMS Group.

In Algeria, the price of natural gas for the steel industry is $0.50 per million British thermal units (MMBtu), one of the lowest prices globally when compared with $5.50 per MMBtu in Egypt.

There is a possibility that DRI/HBI production may improve in Libya as well, but “everything will depend on the political process there in the next few years,” Paul Wurth added. “The country is blessed with huge natural resources but will not keep up until the political and social picture stabilizes.”

Libyan Iron and Steel Co (LISCO) - the only DRI/HBI producer in the country - has the capacity to make 1.1 million tpy of DRI and 650,000 million tpy of HBI, although it produced just 728,000 tonnes over the first 11 months of 2019.

Shortage issue likely to fade in DR pellet market

Supply growth In total, global DR pellet supply may increase by around 24.9 million tonnes between 2018 and 2025, the IIMA estimated. Global DR pellet demand between 2018 and 2025, meanwhile, is expected to increase by 23.9 million tonnes.

“Nearly all of this growth should be realized in the next year or two, with the important exceptions of both Vale and Samarco, which account for more than 50% of the expected increase, due to both of them facing political obstacles in Brazil that are difficult to predict the timing of,” Joseph Poveromo, special member of the IIMA and president at Raw Materials & Ironmaking Global Consulting, told Fastmarkets.

Samarco, which has capacity to produce 30.5 million tpy of pellets, is expected to restart operations between the third and fourth quarters of 2020, but most likely in the fourth quarter, sources said.

Samarco - a joint venture between BHP and Vale - has been closed since late 2015, when a tailings dam failed and flooded the nearby Rio Doce river in southeastern Brazil.

The pellet producer received an environmental permit needed to restart production of its Germano complex in late October 2019, which was the last license necessary to resume activities, according to Vale and BHP.

Samarco plans to restart operations initially with one iron ore concentrator at 7-8 million tpy. A

second phase is expected to increase capacity to 14-16 million tpy within six years, and a third is scheduled to start in 10 years, reaching 22-24 million tpy.

“The best estimate today is that product split will be similar to the pre-dam collapse - around 50% blast furnace [BF] pellets and 50% DR pellets, thus 3.5-4 million tonnes of DR-grade pellets will be added to the market in first phase,” the IIMA estimated.

Samarco is starting re-establish contact with key customers, Fastmarkets was told.

Vale plans to produce 49 million tonnes of iron ore pellet in 2020 via the gradual restart of idled capacity, which is up by 6 million tonnes compared with the anticipated 43 million tonnes in 2019.

Once Tosyali Algeria started its own 4-million-tpy pelletizing plant in late 2018, it no longer needed to buy seaborne material. The company produced around 150,000 tonnes of pellets in 2018 and is currently running at full capacity, Fastmarkets was told. That shift freed up some 3.8-3.9 million tonnes of DR pellet supply into the market.

Bahrain Steel, which has a combined capacity of 12 million tpy from its two pellet lines, shipped 8.2 million tonnes to customers in 2018. Therefore, the company has capacity to increase shipments by 3.8 million tonnes, according to Fastmarkets’ calculations.

“A strong ramp-up at Minas Rio [Anglo American’s Brazilian iron ore production operations] will



provide the DR pellet feed needed at both Bahrain Steel and Tosyali Algeria,” Poveromo said.

Anglo American expects Minas Rio to produce 20-22 million tonnes of the steelmaking raw material, compared with 19-21 million tonnes previously.

A pipeline rupture in mid-March 2018 had kept the mine shut for most of the year before it was restarted in December 2018.

Iron Ore Co of Canada (IOC) - Rio Tinto’s partly owned pelletizing plant - has the capacity to produce 12.5 million tpy of pellets. The final split between DR-grade and BF-grade pellets will be “market- and margin-dependent, but the DR share could in theory be 50%,” the IIMA estimated.

In 2019, IOC had a target to ship around 4 million tonnes to the global DR pellet market. Thus, the company has the capacity to increase its DR pellet supply by around 2.25 million tonnes, according to rough calculations from the IIMA.

Sweden’s LKAB has a pellet production capacity of 10 million tpy. Of this volume, DR pellet output accounts for around 7 million tpy, yet the company shipped around 6.5 million tonnes in 2018, the IIMA estimated. The company could therefore be able to increase its DR pellet shipments by around 500,000 tonnes.

Cleveland-Cliffs started DR-grade pellet production at its Northshore operation in the US state of Minnesota, which has a capacity of 3 million tpy, in August 2019. Meanwhile, its 1.9-million tpy HBI plant in Toledo, Ohio, is scheduled to start up in mid-2020 and will consume around 2.7-2.8 million tpy of pellets. That means that Cleveland-Cliffs may have around 250,000 tonnes of DR pellets available for sale to third parties.

Global DR-grade pellet supply will also increase amid plans from Ukraine’s Metinvest to start DR pellet shipments in 2020.

The company aims to produce up to 2 million tonnes of pellet with higher iron content; from the total, up to 1 million tpy will be related to DR pellet, although these tonnages were not included in the IIMA’s estimations.

Metinvest plans to start shipments in May and sell around 1 million tonnes of improved quality pellets, both DR- and BF-grade, from the Central Gok in 2020.

In addition to higher production of DR pellets, market supply may increase due to a concurrent weakness in the BF pellet market.

“Continued weakness in BF pellets will increase DR pellet supply, as most pellet suppliers can swing both ways,” Poveromo added.

Premium to decrease under pessimistic market mood“The market remains pessimistic, and for the first quarter of 2020 [the DR pellet premium] is expected to fall even lower, to less than $30 per tonne,” one buyer told Fastmarkets.

For shipments in the fourth quarter of 2019, the premium was agreed slightly above $40 per tonne, although all buyers got discounts of around $3-7 per tonne depending on volume and destination, sources told Fastmarkets.

Initially, the premium for DR pellet shipments in 2019 was agreed at $62-68 per tonne in late 2018/early 2019. But due to the decline in finished steel prices and falling scrap prices over 2019, the premium has since been renegotiated to compensate for the buyers’ losses in the second and third quarters.

Fastmarkets’ assessment of the iron ore DR-grade pellet premium, Middle East reference was unchanged month on month at $39 per tonne on December 31.

Fastmarkets’ index for iron ore 65% Fe, Brazil-origin fines, cfr Qingdao, which is used as the basis for pellet premium contracts, averaged $102.71 per tonne in December, up from $96.10 per tonne in November.

For 2020, the DR pellet market switched from annual to quarterly contracts because shorter terms of price fixing will help mitigate risks and react to market changes faster, a buyer said.

A weak market for scrap, which is an alternative feedstock for EAF-based steelmaking, may pressure the DR pellet market further.

Some EAFs are equipped to be charged with 100% scrap input. However, “in normal practice, scrap mix doesn’t exceed 35%,” a steel producer from the Mena region told Fastmarkets.

Still, buyers may prefer to continue to use more scrap in steel production, because that practice has proven to be more cost-effective.

Fastmarkets’ daily index for steel scrap, HMS 1&2 (80:20 mix), US origin, cfr Turkey, which is a strong indicator of the global scrap market, averaged $264.64 per tonne in the fourth quarter of 2019. This was down from an average $274.52 per tonne in the third quarter 2019 and an average $311.13 per tonne in the first quarter 2019, on weakness in the finished steel markets.

Market sources expect the scrap market to remain strong in the first quarter of 2020 but will start to weaken later this year. nMARINA SHULGA


Indonesian ferrous scrap demand should continue to grow in 2020 despite the new rules imposed by authorities.

“The new regulations should be smoothed out over the next couple of months and containerized scrap shipments should resume within the first half of the year,” Hoffman Iron & Steel chief executive Phil Hoffman told Fastmarkets.

He was referring to the new regulations enacted by the Indonesian government in October, which state that ferrous scrap imports must be shipped directly from the exporting country - cargoes are not allowed to be transhipped through other countries. There is also zero tolerance for impurities.

“The Ministry of Industry has indicated that it will be meeting with the Ministry of Trade to try to resolve the regulatory issue to normalize scrap imports so that steel production can be maintained, so I expect the situation to blow over in a relatively short period of time,” Hoffman said after meeting government officials in early December.

Trading in the Indonesian import ferrous scrap markets remains sparse, numerous traders told Fastmarkets recently, with market participants waiting for new direction from the government before attempting to buy or sell material. There has been some market chatter about bulk shipments still being sent to Indonesia but containerized trade has almost died out, industry sources said.

“In any case, it’s impossible to have no impurities in ferrous scrap. Any kind of ferrous scrap will likely have some dirt or dust on it. So the new regulations don’t really make sense,” Hoffman said.

Increased shipments of bulk scrap or billetIndonesian demand for billet has risen in the wake of the regulations, with sellers offering Vietnamese material at $425 per tonne cfr. A major Indian steel mill has also floated billet tenders sourcing for bids on an fob India basis. But this is unlikely to be a long-term trend.

“Indonesia is indeed arranging for more billet to be imported,” Hoffman said. “However, a significant portion of Indonesian steel production is based on induction furnace technology. These IF-based

mills rely entirely on containerized scrap, not bulk shipments. It is easy to say that bulk shipments may increase but not all steel mills have the infrastructure and logistics facilities to handle these shipments.”

The higher cost of bulk shipments will also deter buyers from purchasing such cargoes.

“For example, if the Vietnam market is at $275 per tonne cfr, then the Indonesian market will easily fetch $285-290 per tonne cfr. This high price will put off buyers, who will continue to want to buy lower-priced containerized scrap,” Hoffman said.

“Furthermore, each mill has an import quota. They can’t just buy bulk shipments and then break up the bulk shipments to resell to containerized buyers,” he continued.

The expected continued demand for containerized scrap in Indonesia and the country’s economic growth are the reasons Hoffman Iron & Steel has started domestic operations in the country.

“We have invested in Indonesia and are basically the first Americans with a local business there. We are setting up a small scrapyard and testing out the markets. We are also working with the largest domestic broker in the country to accumulate and

Bullish outlook for Indonesian scrap demand despite new rules

Hoffman Iron & Steel CEO Phil Hoffman expects new regulations to be smoothed out over the next few months.


sell scrap,” Hoffman said.

The Indonesian domestic ferrous scrap market is generally fragmented, with groups of people who accumulate tonnages and then sell them off on daily basis quickly. Brokers then consolidate the tonnages and sell it on to steel mills.

Positive outlook The construction industry in Indonesia maintains a positive outlook, in part because it operates in a protected market.

“There are some imports of billet and slab but some finished steel products like I-beams and H-beams are protected by the government,” Hoffman said.

Steel demand also remains positive, especially with the economy growing at 3-4% each year, and a young population of 270 million.

“Government projects and infrastructure rejuvenation around the Jakarta area will boost steel demand,” Hoffman said.

According to the Indonesian Iron & Steel Industry Association, building at height in Indonesia has been increasing steadily, driving up demand for stronger steel. In Java province, more than 86% of total floor space is in buildings that are more than 12 stories high.

Population growth also requires additional housing and related facilities. This is especially so in high-density areas such as Jakarta, where the average number of people per square kilometer has reached 15,500.

The high level of seismic activity in certain parts of Indonesia will also require high-grade earthquake-resistant construction steel, especially in Sumatra. nPAUL LIM

The ferrous scrap market in the United States might be calmer in 2020, with metals recyclers potentially facing less volatility and fewer price declines than in 2019, which could present a unique set of opportunities for buyers and sellers.

Market participants do not expect the steep decline in prices that characterized the market in 2019 to reoccur due to the extent of that drop. Fastmarkets’ assessment of steel scrap No1 busheling, consumer buying price, delivered mill Chicago was $270 per gross ton in December, down by 33.3% from $405 per ton in January 2019.

While it seems doubtful that prices could return to January 2019 levels - an increase partially fueled by Section 232 tariffs and stronger demand for energy products - there could be modest and manageable price swings next year unlike the $40-per-ton drop in ferrous scrap prices during the October and November 2019 trades, according to a scrap executive in the Midwest.

The following themes are expected to affect the ferrous scrap market in 2020:

Consolidation

Consolidation will be a prevalent theme in the ferrous scrap market next year, be it acquisitions by vertically integrated steel mills or mid-to-large-sized scrap processors deepening their territorial footprint, according to a scrap metal broker in the South.

A full year of repeated price declines has taken a toll on scrap dealers, making it impossible for them to recoup losses on inventory and at the same time squeezing margins, a shredder source in the South said.

Scrap operations that are less financially sound are looking for opportunities to exit the industry, triggering a wave of mergers and acquisitions not seen since 2016, according to scrap executives in the Midwest and Southeast.

More stability looming for US ferrous scrap market?


Steel and scrap prices recorded a stellar year in 2018. Those who wish to sell their companies are seeking a purchase price based on their performance that year - which does not sit well with many buyers.

“We are a buyer right now but we are seeking 2016-type asset-based sales. I think there are a lot of people who would like to sell but the biggest challenge for consolidation in 2020 is the divide between buyers and sellers,” a Southern processor source said.

Alter Trading Corp’s purchase of Schneider’s Iron & Metal in mid-2019 and Allmetal Recycling’s buy of Glickman Recycling’s assets in late October, among others, have sparked more mergers and acquisitions across the US.

In mid-December, Alter Trading purchased the assets of United Milwaukee Scrap’s six locations in Wisconsin and Minnesota.

Several major scrap operations in various regions are also said to be looking at selling their assets to vertically integrated mills in their areas.

One area that is a potential hotbed for acquisitions is Texas, where a major electric-arc furnace (EAF) steelmaker is allegedly seeking scrap-related assets to secure the raw material pipeline for a new mill.

“I hear they are looking in Houston but Dallas is also a good option because there is a lot more prime scrap available there,” the Southern processor said.

Southeast

While Pittsburgh-based U.S. Steel Corp is not expected to begin commercial production at its Fairfield Works until the end of 2020, the steelmaker plans to start buying and holding 35,000 tons of scrap per month as early as April in anticipation of the opening.

The furnace will have capacity of 1.6 million tons per year and is expected to buy 100,000 tons per month of good material because the facility will make rounds for seamless tubular products. Its mix is said to be No1 busheling and No1 bundles, plate and structural scrap, shredded scrap and alternative irons.


US Heartland Charlotte, North Carolina-based Nucor Corp has opened a steel reinforcing bar micro-mill in Sedalia, Missouri. In addition to an on-site shredder that is expected to have processing capacity of 180,000 tpy, it is assumed that the mill will be supplied by Nucor scrap subsidiary David J Joseph Co (DJJ).

DJJ owns Advantage Metal Recycling (AMR), which has 11 scrapyards in the Kansas City area that could feed the micro-mill. Smaller yards that sell to AMR facilities will have more opportunities with the new mill.

Ohio Valley AMR will also be busier now that Nucor Steel Gallatin has started operating its new hot-rolled coil galvanizing line, boosting the mill’s capacity by an additional 500,000 tpy per year.

This mill is mostly self-sufficient on shredded scrap after DJJ’s River Metals Recycling LLC subsidiary acquired Louisville, Kentucky-based Industrial Services of America Inc in August, but it might have to reach outside of the Cincinnati/Middletown market in order to fill its prime scrap needs.

“As they expand production and demand for scrap, their first choice will likely be the Chicago market or places to the west of Chicago,” an Ohio Valley processor said.

Even though scrap is readily available in Cleveland and Pittsburgh, until demand improves for mills in that region prices remain higher in these two cities than in Chicago. This makes the Ohio Valley less attractive as a source for scrap on a consistent basis, the Ohio Valley processor noted.

Fastmarkets’ assessment for steel scrap No1 busheling, consumer buying price, delivered mill Chicago was at $270 per gross ton in December, $20 per ton lower than the price for No1 busheling, consumer buying price, delivered mill Cleveland at $290 per ton.

The good news for scrap sellers is that this represents the first phase of expansion at the Gallatin mill. Nucor also plans to increase hot-band capacity at the mill by mid-2021 - an effort that will almost double its production to about 3 million tpy from 1.6 million tpy.

Midwest While Nucor Gallatin’s need for additional raw materials is a positive for Midwestern dealers, 2020 could be a challenging year for the Chicago scrap market due to the closure of the Illinois River, scheduled for July 1-October 31.

The river system is a key part of the Chicago market, without which it is difficult to move any excess scrap generated in Chicago to the river mills in Arkansas and Tennessee. But if steel demand improves and the Chicago mills get busier, it could make up for the tons usually sold on the river.

“There was a period of five years when we didn’t ship anything by barge. It could be a squeeze trying to ship all our material if we cannot get enough rail cars but if things get back to a normal melt at the local mills we can easily place everything by rail or truck,” a Midwest processor said.

Shipping by rail incurs higher freight cost but if the river mills are in desperate need of material it is possible to ship out of Chicago via rail. This is not the preferred option, however, because Texas is more cost-effective for remote shipments by rail.

“It all depends on mill demand. Nobody knows what mill demand is going to be like in 2020. If market conditions are poor, then the river closure will exacerbate the situation. But if the market is good, there won’t be too much of an impact on the market,” the Midwest processor said.

Wild cards Two factors that could potentially cause the market to rise or fall too quickly are exports and the government, with 2020 being a presidential election year. Businesses are therefore cautious since it is unclear who the next head of the country will be, and the upside of the Section 232 tariffs has run its course.

Exports are another unknown since the US often exports 20-25% of its ferrous scrap to other countries. If Turkey, for instance, exits the market, the effects of oversupply will quickly be felt in the US. nLISA GORDON, MEI LING TOH


Steel-consuming sectors in Mexico should receive a boost from a gradual recovery in the Mexican economy this year, with optimism among participants in the scrap market slowly growing as a result.

The country’s gross domestic product (GDP) is expected to grow by 1.2% in 2020, according to the International Monetary Fund (IMF), although more recent forecasts from economists have been lower.

“We forecast a 0.8% growth in Mexico’s GDP in 2020, which is a recovery from this year,” according to Carlos Alberto Gonzalez Tabares, head of analysis and stock exchange strategy at Mexican financial group Monex.

Monex expects Mexico’s GDP to be flat this year because the economy has been struggling with a recent change of government in early 2019 and the long negotiation of the United States-Mexico-Canada Agreement (USMCA). Both events contributed to a halt in infrastructure investment and the construction sector last year.

Prices of ferrous scrap in Mexico had dropped sharply in 2019 before partially recovering toward the end of the year, which was mainly due to lower prices of scrap in the US but was also the result of weak economic activity.

Fastmarkets’ weekly assessment of steel scrap No1 busheling, consumer buying price, delivered mill Bajio, was 6,100 pesos ($322) per tonne on January 8, 2019, while the assessment of steel scrap No1 busheling, consumer buying price, delivered mill Monterrey, was 6,200 pesos per tonne on the same day.

Both assessments stood at 4,750 pesos per tonne on December 17.

“Scrap flow in the Mexican domestic market has fallen sharply... because of the decrease in prices,” a scrap seller source said. “One steelmaker believes that the construction sector is starting to recover.”

But other market participants were more cautious.

“Demand for steel has been mostly stable [in 2019]; we are unsure about 2020,” a second scrap seller source said.

One of the factors likely to provide a boost to the economy is the conclusion of the USMCA, expected to come soon, after the three countries signed a revision of the deal early in December.

The Mexican steel association, along with its US and Canadian counterparts, requested the “urgent ratification” of the deal, in a joint release on December 18.

The absence of growth of the Mexican economy is also partly due to a change of government in 2018, with the country’s ushering in a new president, Andrés Manuel López Obrador, on December 1, 2018.

The Mexican government announced in mid-2019 a program of investment and economic measures to expand infrastructure and boost the economy, called the National Development Plan 2019-2024.

Projects included infrastructure works and tax benefits, and are expected to benefit mostly the southern states in Mexico, according to Monex.

“The plan does not include huge projects, but maintenance works and projects that were already expected,” Gonzales Tabares said. “But it is a change in the sign of the economic policy and shows more commitment from the government.”

Economic projections were affected by a decision by the new government to cancel the construction of the Texcoco airport near Mexico City late 2018.

“The government went through a learning curve in 2019, and it is likely to perform better in 2020,” Gonzales Tabares said.

A Mexican scrap seller source concurred.

“Finally the private and public sectors have signed a peace treaty in Mexico, and now they will work together and thereby boost Mexican economic growth,” this scrap seller said. nFELIPE PERONI

Mexican scrap market cautiously optimistic amid expectations of gradual economic recovery

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Look ahead - Metal Bulletin · To help answer these questions, we need to look specifically at what drives steel demand. According to Worldsteel, there are seven key end-user industries