Ferrous scrap

© Copyright The Steel Index

‘The Ferrous Scrap Market’

The Steel Index

Jarek MlodziejewskiTim Hard

January 2011


Agenda

• Scrap – What is it?

• Scrap – What does it affect?

• EAF Production

• Raw Material Costs

• Scrap Trade

• Turkey’s Role

• Introduction to The Steel Index (TSI)

• TSI’s Underlying Methodology

• TSI’s Scrap Price Publication


• Steel is a „multi-cycling‟ material: it can be recycled repeatedly without degradation.

• Ferrous scrap is classed as either „prime‟ or „obsolete‟.

• Prime scrap material comprises off-cuts of new steel (by-products of manufacturing).

• Obsolete material represents redundant prior steel-based industrial production and consumption. It is primarily generated from discarded automotive and white product materials, or demolition of steel building structures and railways.

• It is a “greener” steel feedstock, as „virgin iron units‟ (i.e. those mined in ore form) require more power, processing and transportation than scrap.

• Over 1400kg of iron ore, 400kg of coal and 55kg of limestone is saved for a tonne of scrap used.

• It is the world‟s most recycled material. Over 80% of consumer steel is recycled

• Electric Arc Furnaces (EAFs) can be charged with between 90-100% of scrap.

• Basic Oxygen Furnaces (BOFs) can be charged with up to 30% scrap.

Ferrous Scrap – What is it?

400

420

440

460

480

500

520

540

560

580

600

25%

27%

29%

31%

33%

35%

37%

39%

41%

43%

Steel Scrap Produced mt

Steel Scrap Ratio Steel Scrap/Crude steel in %

Source: SBB Crude Steel Forecaster

% ratio falling due to 300mt of BOF capacity coming on stream (especially in China) compared with 80mt of new EAF capacity

mt


Ferrous Scrap – What does it affect?

• Steel mills using electric furnaces (80-85% of cost of production)

• Integrated steel mills (up to 15% of cost of production)

• Steel billet producers’ and purchasers’ margins.

• Rebar, wire rod and merchant bar markets are heavily affected by scrap

costs as these products are typically produced via the EAF steelmaking

process.

• Construction company margins. Long-range, fixed-price construction

projects are directly affected by the increasing price volatility of these

finished steel goods.

• Scrap yards, traders and brokers sales price margins.

• We cannot forget producers of flat products either, as high grade scrap is

used in the production steel coil and sheet products for the construction,

automotive and manufacturing industries (especially in North America).


300

350

400

450

500

550

500

550

600

650

700

750

800

Apr 10

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10

Jan 11

Rebar N.Europe

Rebar S.Europe

Wire Rod Europe

Debar Turkey export FOB Turkish Port

Merchant Bar Turkey export FOB Turkish

port

Turkish Scrap(RHS)


$USD/t $USD/t

The imported Turkish scrap price is important to a number of finished steel markets.

Source: TSI and SBB



0

20

40

60

80

100

120

140

0

100

200

300

400

500

600

700

Spread (RHS) Turkish Scrap LME Billet

Source: LME/TSI

Not least the LME billet price. The TSI Turkish #HMS

1&2 80:20 import and LME cash seller and settlement

prices show a weekly correlation of 82.4% correlation

over this period. The correlation of the average monthly

average prices over the same period rises to 91.4%.

However once you spread out the data set and split it

into quarters you will find that the average correlation

Q2 – 2009 to Q4 -2010 is only 74%. Furthermore, there

is no consistency over the period of time; with a low of

49% and a high of 95%

$USD/t $USD/t

Quarterly correlation – LME and Turkish Scrap

Q2 – 2009 49 %

Q3 – 2009 74 %

Q4 – 2009 75 %

Q1 – 2010 91 %

Q2 – 2010 95 %

Q3 – 2010 56 %

Q4 – 2010 76 %


Mid-East17mt

South America

16mt

Africa11mt

Asia168mt

North America

68mt

EU-2772mt

EAF Production - Many countries have a higher production

of EAF (scrap based) production than BOF.

EAF mill capacities tend to cluster around the 300 kt/year level as well as near the 1.2mt/year level. This reflects the economic scale for EAF plants and strategies to serve local

geographic marketsCountries with >50%

EAF production

Regional yearly EAFproduction



EAF Production - ...and steel scrap use is growing,

leading to increased global trade of scrap.

26%

27%

28%

29%

30%

31%

32%

33%

500

700

900

1100

1300

1500

1700

1900

World crude steel production

mt

BOF EAF % by EAF

Given that the world’s steel recycling ratio has fallen significantly as emerging markets

consume steel and produce little scrap, the market has become structurally tighter than

those for iron ore and coal.

GFC

300

350

400

450

500

550

World crude steel via EAF in

mt

EAF


GFC

The global financial crisis hit construction markets (which EAF producers primarily serve)

particularly hard: dragging down the trend line in 2009: however, construction markets are

recovering...



EAF Production – Exclude China and we have a different

picture.

20%

25%

30%

35%

40%

45%

50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e

%EAF route excluding China %EAF Route World total

The EAF route, as a ratio to total steel production, has been rising steadily if China is taken out of the equation


222.69265.05

310.97

423.82

241.47

380

27.41

27.53

29.87

31.94

30.35

28.72

14.54

15.05

16.82

18.59

17.67

16.72

2005 2006 2007 2008 2009 2010e

Operational production cost/t liquid steel EU EAF Mill, US$/t

Scrap/pig iron Alloys Electricity Electrodes EAF Refractories Scrap credit Labour & maintenance Other

Source: SteelConsult analysis

Assumptions:Scrap rate: 100%Electricity consumption: 490kWh/t

Raw Material Costs – scrap currently accounts for

around 83% of the EAF mill production structure...

83%Scrap

Indicative


Source: SteelConsult analysis

Assumptions:Scrap rate: 18%

Raw material costs – …and around 7-15% of BOF

production costs....

15%Scrap

159.05 156.19188.78

380.95

184.51

304.26

41.9 49.06

57.33

78.65

44.66

64.02

15.32 15.46

16.86

18.03

17.14

16.21

39.43 40.79

45.6

49.82

47.34

44.8

19.99 20.73

22.35

23.9

22.71

21.49

2005 2006 2007 2008 2009 2010e

Operational production cost/t liquid steel EU BOF Mill, US$/t

Hot metal Scrap Fluxes BOF gas credit Scrap credit Labour & Maintenance Other

Indicative


Raw material costs – ...and scrap is a volatile commodity,

which poses headaches for EAF mill buyers, as well as downstream buyers.

$-

$100

$200

$300

$400

$500

$600

Jan-0

9

Feb-0

9

Mar-

09

Apr-

09

May-0

9

Jun-0

9

Jul-

09

Aug-0

9

Sep-0

9

Oct-

09

Nov-0

9

Dec-0

9

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-

10

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Jan-1

1

+121%

Hard Coking Coal (FOB E. Australia)

Iron Ore 62%FE (CFR China)

Scrap HMS #1&2 80:20 (CFR Turkey)

+29%-26%

• Steel and ore price cycle amplitudes are increasing.

• 2004-2005 saw a 60% steel price movement peak-to-trough.

• January 2009 to 2011 has so far seen a121% increase trough-to-peak for scrap.

• Price volatility and future price uncertainty is detrimental to all companies participating in the supply chain in many ways:- commercial negotiations- relationship management- production planning- raising finance, cost of capital

Source: Scrap and Iron Ore - TSI, Coking coal - SBB

US$/t


Raw Material Costs - Iron ore prices also correlate with

scrap.

Price volatility is set to continue in the future, with scrap and iron ore

prices likely to show an increasing correlation

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Scrap HMS 80:20 $USD CFR Turkey Iron Ore 62%Fe CFR China - SBB(RHS)

Source: TSI

US$/t US$/t88% Correlation


Scrap Trade – There will be over 120mt of scrap traded

this year.

Trade flows

Countries with >50%

EAF production

At current prices of around US$470/t, the yearly scrap

trade is worth US$ 56 billion

Source: BIR and TSI


Scrap Trade – Russian EAF capacity expansion will curtail their

exports, while Asian demand stokes world export demand.

10 m/t EAF

4 m/t BOF

7 m/t EAF

Top 4 countries with

upcoming EAF

capacity – up to 2013

+7 mt EAF

+10 mt EAF

+ 4mt EAF

+10 mt EAF


Scrap Trade- An already structurally tight global market is set

to tighten further.

Country Tariff Rate on scrap

Argentina 20%

China 40%

Egypt 500-1500EGP/t

India 15%

Iran 50%

Kazakhstan15% min 20EUR/t and export

licence

Kenya 25% and export ban

Malaysia10% and non-automatic export

licence

Russian Federation 15%, min 15EUR/t

Ukraine 16.4EUR/t and export licence

Vietnam 25%

UAE Dirham 250/t

Argentina Temp. Export ban

South Africa Export permit

Azerbaijan Export ban

Indonesia Export ban

Jordan Export ban

Sri Lanka Export ban

Uruguay Export ban

Used to be key exporters of

ferrous scrap.

-5

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010

World Scrap Exports (mt)

USA EU Japan

Russia Ukraine Linear (Russia)

Source: BIR World ferrous report

Source: OECD

Russia CAGR -38%

Will become major importers of

ferrous scrap in the future.


Source: TSI, SBB and Turkey Statistical Institute

-

500

1,000

1,500

2,000

2,500

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Jan-0

9

Feb-0

9

Mar-

09

Apr-

09

May-0

9

Jun-0

9

Jul-

09

Aug-0

9

Sep-0

9

Oct-

09

Nov-0

9

Dec-0

9

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-

10

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Imports (000's t) vs. Price

Total Turkish scrap imports Scrap HMS 80:20 $USD CFR Turkey

The US and Europe are the primary producers of steel scrap.

Turkey, as the largest importer of scrap in the world, is a key consumer of world scrap,

affecting domestic producers and consuming both EU and US origin material.

Source: BIR World ferrous report

Scrap Trade – The world’s largest importer of scrap...

0

5

10

15

20

25

30

35

40

45

50

2005 2006 2007 2008 2009 2010e

Top 5 Importers

Turkey China South Korea India Taiwan

mt

$USD/t


300

350

400

450

500

550

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11

HMS 80:20 CFR Turkey Shredded N.Europe Dom. Del.

Shredded Rotterdam Export Shredded / N.Am export FOB E. Coast

Turkeys’ Role – ...and an important regional marker...

TSI HMS 80:20 CFR Turkey Shredded N.Europe Dom. Del. Shredded Rotterdam Export Shredded N.Am export FOB E. Coast

Apr-10 456 422.5 447.5 396

May-10 381 347.5 367.5 344.5

Jun-10 324 308.5 324 312.5

Jul-10 349 306 338.5 312.5

Aug-10 395 338.5 367.5 335

Sep-10 399 354.5 382.5 364

Oct-10 377 350.5 345 337

Nov-10 401 342.5 357 356.5

Dec-10 460 396 409 399

Jan-11 515 472.5 480 453

Correlation to TSI Turkish Scrap: 93.00% 92.10% 95.80%

All prices $USD/t. Turkish price: TSI, all other prices SBB.

$USD/t

All prices $USD/t. Turkish price: TSI, all other prices SBB.


European Union

50%

US/Canada

26%

CIS/Balkans

15%

MENA

8%

Other

1%

Germany

Austria

Belgium

Bulgaria

DenmarkFrance

Estonia Finland

Holland

England Sweden

Italy

Latvia

LithuaniaMalta

Hungary

Poland

RomaniaSlovenia

European Union

56%US/Canada

22%

CIS/Balkans

13%

MENA

7%

Other

2%

GermanyAustria

Belgium

Bulgaria

Denmark

France EstoniaFinland

Holland

EnglandSweden

Italy

Latvia

Lithuania

Malta

Hungary

Poland

Romania

Slovenia

Turkeys’ Role – ...its diverse scrap sourcing affects many

domestic markets.

Source: TSI, SBB and Turkish Statistical Institute

2009

2010

Turkish buyers have

increasingly looked

towards their neighbours

for their scrap supply.

The shorter lead times

and familiarity with

European business

practises have lead to

closer relationships and

better contacts.


The Premier Price Information Service

Prices You Can Trust

Weekly WeeklyDaily

The Steel Index (TSI)


• Prices compiled from verifiable industry transaction price data.

• Transaction data submitted to TSI confidentially by companies

buying and selling relevant products (over 500 registered ‘data

providers’).

• Fully transparent and verifiable processes.

• Unique consistent methodology applied worldwide.

• Available on-line and by e-mail.


Unique, fact-based and verifiable approach used to

compile all reference prices.

Introduction to The Steel Index (TSI)


• The Steel Index was launched in 2006 specifically to respond to the

need for:

− more frequent

− more precise

− independent

…reference price information

• Ferrous prices are gathered in a robust, reliable manner.

• The index is produced from actual physical market transaction data

points: a volume-weighted average. It is not a journalistic assessment.

• Pioneering approach to compiling steel price information – using only

transaction data, suitable for indexing and price risk management.


Introduction to The Steel Index (TSI)


LEGAL

AGREEMENT

TransactionData Sample

Step1Step2

High & low excluded

Outliers excluded

PublishTSI Reference

Prices

FinalData Set

Step3

Volume-weighted averages calculated

Buy/Sell balance

Step4

Submits price data to TSI

using secure online system

The Steel Index

Data Provider

TSI’s Underlying Methodology


TSI’s Scrap Price Publication

• Submissions of actual physical spot market transactions are

submitted to TSI throughout the week, up until the deadline of 11.00

GMT each Friday.

• The data set is then subjected to an analysis to remove outliers,

with the remaining data points being volume-weighted to produce a

single average price. This methodology firmly grounds the number

in the physical market.

• TSI publishes scrap prices to our subscribers each Friday at 12.30

GMT (apart from UK public holidays, in which case prices are

published the following UK business day).

• Prices are published online and by email, with associated market

commentary and other relevant market information.


TSI’s Scrap Price Publication

Ferrous scrap

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