China Volatility Affecting Asian Ferrous Scrap Markets

Publicly listed Chinese stocks have pledged their companies stock as collateral for financing. As the stock market sharply declined, banks started selling these listed stocks pledged as collateral and consequently, requested more collateral. The only quick collateral that can be pledged is letters of credit against sales.

Its my speculation that during this week, as iron ore moved lower, traders/mills offers of small size square billets moved lower and lower. The price offers seemed of desperation in order to secure deals. In the case of Taiwan, offers started last week about $325/mt cfr basis and by the end of the week dropped to a low of $295/mt cfr basis. It remains to be seen whether some of these offers will be retracted next week as iron ore dropped to a low of $44.60/dmt basis and rebounded to over $50/dmt on Friday.

Ferrous scrap this week suffered from low demand following the downward slide of iron ore.  Matching the small billet offer prices.  Tokyo Steel continued dropping H2 ferrous pricing but in relative terms, still expensive to the Korean and Taiwan mills.  USA containerized scrap started last Friday [July 3rd] at $195/mt CFR basis and dropped to $180/mt CFR basis as of Thursday [July 9th].   The prices on containerized will not react as fast as the spot iron ore prices, so we shall see next week where the actual prices land.

There is quite a large amount of China billets being offered around the world (SE Asia, Korea, Taiwan, and even Turkey). The actual quantity, in relative terms, is not as large as the psychological price implications and impact. As long as China continues to need to export its way out, there is always a larger downside risk and limited upside potential.    

Next week will determine if we find some short term stability in commodity pricing. Going into August, Asian EAF mills will start preparations for additional shift of production in September and plan their scrap purchases accordingly. We should see an uptick in scrap demand in August-September.