Brexit and World Scrap Markets to Affect USA Steel Prices

1) China Customs Bureau has started inspections for alloy content in the export of billets (square bars).

• The export tax rebate (9%) is applicable only to alloy square bars that are exported for billet purposes.
• These “alloy square bars” are to include some sort of alloy, normally chromium
• For the past year or so, the mills neglected to add the alloy to save costs.
• For the time being, the steel mills will need to add the alloy which increases their costs abt $25/mt.

We therefore have seen Chinese billet prices increase from $290/mt level to $315/mt level CFR offer costs.

2) Japan Yen exchange rate has moved from Y106:US$1 to abt Y102:US$1 which means export prices of ferrous scrap has upwards pressure.   Current quotes of Japan H2 via barge in the $230/mt cfr range which is too expensive for the Asian mills.    If the Japan Yen remains stronge, due to the Brexit, we should see some downwards pricing on scrap based on exchange rates only.

Over the past few weeks, we have seen ferrous prices rebound off the “crash” seen in May, currently about $20/mt off the recent lows.   Containerized HMS pricing in the $205/mt cfr range and latest bulk scrap prices are in the $233/mt cfr range.  We have been relatively stable over the past week at this range.   There is some expectations of some softening on scrap prices, mainly on weak demand on finished product and inability to raise finished product prices at this time.

The Brexit “fiasco” will tend to affect the European/Turkey trade with prices for Ferrous already softening into Turkey (bulk HMS $215/mt CFR range).  European scrap will be more competitive while finished product prices have weakened due to exchange rates.   This will have an affect on USA imports (more pressure on USA domestic finished steel pricing), as the uncertainty in EU economies and Middle East markets will look for finished order demand from North America.

The Brexit uncertainty will carry over into regional economies and demand.  Lower interest rates and currency devaulation will need a few weeks to settle down before we can see the direction commodities markets.   Important to note that most Asian EAF furnaces will start making their September production requirements in August (4-5 weeks away).  The September production requirements will entail an additional shift of production (30% increase) as the summer electricity curtailments are over in September.

The key indicators for ferrous will be China billet prices and Japan Yen.  Iron ore is somewhat a lesser factor these days as China mills have made some mandatory production cuts which lends semi-finished/finished price movements more important than the raw materials components.

Enjoy July and the summer months, I expect starting August we will see another round of volatile price movements.