MACQUARIE: Record ferrous scrap sell-off shows weakness in emerging market steel consumption

Getty/Peter Macdiarmid

Spot ferrous scrap prices followed metallurgical coal and manganese in falling sharply last week.

With the ferrous waste a key barometer of “real-time” metal demand, the sell-off suggests a potential slowdown in emerging steel consumption, according to Macquarie.

Benchmark Turkish import prices of ferrous scrap dropped more than 15% last week, including the largest single day fall ever recorded, Macquarie said. Such price falls suggests a breaking point was reached among scrap exporters, who are probably sitting on high inventories.

Global scrap consumption recovered from a weak start to 2016 and nudged up 5% last year. However, the momentum seemed to have ebbed towards the end of the year with consumption still 6% below the peak seen in mid-2014, Macquarie said.

Ferrous scrap demand is an indicator of steel consumption in emerging markets with Turkey and India the largest buyers of the metal. Chinese steel makers, who rely more on iron ore and coal over scrap, have also been making inroads in the Middle East and South East China at the expense of mills that use the ferrous scrap, Macquarie said.

“In a world awash with uncertainty such as we have currently, emerging market investment tends to come under pressure,” Macquarie said. “While we are confident China will look after itself, 2017 is likely to see emerging market ex-China demand underperform, particularly given the currency moves seen since November.

“It is a reminder that a protectionist world where trade flows are negatively impacted is a net negative for metals and bulk commodity markets.”

Macquarie also cited a pile-up of the scrap as a reason for the price fall. Developed market scrap generation could have picked up amid the less than severe winter and a manufacturing recovery, it said. S&P reported that US scrap exporters have been sitting on high inventories.

Turkey is the largest importer of the scrap taking in 17 million tonne a year followed by India with 6 million tonnes. China takes at best 3 million tonnes.

The US shipped 13 million tonnes last year, with each of Japan, Germany and the UK exporting 8 million tonnes to 9 million tonnes, Macquarie said.

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