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Commodities 2021: Brazilian imports of ferrous scrap could put a break on local price rally

Increase font size  Decrease font size Date:2020-12-31   Views:45

  Sao Paulo—The fundamentals behind the 2020 Brazilian ferrous scrap price rally will continue to have momentum in 2021 as domestic and global steel production continue sustaining demand for the raw material. However, large volumes of scrap imports arriving February-March into the Latin American nation could break the stride in market prices.

  Prices for the most traded ferrous scrap grades in Brazil kicked off the year ranging Real 625-700/mt ($120-$135/mt) FOT, but have escalated since June following the reactivation of mill furnaces amid stronger-than-expected steel demand.Year-to-date, spot prices for Brazilian HMS 1/2 grade jumped 120.5% and hit the record high value of Real 1,450/mt ($279/mt) FOT on Dec. 21.

  Brazilian steelmakers were active in the global bulk scrap market in October-November, chasing at least 300,000 mt of shredded and HMS grades from Canada and the US, paying premium prices compared to Turkish mills, sources said.

  One trader noted it's not guaranteed that all mills succeeded contracting their desired volumes, as some were late on their procurement schedules and other nations such as Peru and Mexico were strongly demanding at the same time.

  Brazil is not a typical importer of scrap, sources said. In the first eleven months of 2020, imports totaled 57,567 mt, down 66.7% on year, according to customs data.

  Another trader said that at least 500,000 mt of imported scrap would be needed by Brazilian mills to stabilize supply and production cycles in the first half of 2021, considering their annual scrap consumption of around 8.5 million mt.

  One local dealer said that imports will be temporary, citing steelmakers paying much higher for foreign material at a time supply is stabilizing locally. "It was a just a maneuver to break the price rally," he said.

  A mill source disagreed. "It's not about the price, because steel prices also rallied, but about supply and how much scrap we have in our inventories," he added.

  Demand boostProcurement for scrap turned fiercer in Brazil in October–amid the more solid return of foundries which were struggling to resume pre-COVID 19 levels–at a time when generation was out of step.

  At that time, no steelmaker in the country had guaranteed scrap supply for more than 15 days, thus impacting production plans and predictability.

  "Now, scrap generation is back on track and imports will balance the market a bit," another mill source said, signaling the pressure over scrap prices may come to a halt.

  Another mill source said that a correction in scrap prices is needed because steel prices may also correct soon, so margins need to be aligned.

  A scrap dealer partially agreed but said that a correction downwards on scrap prices may be limited and slow.

  "We established a new pricing level for scrap prices in Brazil, and this is something not easy to change in a fast way," he said, highlighting that for prime/industrial grades there are three-to-six month contracts inked at these higher values.

  Key exportsThe negative impact from the coronavirus pandemic was short-lived in the Brazilian scrap market as the local steel sector witnessed a sharp recovery and exports played a key role in critical months.

  Despite stagnant demand and scrap generation in Brazil in Q2, the focus on exports balanced gains and opened up opportunities in light of a favorable exchange rate and the resumption of activities elsewhere.

  In the first eleven months of 2020, ferrous scrap exports totaled 715,043 mt, surpassing 2019's total of 710,048 mt and becoming the highest annual volume exported by the country, according to customs data.

  During the year, Bangladesh and India topped the destination list for Brazilian ferrous scrap, with 235,000 mt and 217,000 mt, respectively, followed by Pakistan (108,000 mt) and Indonesia (43,000 mt).

  A dealer that is exporting most of its scrap said the export market was a good alternative when mills shut down operations. "Everyone is looking to the best way to survive amid this pandemic, so I found good opportunities abroad, with a favorable exchange rate," he said.

  The source added that the reactivation of markets in other nations prior to Brazil, in particular in Asia, forced several dealers in Brazil to commit with some contracts and shipments, fearing a slow recovery in the domestic market.

  "There was also a false impression of booming scrap exports in the third quarter because several shipments were delayed in the prior months," he added, while recognizing that exports may continue surpassing the 50,000 mt per month.

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