>METALS SECTOR (ICICI SECURITIES)

Higher metal scrap imports by the Far East (China) from the US (largest scrap exporter) have reversed the trend of continuous scrap price decline in the past two months. Bunching out of deliveries (prior to New Year holidays) is indicting an increased Chinese propensity to produce. Also, direct orders from producers and affiliated trading companies point to ground-level demand accretion. Further, scrap at current levels is increasingly being considered as a substitute to iron ore. Helped by restocking demand in other regions of the Far East, we expect a hitherto weak US scrap market to firm up. With rebar-to-scrap spread at five-year average and strengthening export markets, a short-term inflationary cycle in steel price is likely. Though Indian prices for all products have got differentiated (higher) versus inventory-evacuation priced ‘distress-exports’ from the East, a positive scrap price trend will in turn lead to stocking intention, thereby propping prices. We maintain our positive stance on Steel Authority of India and Tata Steel.

■ Chinese deep-sea scrap imports fetch higher prices. Price of #1 heavy melting scrap (HMS) has increased to US$308-315/te CIF (3-10% rise) for imports to China from the US. This is due to purchase of deep-sea cargoes in rapid succession between the final week of October and the first week of November, with most of the cargoes scheduled for December delivery. Chinese buyers have secured 14 cargoes (total quantity 450,000-500,000te). Concerned Chinese buyers represent major steelmakers for end users and their affiliated trading companies. Hence, deep-sea cargo imports stem from inquiries close to actual demand. Since arrivals might be one after the other in early CY10, negotiated scrap imports may be used to meet increased steel production before China’s lunar New Year holidays in CY10.

■ China’s cumulative ferrous scrap imports hit an all-time high of 11.2mnte in January-September ’09, up 389.2% YoY. In September ’09, China’s ferrous scrap imports totalled 1.3mnte, up 4.7x YoY. Of the total, the US supplied the largest quantity of 499,000te followed by Japan at 353,000te (Table 1).

■ Scrap increasingly substituting iron ore. China’s major steelmakers are considering imported ferrous scrap as a low-cost material given rising spot prices of iron ore imports. At present, spot prices are at ~US$100/te for Indian iron ore supplies to China, up ~10% from mid-September ’09 levels. So more impetus will be given on: i) accrued iron ore inventory on ports (wherein signs of destocking are visible), ii) increased domestic production of iron ore and iii) increased scrap imports to build a stockpile (as most cargoes are aimed for December delivery).

■ Prices further propped by stock piling in South Korea where Public Procurement Service (PPS) held its tender in the fourth week of October ’09 to purchase a deep-sea cargo from the US for December delivery. PPS has secured 40,000te at US$312/te C&F for #1 HMS. PPS held its purchase tender this time under its policy to stockpile ferrous scrap, thereby stabilising the domestic market.

■ Scheduled December deliveries will help firm up weak US markets. A weak domestic scrap market in the US has been a concern. The composite price of US ferrous scrap fell by US$17.67 a week ago to US$207/te for #1 HMS as of November 9, when it came down for six consecutive weeks since the first week of October. The composite price of #1 HMS declined by a cumulative US$49.34 after it peaked at US$256/te in the second week of September. The composite price indicates the average of delivered prices for steelmakers in Pittsburgh, Chicago and Philadelphia. The scrap-rebar spread in the US is at normalised five-year average (Chart 2). Upward pressure on scrap price will invariably lead to steel price inflation.

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