The global ferrous scrap market has experienced significant volatility over the last 18 months. Turkish and US scrap markets have seen large price fluctuations due to changing supply and demand dynamics with China, including periods of no activity in Turkey. New futures contracts have emerged to help market participants manage risks, but uncertainty remains high given ongoing oversupply issues and geopolitical risks like currency fluctuations following events in Turkey.

1. www.platts.com/metals METALS
METALSSPECIALREPORT
AUGUST 2016
Stefan Swanepoel, TSI Analyst, EMEA
Kurt Fowler, TSI Regional Manager, Americas
ATALEOFTWOMARKETS

2. SPECIAL REPORT: METALS A TALE OF TWO MARKETS
2© 2016 S&P Global Platts, a division of S&P Global. All rights reserved.
INTRODUCTION
Over the last 18 months the global ferrous scrap market has
experienced a number of seismic shocks significant enough to
measure on the Richter scale. From the black swan month in
February 2015 in the US, to the recent run-up and subsequent
drop-off in the Turkish market, the nerves of steel typically
shown by ferrous markets have understandably been shaken.
The Steel Index (TSI) publishes indices in each of these markets
and therefore spends significant time studying the market and
conversing with participants. In the following we attempt to
deconstruct the markets and their recent evolution.
TURKISH
The Turkish scrap market went five weeks without a bulk cargo
booked earlier this year - an unprecedented time period for a
country that is globally the largest scrap importer, importing
16.3 million tons in 2015. The last cargo imported on May 4th,
which was from the US East Coast, was booked at the highest
level (US$330/tonne) since October 2014. Therefore, having
a historically high trade followed by a period of no activity in
the market, uncertainty amongst scrap traders has increased,
which in turn permeated throughout the global scrap market.
Scrap’s record price rise in 2015 on TSI’s Turkish HMS 1&2
80:20 index from February (US$175/t) to October (US$327/t)
came about due to the continuous increase of rebar export
prices, which in turn was a result of upward adjustments
following renewed strength in the Turkish lira versus the US
dollar. Moreover, cargoes booked by mills ahead of the fasting
month of Ramadan when, typically, crude steel output falls,
also resulted in demand increasing. However, as with many
industries in global markets, these factors seemed to not have
as significant an impact as events happening in China.
In the second half of 2015 the Chinese market experienced
a downturn in steel prices due to the market being in a state
of structural overcapacity. In turn this resulted in lower-cost
producers in East Asia seeking to export excess material. This
also caused steel billets, the semi-processed precursor product to
rebar, becoming cheaper. As was seen in Q4 2015, when Chinese
billets become competitively priced mills prefer to purchase
billet over scrap due to the lower conversion costs, as billet is
rolled directly into rebar. Moreover, Chinese steel producers
also have a preference to exporting billet due to savings on
additional conversion costs, in turn flooding global markets with
billet and causing scrap prices to decline. This situation again
materialized earlier this year and therefore as Chinese prices
continued to drop, so too did sentiment in the market.
As import activity of scrap came to a stand-still, market
participants began seeking clues in global markets to get
a sense of where the level of the next trade may be. Given
the continuous level of interaction Turkish steel mills have
with scrap suppliers globally, it is to be expected that the
Turkish import price has a strong correlation with other
major prices. The Taiwanese market experienced dramatic
declines throughout May, decreasing 31.12% over the course
of the month and therefore the Turkish market could use this
as a proxy. As can be seen in the figure, Turkish scrap has
consistently traded at a premium of US$20-US$40/t since July
2014. Yet, with the recent price slump in the Taiwanese market
and the inactivity in the Turkish market, this premium jumped to
an unprecedented US$109/t. The assumption was therefore that
this significant differential should correct back to the historical
range, which the market has begun to see.
SIMILARSCENESACROSSTHEATLANTIC
The US market, which is the largest scrap exporter with 12.8
million tons in 2015, has also not been able to avoid the recent
global volatility, with the oversupplied Chinese market having
similar effects on domestic pricing. The US traditionally has
above average spot prices; therefore naturally it becomes an
attractive destination for exporters. However, despite more
trade sanctions being implemented against allegedly dumped
or subsidized foreign steel, ever increasing imports continued
to place downward pressure on domestic steel prices. Mill
capacity utilization rates in the Midwest dropped as a result
and ultimately led to a 10.5% year-on-year fall in crude steel
output in 2015. These conditions filtered through to the obsolete
shredded scrap market as prices dropped 50% year-on-year.
0
20
40
60
80
100
120
Jul-16Jan-16Jul-15Jan-15Jul-14
($/mt)
TURKISHSCRAPPRICEPREMIUMOVERTAIWANESEIMPORTS*
*Turkey: HMS 1&2 80:20, Taiwanese: HMS 1&2 80:20 (containerised).
Source: TSI
-100
0
100
200
300
400
500
Aug-16Feb-16Aug-15Feb-15
($/mt)
CHINESEDOMESTICTANGSHANBILLET*PRICEPREMIUMOVER
TURKISHSCRAP
*Includes 17% VAT.
Source: Platts, TSI
Turkish Scrap - HMS 1&2 80:20 Billet - Scrap SpreadChinese Billet - Tangshan
Figure 1. The collapse in Chinese billet prices has resulted in mills preferring to buy billet
over scrap due to cheaper conversion costs to rebar.
Figure 2. Taiwanese EAFs are located very close to Chinese BOFs. As a result, their scrap
prices are the most sensitive indicator for the competitiveness of EAF vs BOF in Asia. A rise
in the Turkish scrap premium over Taiwanese scrap indicates a growing East-West.

3. SPECIAL REPORT: METALS A TALE OF TWO MARKETS
3© 2016 S&P Global Platts, a division of S&P Global. All rights reserved.
In early May shredded scrap delivered Midwest reached a
high of US$293/long ton for the first time since January 2015.
Prices have however been in a steady decline since, as would
be expected if one was watching the Turkish market since US
prices have a 96% correlation with the Turkish market. When the
export market came to a halt, coastal suppliers began sending
shredded scrap inland to an already well supplied market.
Furthermore, as Chinese billet offers continued to drop, scrap
prices reacted as the market became alarmed at the bearish
sentiment prevailing in the market. Uncertainty continued to
grow and thus buyers and suppliers stepped to the sidelines,
causing bids and offers to dry up and hence resulting in the
market essentially coming to a standstill. Pressure remained on
obsolete scrap as US steelmakers had to begin turning down
mid-month offers from sellers whereas those mills that did buy
scrap late in the month were able to do so at the same price
level as buy-week.
July saw prices level around the US$240-US$245/l. ton mark after
bulk scrap activity off the East Coast eventually resumed, with
the first trade reportedly booked at US$235/t CFR Turkey in the
second week of June. This in turn resulted in East Coast shippers
dropping offer prices to local scrap suppliers. Although prices
have managed to bounce back, volatility remains high in the scrap
market with monthly price jumps of +/-5% becoming increasingly
frequent. Moreover, scrap exports have declined 39% between
2012 and 2015 as a strong US dollar meant Turkish buyers opted
to source material from European and Baltic suppliers. Evidently
there is cause for concern for domestic players.
WHEREISTHECHINESESCRAP?
With the US and Turkey being the largest players in scrap, the
question begs what is China’s position on scrap? China has a
unique relationship with scrap as it is a minimal importer and
consumer of scrap when compared to its >800 million tonnes
of annual steel production. Unlike in Turkey where electric arc
furnaces, a steel production method that requires over 80%
of scrap as an input material, makes up around 70% of steel
production, only 6% of Chinese steel production is done through
EAFs. Furthermore, blast furnaces, which produce steel mainly
through iron ore, Chinese scrap consumption is as low as 8%
compared with a typical 15-20% globally.
If China was to increase scrap consumption to 15% in the blast
furnace method, resulting in an additional 54 million tonnes of
scrap consumption, it would be akin to adding an additional US
worth of demand in the market! With the government having
environmental targets to meet, and with the usage of scrap
over iron ore reducing carbon dioxide emissions, pressure is
mounting on China to increase scrap consumption.
EVOLVINGMARKET
Volatility in ferrous scrap prices is evidently increasing as
the global steel industry suffers an oversupplied market for
finished products, trade wars escalate, and the price of iron ore
fluctuates wildly.
To combat this volatility in pricing, two new risk management
contracts have emerged to encourage participants to address
the price risk in the markets. The London Metal Exchange
(LME) listed contracts for steel scrap and steel rebar, based on
TSI and Platts assessments, in November last year, with both
contracts targeting the Turkish long products steel supply
chain. Furthermore, in late March the world’s first US obsolete
shredded scrap futures contract, listed on the NASDAQ and
cash-settled against the TSI-day Shredded Scrap (delivered US
Midwest) reference price, was launched.
For scrap recyclers, the motive for hedging is clear. A cash-settled
scrap futures contract can help bring about forward price certainty
by protecting processing margins. Equally, for steel producers, the
futures contract represents an opportunity to lock-in a portion of
their raw material input costs and thereby help them to manage
gross margins. Finally, the value for end-users is clear too.
Those in the demolition industry can utilize scrap derivatives as
an opportunity to tender more competitively for projects with a
clear view of the future value of the scrap recovery.
The past month has once again highlighted the significant
volatility that can be expected from this market after the
attempted coup in Turkey. This in turn resulted in currency
fluctuations that saw the Turkish lira drop over 5% in value to
the US dollar. Turkish mills saw the weakening of the lira as an
opportunity to galvanize export sales, which in turn explained
the flurry of scrap buying activity immediately following the
weakening of the lira. This is what ultimately resulted in the
recent uptrend in scrap import prices.
0
2
4
6
8
Rest of
the World
TurkeyTaiwanSouth KoreaMexicoIndia
(million mt)
USSCRAPEXPORTDESTINATIONS
Source: US International Trade Commission
2013 2014 2015
100
200
300
400
500
Aug-16Aug-15Aug-14Aug-13Aug-12Aug-11Aug-10
($/lt)
USSHREDDEDSCRAPPRICEDELIVEREDMIDWEST
Source: TSI
Figures 3 and 4. US scrap exports fell 39% in the period between 2012-2015. Declines in
2015 were mainly due to lower export volumes to Asia based nations.

4. SPECIAL REPORT: METALS A TALE OF TWO MARKETS
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