Turkey’s Imports of Semis Ease as Scrap Price Declines.

As Turkey is by far the largest importer of steel scrap, any changes in domestic demand can have a significant effect on the wider market for this commodity. In line with many other raw materials and steel products, the price of scrap has been declining over the past few years and by August 2015, the price had fallen by 37% in just a year. This decline was not as pronounced as the fall in slab prices, however, as they fell by 44% over the same time frame.

As other steelmaking costs had not fallen to the same degree, we saw that some producers in Turkey, instead of producing the semi-finished products internally, favoured importing slab and billet. These imports came from countries such as China and Brazil where the cost of the predominantly BOS dominated steelmaking had fallen considerably, and slowing internal demand had driven producers in those countries to search for export markets.  As the year progressed further, however, the decline in the price of scrap accelerated and by October, scrap prices had fallen 55% from our reference point in mid-2014, compared to slab prices that declined by 50%.

In the first eleven months of 2014, Turkish imports of semis fluctuated between 291K tonnes and 488K tonnes per month before rising to 597K tonnes in December. As the differential between the price of scrap and semis narrowed during 2015, we can see that Turkey imported increasing quantities of billet and slab, peaking at 841K tonnes in September.  During the last quarter of 2015, however, as the price of scrap went on another decline, Turkey started to ease up on its imports, finishing the year with 504K tonnes in December which was actually below the same month of 2014, the only time that happened during the year.

This pattern of semis imports was mirrored in the imports of scrap. Throughout 2014, Turkey averaged 1.6M tonnes of scrap imports per month but in December this declined to less than 1.3M tonnes. By September 2015, just when the tonnage of semis had reached its peak, the quantity of scrap imported hit its lowest level, down to just over 1M tonnes before rebounding strongly to finish the year at over 1.7M tonnes in December.

At the start of this year, the scrap/semis price differential has narrowed somewhat with both scrap and slabs having fallen by 54% from our benchmark in 2014. Is this enough to encourage Turkish producers to increase their imports of semi-finished products once again at the expense of scrap?  Of course, given its size and ability to move the scrap market, lowering demand for scrap in the country due to falling semis prices will have a knock on effect, further lowering the price of scrap in a race to the bottom.  With many steelmakers, particularly in China, now running at a loss, however, it does seem as though the bulk of the decline in semis prices is probably behind us which would suggest that in the medium term, Turkish steelmakers are likely to return to the scrap market for their raw material requirements.

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Turkey’s Imports of Semis Ease as Scrap Price Declines.

EAF Vs BOS – September 2015

In recent months EAF producers have struggled against the falling cost of BOS produced steel.

The decline in iron ore prices has been severe and well documented. Since the start of 2014, the price of the raw material has collapsed by 53% as of the end of May. The price of steel scrap has also been declining but at a much slower rate than iron ore, with the scrap price down around 23% during the same period. This seems to be having a detrimental effect on EAF steelmakers who find themselves at a disadvantage to the low cost BOS steelmakers based in countries such as China and Russia. We will have a closer look at two countries whose steel industry is dominated by EAF steelmakers, Turkey and Italy.

In the first five months of the year, crude steel production in Turkey, whose EAF industry accounts for about 70% of total steelmaking, fell by 6%. This is not entirely a reflection of falling demand, however, as imports during the same period increased by 29%. Imports of finished steel products were up 22%, driven by a three-fold increase in imports from China and a 32% growth in imports from Russia. The two countries are now by far the largest suppliers to Turkey with a combined annualised tonnage of over 3 million tonnes. It is also interesting to note that Brazil, from a minimal tonnage last year, has supplied over 100K tonnes in the first five months of the year. It is no coincidence that China, Russia and Brazil are all large BOS producers (68%, 93%, and 77% respectively) whose costs are driven by iron ore prices.

As well as the large increase in finished steel imports, we have also seen a 43% growth in the import of semi-finished steel products, with imports of semis from Russia more than doubling to over 1 million tonnes in the first five months of the year and imports from Brazil and China coming from no-where to record tonnages of 184K tonnes and 111K tonnes respectively. It seems, then, that as well as seeing higher imports of finished steel, Turkish steelmakers have been substituting their own steelmaking with semi-finished products from lower cost producers. This conclusion seems to be backed up by the 12% fall in imports of steel scrap.

The situation in Italy, whose EAF industry makes up around 73% of total production and is the EU’s largest consumer of scrap, is similar to that of Turkey. In the first five months of the year, crude steel production in the country has fallen by an incredible 10% when compared to 2014 with imports of scrap down 11%, whereas imports of finished steel are up 18% and imports of semi-finished steel increased by 20%. Once again, this growth in imports was driven by China which more than doubled supply to the country in the first five months of the year and represents an astonishing annualised tonnage of 2 million tonnes. The other large increase seen during the period was from Iran with a four-fold growth in imports to nearly 300K tonnes.

As with Turkey we have also seen an increase in the import of semis with the 20% increase being driven by imports from Russia. As the fundamentals for EAF steelmaking become less competitive, we should see the price of scrap come down further as demand falls. Although since May the scrap price has reduced by a further 12% reduction, this has been more than matched by a 15% further decline in the price of iron ore, however. It looks as though EAF steelmakers are likely to find trading difficult for the foreseeable future.

EAF Vs BOS – September 2015

Uncertain Outlook for Turkish Steelmakers – July 2015

For some time Turkey has been considered a major player in the global steel industry. Benefiting from a unique position, bridging East and West, the country has also undergone decent economic expansion in recent years with annual GDP growth regularly over 6%.

In recent months, however, a number of factors have combined to put some strain on the steel industry within the country. In Q1 2015, annual GDP growth slowed to 2.3% and in 2014 internal steel consumption fell by 1.9%, the first decline since the economic downturn in 2009. Other external factors affecting the industry include the rapid decline in the iron ore price and the dramatic rise in Chinese exports. China is by far the largest iron ore consumer in the world and BOS steelmaking accounts for 94% of the country’s total output. This contrasts strongly with Turkey, which is the world’s largest steel scrap importer where EAF steelmaking accounts for 70% of all crude steel produced in the country. Although the price of steel scrap has reduced in recent years, it has not undergone the rapid decline that iron ore has seen and this has meant that Turkey has struggled to cope with the increasingly prevalent steel exports from China which have been eating away at their export markets.

These effects can be seen through the analysis of the figures. So far, in the first four months of this year, Turkish crude steel production has fallen by nearly 7% when compared to the same period of 2014 and exports are down 6%, driven by declines in shipments of semi-finished products, heavy and light sections. At the same time, scrap imports have fallen by 13% and there is evidence that Turkish finished steel producers are finding it more cost effective to import blooms and billets than to manufacture them internally. Imports have more than doubled year on year driven by larger volumes sourced from Russia, Brazil and China. Import prices from Russia, the cheapest source, just £282 per tonne compared to the average price of scrap of £200 per tonne.

The year ahead looks uncertain for Turkish steel makers, whilst the fall in demand for steel scrap within the country is likely to lead to a natural decline in the price of the raw material, thereby making EAF steelmaking in the country more competitive, it seems unlikely that cheap steel exports from China and Russia are going to cease in the near future. With a slowdown in GDP growth and further uncertainty following recent election piling on the pressure this could be a difficult year.

Uncertain Outlook for Turkish Steelmakers – July 2015