Balance of use of iron ore and scrap metal by steel mills in China

Morgan Stanley analysts said in a recent report that China uses less ferrous scrap in steel production due to low steel margins, which supports demand and prices for iron ore.

“The price of iron ore remains high as steelmakers in China consume less scrap,” analysts say.

"The profits of the smelters have declined and scrap steel is becoming more expensive compared to the variable costs of producing hot metal in a blast furnace."

HRC Platts China and its iron ore and coking coal rebar exports, which weakened sharply in October and November, began to stabilize this month as steel prices stabilized.

According to Morgan Stanley estimates, scrap rates in China in the oxygen converter, or in the steelmaking process at BOF, fell during 2018 to 15% in November from 24% in March.

"Given the current price differential, it is likely that China's steel industry will consume less scrap for longer if steel margins do not improve as a result of the policy easing."

Iron ore demand in China could rise by 40 million tonnes if scrap consumption at the mills remains lower and EAF production in China remains at 9% of total crude steel, the bank said.

The assumptions were based on a drop in China's steel production in 2019 to 897 million tonnes, down 2.6% from 2018.

Additional demand for 40 million tonnes of iron ore will lead to a balanced iron ore market in 2019, exceeding the global iron ore surplus of 37 million tonnes in the bank's baseline scenario.

“Despite low steel margins and falling production, we may see higher-than-expected iron ore prices this year,” analysts say.

“However, we do not believe this scenario will continue after 2019, as lower scrap consumption will start to drive down the scrap price, rebalancing the equation versus iron ore.”

Morgan Stanley said that domestic scrap metal supply in China is expected to grow over time, while scrap metal consumption is expected to increase in the long term, and market factors make it difficult to understand how the expected trend will develop.