Reduced use of steel scrap to accelerate decline in crude steel output in February 

SHANGHAI, Feb 14 (SMM) – As the coronavirus （COVID-19) outbreak disrupted shipments from steel mills and trigger production cuts or maintenance, shortage of steel scrap may expand the cutback and result in a significant decline in crude steel output in February. 

An SMM survey indicates that the amount of molten iron daily production affected by cutback and maintenance at steelmakers has increased from less than 100,000 mt on January 23 to nearly 300,000 mt as of February 13. 

China has a total amount of scrap steel resources of 240 million mt in 2019, up 9% from a year earlier, showed statistics of the China Association of Metal Scrap Utilisation. But currently supply tightness still dominates the steel scrap market, according to SMM survey, as the epidemic prevented some scrap processing companies from returning operations, and transportation curbs disrupted purchases of some steel mills. 

Some steelmakers have halted procurement of scrap and turned to produce scarp on their own. They also reduced the proportion of steel scrap used in raw materials, which is set to weigh on their near-term production. 

A steel plant in central China has cut its monthly production of hot-rolled coils from the previous 400,000 mt to 290,000 mt, due to disrupted supply of steel scrap. 

Prices of steel scrap have slipped 1.7% from the pre-holiday levels, SMM assessed as of February 13. This, compared with a drop of 8.3% in rebar prices, squeezed margins at electrical arc furnace (EAF) steelmakers. Losses at EAF steel mills have widened to 417 yuan/mt from 157 yuan/mt before the holidays, and this accounted for the recent shutdown of a slew of producers. 

Steel scrap prices held relatively firm (Source: SMM)

Profits at EAF steelmakers slipped (Source: SMM)

Operating rates of scrap-using steel mills fell to low levels (Source: SMM)

With the increase in steel scrap usage in steelmaking over the recent years, steel scrap has accounted for around 20% of the crude steel production. SMM calculates that a reduction of 1% in the proportion of steel scrap in raw materials mix will cause a decline in crude steel output by 15 million mt. 

SMM expects steel scrap shortage and elevated in-plant inventories will likely expand the maintenance or production cut at steelmakers.