Why is iron ore up, but scrap steel down?

Scrap steel is an important material for making steel. Normally, scrap steel should move up and down together with coking coal, iron ore, and finished steel. But this time is different. Iron ore, coking coal, and coke are going up. Finished steel is also going up. But scrap steel is going down. Steel mills are starting to lower scrap prices.

People in the scrap steel business feel bad. They see finished steel prices rising and want the same for scrap. But the more scrap they sell, the more money they lose. Payment is slow. Their profit is gone. They say, “We can’t work like this.” Today, let’s look at why this is happening.

Main reasons why scrap steel prices are different from other materials:

1. Costs are not the same. Hot metal is cheap, so scrap is not wanted.

• For large steel mills: Since the Spring Festival, iron ore and coking coal prices have gone up and down. But after the rise, hot metal cost is still lower than scrap steel price. According to Fu Bao, on April 16, hot metal cost in East China was 2,228 yuan per ton. The price gap between hot metal and scrap was minus 17 yuan per ton. Also, mills say scrap steel needs to be at least 100 yuan per ton cheaper than hot metal. Only then will they want to use scrap.
• For short-process mills: The cost is too high when using regular-hour electricity. Fu Bao says on April 16, mills lost 125 yuan per ton using regular-hour power. They lost 14 yuan per ton using cheap night power. Mill owners say they can’t afford to produce.

2. Supply and demand do not match.

In recent years, the spring season for finished steel has been weak. Mills are not keen to produce. For example, in Inner Mongolia, mills rarely run at full capacity all year. They don’t need much scrap. On the supply side, scrap sellers say there is not much scrap to find. But in fact, mills still get enough scrap. Mills have what they need each day. If mills are not short of scrap, why would they raise prices? Also, it is very hard to get invoices. Some mills have to buy less scrap because of this.

3. Scrap sellers have no power to set prices.

Iron ore, coking coal, and finished steel all have futures markets. Big companies set the prices. They can pass costs up and down. But scrap steel is fully open to the market. No one company decides the price. Sellers can only accept the low prices mills offer. Plus, invoice and money problems make it worse. It is hard to get input invoices. Mills pay slowly. Costs for processing and transport are fixed. Profits in scrap are squeezed from many sides and are nearly gone.

What may happen next:

• Scrap steel: Scrap yards and traders face less scrap, invoice problems, thin profits, and money issues. If mills cut prices too much, supply will drop. So scrap prices may not rise, but they also can’t fall much. In the short term, scrap may stay weak and move up and down a little.
• Finished steel: Prices have gone up a bit lately. But demand for finished steel is still weak. Without new help from the government or the economy, finished steel prices may not keep rising.
• Steel billet: Billet and finished steel prices have risen lately. Sales from stock are okay. But we need to wait and see if prices and stock reduction can stay good.