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  • Writer's pictureAtlas Commodities Limited.

The Atlas Short Range Outlook - Metals: December 2020

What has been driving the recent move in ferrous scrap?

In short, iron ore.

Phase #1

With 62% iron ore trading between $115-130/t, cfr China, since Aug 3, implied value in use (VIU) of ferrous scrap HMS 1&2 (80:20) was $352-398/t, cfr Turkey.

Given that ferrous scrap is the residual in the dominant BOF process globally, it can take 2-3 months for iron ore price developments to impact ferrous scrap demand & prices.

For example, iron ore and hot metal production costs become more expensive; prompting BOFs to increase ferrous scrap use & EAFs to become more competitive.

Unsurprisingly, this has contributed to the “strong demand” that ferrous scrap market participants have been referencing for a while. Ferrous scrap hit $353/t, cfr Turkey, on Nov 27 and Atlas expect it to rise considerably into 2021...

Phase #2

More recently, iron ore prices have jumped $30/t since Nov 27 to $160/t on Friday 11th Dec.

Recent iron ore price surge has been driven by a mixture of:

  • Asset Price Inflation:

Close to zero or negative interest rates + large global stimulus-response/liquidity events = asset bubbles/asset price inflation.

  • Tighter Market Fundamentals:

Cyclone was expected to hit Port Hedland (major Australian iron ore export terminal) last week – La Niña weather systems in Asia Pacific.

Interim Aussie government report implies Rio Tinto may have to rebuild ancient cave & renegotiate land access agreements with traditional land owners; limiting iron ore production growth in 2021.

Robust Chinese demand for iron ore, BUT ex-China still not back to pre-COVID-19 levels.

  • Derivatives Market Speculation:

Huge increase in volumes & open interest in the Dalian Commodity Exchange Iron Ore futures contract last week.

Chinese institutional & retail investors punting on industrial metals e.g. iron ore as a proxy for economic growth in 2021.

As a result, some mills have been spooked by the parabolic increase in iron ore prices and have loaded up on “cheaper” ferrous scrap.

Without a doubt, intermittent lockdowns have reduced the generation of ferrous scrap – but not to the same degree seen earlier in the year.

Phase #3

China Iron & Steel Association called on State Administration of Market Supervision and the China Securities Regulatory Commission to clamp down on iron ore futures speculators.

Investigation by the authorities and some tighter capital controls spooked DCE iron ore derivatives market; resulting in a drop in volumes and open interest.

As a result, iron ore prices fell $5/t today to $155/t, cfr China, on Monday 14th Dec.

Expect continued volatility in iron ore prices.

The iron ore pricing mechanism and market is in a state of disequilibrium, and as such is having a knock on effect to “partially” substitutable commodities – like ferrous scrap.

We expect to see further signifficant increases into January.

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