TOKYO -- International prices of scrap iron could be sent tumbling in the not-too-distant future, as China, having consumed much of the domestic supply, has begun showing signs it may start exporting.
Such a situation would see Chinese producers face off with Japanese and Russian rivals in the lucrative Southeast Asian market, industry insiders said.
A source at a Japanese steel trader said the company saw high-quality Chinese scrap as a threat. "We may lose some of our share in the Vietnamese market."
China's scrap exporters in March started seeking out customers in South Korea and Southeast Asian countries like Vietnam -- a market where Japanese producers have been increasing exports.
Scrap iron exports from China totaled about 1,000 tons in 2016, a fraction of the 8.7 million tons Japan shipped that year. But the country has a total 7 billion tons of steel, considered latent iron scrap, in stock. That amount is expected to exceed 10 billion tons by the end of 2020.
If the stockpile results in huge amounts of scrap iron being exported, there would be a significant impact on the global market.
Chinese producers are increasing exports as demand has decreased from domestic steel producers that use induction furnaces -- smaller steelmaking equipment that produces low-quality products. Beijing has identified them as a major cause of the chronic air pollution in the country, and asked producers to stop using them.
The production capacity for low-quality steel products in China is estimated to have been 100 million tons at the end of 2015 -- a figure nearly as large as Japan's entire crude steel production. Should this much capacity be erased from the demand picture, the country's scrap iron producers may turn to overseas market, another industry source warns.
"We estimate 60 million tons of scrap will find no place to go in China and end up flowing out into the international market," the source said.
Chinese scrap is believed to currently cost about $200 per ton, a level considered to have a competitive advantage over Japanese and Russian products, and is believed to have already started to bring down international prices.
The price for Japanese products, which in March rose above 30,000 yen ($263) per ton for the first time in two and a half years thanks to rising steel prices in China, has subsequently fallen below 25,000 yen. Industry insiders attribute the plunge not only to speculation that steel demand in China may slow down, but also the anticipation that Chinese producers may boost exports.
Some observers say, however, that there may be limited room for China to export scrap iron, as China's domestic demand is likely to grow large enough in time to absorb the excess supply.
They point to Beijing's plans to significantly increase spending on infrastructure -- expected to create fresh demand for steel bar products, such as rebars, used to reinforce concrete, and H-beams.
They also argue much of the excess supply will likely be absorbed as producers replace induction furnaces with more environmentally friendly electric furnaces, maintaining demand for scrap iron.
Although the volume of China's scrap iron exports remains difficult to predict, competition is expected to intensify one way or the other.