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Commodities

Rising scrap metal prices put squeeze on Japan steelmakers

Steel producers feel need to raise prices, but demand is lacking

Higher costs for scrap metal is hurting the bottom line of Japan's electric-furnace steelmakers.

TOKYO -- Ferrous scrap used as a raw material for steel has jumped in price to a roughly two-year high on strong overseas demand driven by a weak yen and a rebound in steel prices in China, putting Japan's electric-furnace steelmakers in a tight spot.

Domestic demand for scrap is weak, but that has not stopped prices from surging 80% over the past year in Japan to reach a per-ton price of 27,500 yen ($241) charged to electric-furnace steelmakers in the Kanto area surrounding Tokyo.

Oversupply by China had kept scrap prices on ice through the spring of 2016, but in the fall it became clear that the steel market was bottoming out, and that triggered a rebound for scrap, too.

In China, prices for semi-finished billets used as a substitute for scrap began to rise sharply, and the high prices scared away Southeast Asia's electric-furnace steelmakers. Steelmakers from Vietnam and South Korea turned to Japanese scrap, which thanks to the weak yen they viewed as a relative bargain.

Japan's scrap exports rose a year-to-year 10% in January-November to about 7.9 million tons and are expected to have topped 8 million tons for all of 2016, a level not seen in three years.

Also contributing to the rise in scrap prices is the high cost of coking coal and other raw materials used to make steel in blast furnaces. To reduce their use of expensive coal, blast-furnace steelmakers are using a greater percentage of scrap. In October alone, some 900,000 tons of scrap was used in blast furnaces, the largest amount in 29 months.

Japan's electric-furnace steelmakers are taking the brunt of it. Scrap inventories in the Kanto region stood at an estimated 120,000 tons at the end of 2016, which is below the 150,000 tons considered desirable. Scrap suppliers, anticipating a further rise in prices, are sitting on their shipments, according to the scrap procurement officer at one electric-furnace steelmaker that is not receiving the supplies it anticipated.

At the start of this year, prices for coking coal plunged on the spot market, spurring speculation that scrap prices will also decline. And in China, the rise in steel prices is taking a breather.

No major decline in scrap prices is anticipated in Japan, however.

With scrap trading in overseas markets at prices equivalent to more than 30,000 yen a ton, Japan's scrap is still relatively inexpensive and will probably move sideways at that level, said a source at one steel trader. Takayoshi Meiga, chairman of the Non-integrated Steel Producers' Association, warned that it would be a mistake to think that scrap prices will fall given the unlikelihood that prices for billets in China will decline.

If the cost for raw materials stays high and the margin for finished goods narrows, the profits for Japan's electric furnace steelmakers will suffer. They are thus hurrying to raise the prices for their main products, including the steel reinforcing bars used for building construction.

Bar steel to commercial users in the Kanto area now costs around 55,000 yen a ton, which is 20% above the recent low in February 2016. Tokyo Steel has set a price of 56,000 yen for this February's contracts, and electric-furnace steelmakers in general have their eyes set on 60,000 yen.

But given the weak demand for residential construction, it remains to been seen how quickly and to what extend the companies can pass on their higher costs.

(Nikkei)

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