Metals Amid Strife
As the Russia-Ukraine conflict continues, the metals industry is feeling the effects. Prices for metals have risen sharply amid high demand and supply chain issues, along with imposed sanctions against Russia.
Published: March 28, 2022
Updated: April 25, 2022
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Trade Review: Alumina Faces an Uncertain Q2 as Russia-Ukraine War Continues, Disrupts Trade
The global alumina market is set to be in a state of flux and uncertainty in the second quarter of this year as ripples from the Russia-Ukraine war and a confluence of inter-connected factors could tip supply and demand fundamentals.
In the first quarter of 2022, the benchmark Platts Australia alumina daily assessment rose to heights unseen since the US sanctions against Russian aluminum giant Rusal and refinery output cuts at Brazil's Alunorte in 2018. Platts FOB Western Australia alumina assessments peaked at $533/mt in Q1, surpassing the $484/mt high in Q4 2021.
The alumina market expected global prices to ease in Q1, after the Beijing Winter Olympics, but this was not to be. China's domestic prices were the exception as curtailed refining capacity in northern China was gradually increased post-Games.
Australia's March 20 ban on alumina and bauxite exports to Russia, however, resulted in an immediate global glut. Prices declined within days to close Q1 at $478/mt FOB, falling below the key $400/mt mark on April 8.
This quarter, market participants are likely to keep a close eye on developments surrounding Rusal's international assets and how it will carve its overseas businesses in order to distance itself from Russia. The increase in supply out of Australia will also be in focus.
Export ban boosts near-term Pacific supply
Market participants expect to see more Australian cargoes, initially bound for Russia, made available to the broader market.
Russia imported 1.52 million mt of alumina from Australia in 2021, a third of the country's 4.7 million mt of alumina imports, according to Russia's Federal Customs Service.
The total included 2.65 million mt from Rusal's alumina refineries in Ukraine, Ireland, Guinea and Jamaica.
On March 24, the first prompt 30,000 mt Western Australia cargo traded at $510/mt FOB. But it was barred from being delivered to Russia due to its end-March laycan, market participants said, and was subsequently reoffered to the market on short notice.
"Australian cargoes that were imported into China prior to the war and stored at bonded warehouses might be an alternate source of sales to Russia, though it's not certain if and how the export ban could actually be retrospectively implemented on these goods, since they already arrived on Chinese shores earlier," a trader said.
Market participants will be monitoring Rusal's subsequent alumina supply following Australia's export ban amid renewed discussions of Chinese domestic alumina exports filling the supply gap.
China, the world's largest alumina producer, sold 780 mt to Russia in 2021, almost nothing compared with the volumes that arrive from traditional destinations.
China's subsequent alumina exports will shed light on domestic price movements, sources added, as it remains to be seen how fresh demand and new production capacity for Chinese alumina will balance.
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Top nickel-producing nations can rapidly ramp up production and meet global demand if sanctions or an export ban curtail supply from Russia, the world's fourth-largest nickel producer.
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The UK introduced additional 35% tariffs on imports of a few Russian metals March 15, which should remove from its market or replace with other origins 720 mt of Russian copper, 3,900 mt of aluminum, 7,600 mt of lead, just over 700,000 mt of iron ore and 110,000 mt of steel.
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Steel
Steelmakers Face Soaring Scrap Prices as U.S. Aluminum Supply Remains Tight
U.S. domestic HRC mill spreads managed to gain some ground on March 18, even with soaring scrap prices during the March buy week. But service centers that were in the spot market were only buying to fill gaps in inventories to meet demand.
The HRC spot market again saw tradable values increasing as mills have raised their prices at the mill, ranging from $1,300-$1,400/st for April production with offers ticking up with the escalation of the Russia-Ukraine conflict affecting input costs and capping imports giving domestics mills a stronger hand again.
Domestic prices were impacted by the import arbitrage situation and have been under strong competition but with price volatility globally the arb has closed and some planned import shipments to the U.S. have been canceled
Lead times have also continued to hold below the 10-year average.
Margins for electric-arc furnace mills in the Midwest have trended down from the start of 2022, as HRC spot prices fell by $200/st during the same time period, as prime and shredded scrap prices both rose by triple digits during the scrap buy week with skyrocketing pig iron prices due to the supply from Russia/Ukraine being cut off and global scrap demand has been improving with the push to decarbonize.
Both busheling and shredded scrap prices were in focus as export prices rose by 43.4% from the start of the year. The Platts HRC-MW No. 1 busheling scrap spread bounced back to $670.54/st and HRC-MW shredded scrap spread rose to $755.36/st. Margins are still down by 30.5% and 26.4% from the start of 2021, respectively.
As the market eyes growth in future scrap consumption from EAF capacity expansions and the push to decarbonize and utilize more scrap in basic oxygen furnaces, demand for flat-rolled steel has continued to outpace supply, and prices have held firm in the Midwest.
Strong EAF demand through 2021 saw new scrap tighten and become more valuable compared with iron ore, due to its lower usage of energy and carbon footprint properties, expanding the ratio.
Steelmakers Face Soaring Scrap Prices as U.S. Aluminum Supply Remains Tight
U.S. domestic HRC mill spreads managed to gain some ground on March 18, even with soaring scrap prices during the March buy week. But service centers that were in the spot market were only buying to fill gaps in inventories to meet demand.
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ACCESS MORE RESEARCHChina’s Role
China's Iron Ore Portside Discount to Seaborne Prices Shrinks in March as Import Demand Dips
The discount of China's iron ore portside prices to seaborne prices has narrowed $5.87/wmt in a month and was likely to continue shrinking in the second half of March amid lower-than-expected seaborne demand, despite high stock levels at major Chinese ports and expectations of a recovery in domestic steel production in the second quarter.
The spread between port and seaborne prices, after normalizing to the same specifications, stood at $3.49/dmt March 16 after narrowing steadily from $9.36/dmt Feb. 14.
The port price of 62% Fe Iron ore was assessed at Yuan 966/wmt FOT East China March 16, equating to $141.96/dmt on an import parity basis, and the seaborne benchmark 62% Fe IODEX assessed at $145.45/dmt CFR China.
In contrast, the portside market had traded at an average premium of $3.29/dmt to the seaborne market on a 62% Fe basis for seven months in 2021, from late April to early November, and hit a record high of $19.69/dmt on May 10.
The slide from premium to discount coincided with portside stocks rising to 160 million mt in the current quarter from below 120 million mt in Q2 2021, based on observations by market sources, and the spread ended 2021 at a discount of $1.51/dmt.
The portside market has now been in discount to the seaborne market for four months, but that spread was likely to narrow in H2 March as seaborne demand, while strong, was proving weaker than market expectations.
"China iron ore port stocks have started to accumulate since Q4 2021 and reached a peak level in mid-February after the Lunar New Year holiday, at above 160 million tons, which has been the highest level since May 2018 and close to the all-time high of around 163 million tons in 2018," a steel mill source based in Beijing said. "The import loss reached the peak at the same time,"
End-users have mostly deferred port market commitments since the Lunar New Year holiday due to sufficient supply of most iron ore brands, and were mostly now buying on a hand-to-mouth basis.
"We'd like to have traders and re-sellers build stocks on the port for us instead of transferring the title to us to save cost and capital usage," the source said.
"The port market and seaborne market represent slightly different fundamentals, as the port market links to prompt demand and seaborne indices are referring to the cargoes arriving a few weeks ahead," a trader in south China said.
"The port market can move much faster than the seaborne side when the demand surges. Due to the small parcel at typically 5,000 mt to 20,000 mt per deal on port side, the deals are concluded quickly, and the prices can be very volatile during the day," the trader said.
"On the other hand, the port buying interest can diminish quickly when market uncertainties grow, flipping the import trading margin into a loss. The flexibility of the port market makes it a good supplement to the seaborne market," the trader added.
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ACCESS MORE RESEARCHMarket Dynamics
‘Interesting Times’ Likely Now the Norm for U.S. Metals Markets
Whoever first uttered the expression "May you live in interesting times" must surely have envisioned today's US metals markets.
The saying – part blessing, part curse – is an apt summation of current times. From pig iron to nickel, aluminum to steel, US pricing has soared once again on geopolitical events, supply chain strains and overall uncertainty.
Just as domestic markets began to stabilize from record price increases in 2021 and the economy was coming to terms with the realities of a post-pandemic world, inflation bit hard in the first quarter of 2022, Russia invaded Ukraine and a new COVID-19 variant emerged.
The combination of factors is roiling markets. Russia and Ukraine's conflict has had the most far-reaching impact.
The two countries accounted for about 62% of American pig iron imports in 2021, and the war has removed significant supply of the key electric-arc furnace steel feedstock for US-based steelmakers and global producers alike. About 70% of US steelmaking is EAF based.
US buyers have had to look to replace Russian and Ukrainian material since the February invasion, with Brazil picking up the bulk of that business. S&P Global Commodity Insights' Platts Brazilian pig iron export assessment nearly doubled from January to mid-March, topping $950/mt in early April.
In turn, Platts CIF New Orleans pig iron price assessment rose about 91% by mid-March – reaching $1,030/mt, the highest level since S&P Global began assessing it in January 2018. The weekly US pig iron import assessment is now down $90 from the recent peak but still elevated.
Pig iron often acts as a release valve for steelmakers when ferrous scrap prices rise. However, as pig iron prices spiked in the US, so did scrap. The Platts US Midwest No. 1 busheling price has jumped by 53% to $780/lt since early February, while the Platts TSI US Midwest shredded scrap index increased by 30% to $610/lt over the same time.
As raw materials surged, US finished steel markets witnessed a spike in prices. The Platts TSI US hot-rolled coil index increased by more than 50% in just over 30 days following the invasion, hitting a recent high of $1,500/st before easing slightly.
Supply concern boosts nonferrous pricing
Rising US prices related to Russia uncertainty aren't limited to the ferrous complex. Global nickel pricing rose by some 57% so far this year and Platts delivered nickel cathode premium has nearly doubled to 17.771 cents/lb.
In addition to Russia accounting for roughly 17% of world nickel production, inventories remain low for the material – as well as for metals such as copper, aluminum and zinc – following a global market deficit last year, according to data from the World Bureau of Metals Statistics.
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