Viewpoint: Demand for Japanese ferrous scrap to rise

Overseas demand for Japanese ferrous scrap is likely to recover in 2023, while stronger domestic consumption and slower scrap generation in the country limit availability for exports.

Japan exported 5.35mn t of scrap in January-October 2022, with exports to South Korea broadly flat on the year and shipments to Taiwan down by 8.4pc. Exports to Vietnam, the largest buyer of Japanese scrap in 2020, fell by 38.6pc on the year as the country's real estate industry faced a liquidity squeeze and slower payment from a government project.

Japanese traders widely expect scrap demand from South Korea and Taiwan to at least remain at the current levels in the first half of 2023, with demand from Vietnam and China supported by further stimulus measures and China's relaxation of its zero-Covid policy.

Market participants in Vietnam were bullish that domestic steel and scrap demand will rise this year as the government announced the release of more funding for infrastructure projects to ensure GDP growth of 6.5pc.

In China, steel demand is expected to gradually recover as Beijing abruptly removed its zero-Covid policy last month. Most market participants surveyed by Argus anticipate a rise in buying interest for steel and steel scrap in the second quarter of 2023, even though there are still huge uncertainties on consumer confidence, inflation and a macroeconomic slowdown.

Meanwhile, southeast Asian steelmakers have started to prepare for any rebound in steel demand in 2023 as they began to build scrap inventory in December after sitting out of the market for the past few months.

Seaborne scrap prices, particularly for Japanese scrap, could see larger increases than the demand recovery would suggest as scrap availability from Japan is likely to be limited by slower scrap flow and growing domestic demand. In addition, the Japanese yen is expected to remain volatile in 2023, which may create more obstacles for scrap exporters.

The Japan manufacturing PMI index has been falling since March 2022 and reached a 26-month low of 48.8 in December. Slower manufacturing activity has led to lower new scrap generation in Japan, while old scrap and demolition scrap supply has also been tight throughout 2022.

Scrap supply available for export may become even tighter in 2023 as steelmakers step up to secure supply. This is because ferrous scrap has now become a strategic raw material in many countries, including Japan, as they aim to become carbon neutral.

Tokyo Steel, the leading electric-arc furnace (EAF)-based steelmaker in Japan, has been adamant about keeping ferrous scrap in the country over the past two years as it largely kept its domestic collection prices above seaborne export prices.

This competition for scrap between exporters and local steelmakers may become even more fierce this year as more EAFs are built. Nippon Steel - Japan's largest steel producer - launched a new 700,000 t/yr EAF-based mill in early November 2022. And other steelmakers in Japan also have plans to build new EAF mills in the coming years to replace old blast furnace-based mills.

By Xia Ji and Jing Zhi Ng

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