Problems of scrap formation in Ukraine
According to the DZI experts under Ukraine's Ministry of Economy, the scrap metal fund of Ukraine is estimated at 330-345 million mt (March 2008), with a trend of continuous decrease between three to five percent annually.
The main scrap formation sources in Ukraine:
- Annual volume of obsolescent scrap is 6.0-6.8 million mt. The share of obsolescent scrap in overall scrap formation in Ukraine is 70 percent (for comparison, the share of this type of scrap in Western countries is about 30 percent)
- Waste products from machine building and pipe production - 1.6-1.7 million mt a year (more than 20 percent share in the country's yearly scrap formation capacity)
- Common scrap, scrap from construction and from ships
During the last six years, with average annual crude steel production growth of four to five percent, scrap collection and processing did not change much, staying at an average level of 7.7 million mt. The volume of supplies to domestic steel producers increased from 5.9 million mt in 2003 to 7.04 million mt in 2007, while exports decreased threefold to 700,000 mt.
The large volumes of exported steel products do not contribute the formation of new scrap in Ukraine. Exports of steel products in 2006 equaled 28.4 million mt, stood at 27.1 million mt in 2007, and for the first five months of 2008 steel product exports amounted to 12.8 million mt out of 15.8 million mt produced during the same period.
A positive factor in the formation of scrap in the country is the increasing volume of steel imports. Steel imports to Ukraine increased to 2.68 million mt in 2006, to 3.31 million mt in 2007, and stood at 1.08 million mt for the first five months of 2008.
The following factors may further reduce scrap consumption in Ukraine:
- switch from OHF to oxygen converters will allow reduction of scrap demand in the country in next four to five years by two million mt a year, while sustaining the levels of crude steel production;
- increase of domestic finished steel consumption and reduction in semis exports;
The measures which are to help to sustain the scrap collection capacity at the current level:
- improvement of laws governing operations with scrap
- increasing the depth of scrap collection, reduction of natural loss of scrap
Taking the abovementioned numbers regarding the capacity of Ukraine's scrap fund and also regarding the annual domestic steel consumption into account, it appears possible to sustain the current level of scrap collection on condition of sustaining the current production volumes of crude steel.
However, in the event of implementation of investment projects by several companies directed at increasing their production capacities, crude steel output in the country may reach 50 million mt by 2010 (including five-six million mt produced by the EAF route) and 68 million mt by 2012-2015. Meanwhile, the problem of the scrap deficit will appear automatically. In such a situation, it will be difficult to satisfy the domestic scrap needs with increasing imports of scrap, while the limitation of exports will also produce only limited results. Only the owners of additional scrap funds and as well as those companies which decided to build new DRI modules will be on the winning side.
About possible development perspectives of the Ukrainian scrap market.
The high dependency of the Ukrainian steel industry on developments in the world steel market, allows us to make a number of predictions about the direction of its future development.
- According to data from the Organization for Economic Cooperation and Development (OECD), during 2003-2007 world steel production increased from 970 million mt to 1.345 billion mt, in particular, rising in China to 489 million mt (up 267 million mt), in Japan - to 120 million mt (up 10 million mt), in Russia - to 72 million mt (up 11 million mt), India - to 53 million mt (up 21.9 million mt), Turkey - to 25.8 million mt (up 7.5 million mt). In 2008 the world crude steel production capacity will increase by 2.7 percent to 1.515 billion mt from 1.475 billion mt in 2007.
- According to Iron and Steel Statistics Bureau (ISSB) data, during 2007 the world's leading scrap importers were as follows:
Turkey - with 15.4 million mt of scrap imports (up 10 percent per year), South Korea - 6.9 million mt (up 23 percent), Spain - 6.3 million mt (down 15 percent), Germany - 5.9 million mt (no change), Taiwan - 5.4 million mt (up 22 percent), China - 3.9 million mt (down 37 percent), India - 3.1 million mt (down eight percent), USA - 3.7 million mt (down 23 percent).
The world's leading scrap exporters in 2007 were:
USA - with 16.4 million mt (up 19 percent), Russian Federation - with 7.86 million mt (down 20 percent), Germany - 7.78 million mt (down 7.1 percent), Japan - 6.45 million mt (down 16 percent), France - 5.94 million mt (down three percent), Great Britain - 5.86 million mt (down 21 percent), the Netherlands - 4.19 million mt (down 11 percent), Romania - 1.97 million mt (up six percent), Kazakhstan - 1.7 million mt (down five percent).
- According to data from Russian experts, in 2006 world scrap consumption reached 493 million mt, and in 2007 was expected to climb to 514 million mt (the growth in world crude steel production in 2007 was 75 million mt, including 23 million mt for EAF production and 10 million mt for DRI production). By 2012 world crude steel production output is projected to increase to 1.525 billion mt (growth of 285 million mt compared to the 2006 data, with EAF production accounting for 501 million mt (up 103 million mt) and DRI production reaching 99 million mt (up 39 million mt). In this context, by 2012 scrap consumption is expected to reach 588 million mt (up 95 million mt).
- According to other estimations, in 2007 scrap consumption on a worldwide scale consisted of 162 million mt of recycled scrap, 168 million mt of newly-formed scrap and 330 million mt of old scrap metal. Accordingly, it was assumed that metallurgical enterprises would be able to purchase a minimum of 66 million mt of scrap substitutes such as pig iron, HBI, and DRI.
- According to the IISI's forecast, in 2008 world steel consumption will increase by six percent, from 1.202 billion mt to 1.282 billion mt. Consumption in China in 2008 is expected to increase by 11.5 percent, constituting 35 percent of worldwide consumption. In India, the demand will grow by 8.9 percent in 2008, and in 2009 by an additional 12.1 percent. In Russia an increase of 11 percent is expected in 2008, and in 2009 a further rise of 11.2 percent is predicted. In BRIC countries (Brazil, Russia, India and China), which remain the "locomotive" of the increase in world demand for steel, in 2008 steel consumption is expected to increase by 11 percent and in 2009 by 10 percent. In five years' time the leading steel importer will still be India, which has increased its purchase of finished steel up to 7 million mt per year.
- According to "Strategies for the development of Russian Federation's metallurgical industry for the period until 2015" Russian steel production by 2015 will increase to 71.5 million mt, while domestic steel consumption will rise to 47.5 million mt (in 2006 the figure stood at 39.4 million mt and in 2007 at over 38 million mt).
In 2008, Russia expects to commission EAFs with a combined annual production capacity of 6.2 million mt per year, and in 2009 the EAF capacity will amount 6.5 million mt. Accordingly, the scrap consumption in Russia will increase by 8-10 percent per year.
In 2007 the level of scrap inventories in Russia reached 31.5 million mt (with the depth of scrap collection, according to MAIR's estimation, at about 55 percent, compared with 75 percent in Western countries). At the same time, domestic scrap consumption was recorded at the level of 23.5 million mt, and exports at about 7.8 million mt. In 2015 scrap inventory in Russia is forecasted to reach about 37-40 million mt, with annual exports expected to be in the range of 2-3 million mt.
In Ukraine, according to the plans issued by the main metallurgical companies, in 2012-2015 annual steel production may reach 68 million mt, with pig iron output climbing to 59 million mt, and finished steel production up to about 50 million mt. By 2010, Azovstal, Alchevsk and NDTZ will have completely switched to the oxygen converter route of steel production; by 2012 AMK and Zaporizhstal, and possibly Ilyich and Makeevsk as well, will also have performed this switch. Thus, by 2010 EAF production will increase by 5-6 million mt, in 2012 oxygen converter steel production will rise by 19-20 million mt, while OHF production will decrease to 5 million mt.
By 2011, according to predictions by experts, the share of Ukraine's domestic rolled steel production consumed by the domestic market will increase to 39.3 percent, while the share of rolled steel exports will decrease to 60.7 percent. By 2015 rolled steel consumption is expected to reach the level of 21.5 million mt.
According to the Industrial Association Metallurgprom, in 2006 metallurgists received 858,000 mt of scrap less than their calculated needs, in 2007 there was a deficit of 404,000 mt and a shortfall of 330,000 mt during the first five months of 2008. Thus, steelmakers are aware of the encroaching shortage of scrap (particularly given the planned increases in steel production which will require greater supplies of raw material), but do not come openly with this forecasts, relying on the imports of scrap, coking coals, etc. But it is absolutely unreal to make up for shortages of scrap with imports of this raw material. The nearest market - i.e. the Russian Federation - is being isolated by export duty, and also by the perspective of almost 100 percent of domestic consumption of all stored scrap in the country in the coming years. Incidentally, Russia may move to ban the export of raw materials, including scrap. One more source of scrap, Kazakhstan, is also reducing its exports. Ukraine is also unlikely to be able to rely on imports from Romania and Bulgaria, where everything already is subdivided...
Apparently, the question of scrap supplies is becoming one of the most important issues in the new period for the Ukrainian steel market, with raw material supplies being one of the stimulators of the market's further development.
Conclusion:
1. In the short-term perspective, the development of the Ukrainian scrap market will be determined, in essence, by such factors as the situation in the world scrap markets, in the finished steel and freight markets, and also by the level of domestic steel and scrap demand.
In the current year, we should not expect a decrease in scrap prices, due to the increase in demand and in the prices of other types of raw material, energy supplies and also finished steel.
However, occasional periods of scrap price stabilization, both in the domestic market and in the markets of leading importers of Ukrainian scrap - Turkey and Egypt for example - are possible after the creation of winter stocks etc.
2. In the medium-term perspective, i.e. after 2010, a sharp spasmodic increase in scrap prices is possible with the realization of announced projects for the increasing of existing capacities and the commissioning of new steel facilities. In this situation price jumps will not be in proportion to the steel volume increase - price dynamics will become a hostage of market speculation. Here, action by the state is possible - by using sanctions provided for by antimonopoly legislation; by controlling the profitability of operations with scrap; by strengthening tariff and non-tariff limitations for exports of scrap metal and other types of raw material. The renewal of internal barriers for scrap exports, at regional level, must not be ruled out either.
3. The problem of scrap shortage may eventually embolden the government also to adopt some normative measures, which will further: a) increase volumes and depth of scrap collection; b) stimulate scrap imports; c) decommission some steel facilities; g) direct inflow of investments towards resource-saving technologies, DRI production etc; d) reduce exports of steel products which have only undergone a low degree of processing, etc.
4. The consolidation processes in the scrap market can enter a new phase of possible organizational restructuring of market subjects, leading to the division of the market between several vertically integrated metallurgical groups which secure their scrap needs using their own resources (on the analogy of Russia's Severstal, NLMK, and others). These processes can be accelerated by the intensification of competitive activity for the repartition of the Ukrainian ferrous metals market.