Ferrous Scrap (Tsi) April 11

‘The Ferrous Scrap Market’

The Steel Index
Jarek Mlodziejewski
Tim Hard

January 2011

© Copyright The Steel Index

Agenda

• Scrap – What is it?

• Scrap – What does it affect?

• EAF Production

• Raw Material Costs

• Scrap Trade

• Turkey’s Role

• Introduction to The Steel Index (TSI)

• TSI’s Underlying Methodology

• TSI’s Scrap Price Publication


Ferrous Scrap – What is it?

• Steel is a „multi-cycling‟ material: it can be Steel Scrap Produced mt mt
recycled repeatedly without degradation. 43% 600
• Ferrous scrap is classed as either „prime‟ or 41% 580
„obsolete‟. 39% 560
• Prime scrap material comprises off-cuts of new 37%
540
steel (by-products of manufacturing). 520
35%
• Obsolete material represents redundant prior 500
33%
steel-based industrial production and 480
consumption. It is primarily generated from 31%
460
discarded automotive and white product 29% 440
materials, or demolition of steel building
27% 420
structures and railways.
25% 400
• It is a “greener” steel feedstock, as „virgin iron
units‟ (i.e. those mined in ore form) require more
power, processing and transportation than scrap.
• Over 1400kg of iron ore, 400kg of coal and 55kg Steel Scrap Ratio Steel Scrap/Crude steel in %
of limestone is saved for a tonne of scrap used.
Source: SBB Crude Steel Forecaster
• It is the world‟s most recycled material. Over 80%
of consumer steel is recycled
• Electric Arc Furnaces (EAFs) can be charged with % ratio falling due to 300mt of
between 90-100% of scrap. BOF capacity coming on stream
• Basic Oxygen Furnaces (BOFs) can be charged (especially in China) compared
with up to 30% scrap. with 80mt of new EAF capacity



Home Prime Obsolete
HOME material is the off PRIME material is OBSOLETE material comes
cuts from the mills offcuts/pressings from ‘old’ steel – used
themselves when they from construction,
are sizing their slabs, bars manufacturing – manufacturing steel etc.
etc from ‘new’ steel. from ‘new’ steel.

Scrap


Ferrous Scrap – Sources of obsolete scrap

CONSTRUCTION SHIP BREAKING SHREDDING
Or more accurately, Helping to alleviate some Shredders handle
demolition. When older of the capacity overhang obsolete car bodies and
buildings are taken down, from the glut of late white goods. Some of the
the old rebar and beams 2000‟s shipbuilding, ship larger (“mega
are liberated, cut up and breaking is a significant shredders”) can even
sold as Plate & Structural source of scrap. fragmentise HMS
(P&S) or Heavy Melt (HMS). material.

Ferrous Scrap – Alternative sources?

1. Pig Iron
- Pig Iron generally doesn‟t come onto the market – instead being passed straight
through to the BOF in integrated mills. However; merchant pig iron is produced
from the blast furnace and cast into ingots for sale. It‟s formed from iron ore, coke
and limestone + lots of heat. Minimum 92% Fe.

Integrated
Blast Furnace Basic Oxygen Furnace
2. DRI / HBI
- DRI (AKA „sponge iron‟) is heated iron ore, exposed to a reducing gas. Minimum
90% Fe, typically higher, in pellet form.
- HBI as above, but compacted for ease of handling/shipping.

These alternatives are used to make high quality steel due to the high Fe content and the
fact that that the impurities implicit in the inputs are known quantities. This reduces the
residuals in the liquid steel.



BOF Steelmaking Process

Steel scrap has an important role to make in the steelmaking process. It typically forms
the vast majority of the ferrous charge in EAF steelmaking

Even in integrated steel mills using the BOF steelmaking process, which are often
thought of as using only iron, scrap is used as part of their charge mix.

It is generally added as a proportion of 10-30% of the total BOF volume. This is
dependent on the cost of iron ore vs. scrap. If the price of iron ore is high and scrap is
low, economics will dictate a higher proportion of scrap is used.

Ferrous Scrap – What does it affect?

• Scrap yards, traders and brokers sales price margins.

• Steel mills using electric furnaces (80-85% of cost of production)
• Integrated steel mills (up to 15% of cost of production)

• Steel billet producers’ and purchasers’ margins.

• Rebar, wire rod and merchant bar markets are heavily affected by scrap
costs as these products are typically produced via the EAF steelmaking
process.

• Construction company margins. Long-range, fixed-price construction
projects are directly affected by the increasing price volatility of these
finished steel goods.

• We cannot forget producers of flat products either, as high grade scrap is
used in the production steel coil and sheet products for the construction,
automotive and manufacturing industries (especially in North America).


The imported Turkish scrap price is important to a number of finished steel markets.
$USD/t $USD/t
850 550

800
500
Rebar N.Europe
750
Rebar S.Europe
450
700
Wire Rod Europe

650 Debar Turkey export FOB Turkish Port
400
Merchant Bar Turkey export FOB
600 Turkish port
Turkish Scrap(RHS)
350
550

500 300
Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb-11

Source: TSI and SBB © Copyright The Steel Index


$700 $140

$600 $120

$500 $100

$400 $80
$USD/t $USD/t
$300 $60

$200 $40

$100 $20

$- $-

Scrap - Billet Spread (RHS) Scrap HMS 80:20 $USD CFR Turkey LME Billet

Not least the LME billet price. The TSI Turkish Quarterly correlation – LME and Turkish Scrap
#HMS 1&2 80:20 import and LME cash seller and Q2 – 2009 49 %
settlement prices show a weekly correlation of
Q3 – 2009 74 %
82.4% correlation over this period.
Q4 – 2009 75 %
However once you spread out the data set and Q1 – 2010 91 %
split it into quarters you will find that the average
correlation Q2 – 2009 to Q4 -2010 is only 74%. Q2 – 2010 95 %
Furthermore, there is no consistency over the Q3 – 2010 56 %
period of time, with a low of 49% and a high of Q4 – 2010 76 %
95%
Source: LME/TSI © Copyright The Steel Index

Ferrous scrap - New ways to manage price risk...for scrap.

Turkish Imports HMS 1&2 80:20 – CFR Turkish Port

Actuals Forward
500 Prices
US$/ Forward curve
metric TSI (mid-point
tonne Referenc prices)
450
e price
Mar 16,
2011
400

350

300
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12
Sources: TSI (monthly averages), FIS


Ferrous scrap - New ways to manage price risk...iron ore
market example

• Will a scrap derivatives market take-off?
• The example of iron ore suggests a massive interest in the ability to
hedge raw material input costs. Over US$5 billion (35 million tonnes) of
iron ore swaps and options have been cleared since launch (basis TSI).
• First scrap swap cleared last week (April 2011)....
6000
Iron Ore Swap Contracts – Cumulative Value
5000 Cleared
ICEX
4000 NOS Clearing
US$ CME Group
(m)3000 LCH.Clearnet
SGX
2000

1000

0
01/05/09 01/08/09 01/11/09 01/02/10 01/05/10 01/08/10 01/11/10 01/02/11


EAF Production - Many countries have a higher production
of EAF (scrap based) production than BOF.

EU-27
72mt

North Asia
America
68mt Mid 168mt
-East
Africa 17mt
11mt

Regional
yearly EAF
production

South EAF mill capacities tend to cluster around the 300 kt/year
America level as well as near the 1.2mt/year level. This reflects the
16mt economic scale for EAF plants and strategies to serve local
Countries with >50% geographic markets
EAF production

EAF Production - ...and steel scrap use is growing,
leading to increased global trade of scrap.

The global financial crisis hit construction markets (which EAF producers primarily serve)
particularly hard: dragging down the trend line in 2009: however, construction markets are
recovering...
World crude steel via EAF in World crude steel production
mt mt
550 1900 33%

1700 GFC 32%
500
1500 31%
450 GFC 1300 30%

1100 29%
400
900 28%
350
700 27%

500 26%
300

BOF EAF % by EAF
EAF

Source: SBB Crude Steel Forecaster Source: SBB Crude Steel Forecaster

Given that the world’s steel recycling ratio has fallen significantly as emerging markets
consume steel and produce little scrap, the market has become structurally tighter than
those for iron ore and coal.

EAF Production – There are a few important pinch
points in the world

US Midwest: 68mtpa EAF industry inland has to compete with
the East coast exporting docks for material.

Rotterdam: Dockside exporter material is competed for by both
Spanish and Italian importers, as well as Turkish importers.

Turkey: The world‟s larges scrap importer, Hoovers up scrap
Handymax-size vessel loads (circa 35,000t each) from the EU,
USA, Middle East and Black-Sea bordering countries.

India, West Coast: The world‟s most liquid containerised scrap
import market. Like Turkey, sources from a variety of locations,
but in smaller quantities.

North Asia: China, S. Korea and Taiwan form a cluster of scrap
importers in the largest steel producing region of the world.


EAF Production – Exclude China and we have a different
picture.

The EAF route, as a ratio to total steel production, has been rising steadily
if China is taken out of the equation
%EAF route excluding China %EAF Route World total
50%

45%

40%

35%

30%

25%

20%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e

Source: SBB Crude Steel Forecaster

Raw Material Costs – scrap currently accounts for
around 83% of the EAF mill production structure...

Operational production cost/t liquid steel EU EAF Mill, US$/t
Scrap/pig iron Alloys Electricity Electrodes EAF Refractories Scrap credit Labour & maintenance Other

Indicative
18.59

31.94
16.72
Assumptions:
Scrap rate: 100% 28.72
Electricity consumption: 490kWh/t 16.82
29.87
15.05
17.67
14.54 27.53
30.35
27.41

423.82
380 83%
Scrap
310.97
265.05
222.69 241.47

2005 2006 2007 2008 2009 2010e

Source: SteelConsult analysis


Raw material costs – …and around 7-15% of BOF
production costs....

Operational production cost/t liquid steel EU BOF Mill, US$/t
Hot metal Scrap Fluxes BOF gas credit Scrap credit Labour & Maintenance Other

Indicative
23.9

49.82
18.03
21.49
Assumptions: 78.65
44.8
Scrap rate: 18% 16.21

64.02 15%
22.35 Scrap
22.71
45.6
19.99 20.73 47.34
16.86
39.43 40.79 17.14
15.32 15.46 57.33
44.66
41.9 49.06 380.95
304.26

188.78 184.51
159.05 156.19

2005 2006 2007 2008 2009 2010e

Source: SteelConsult analysis


Raw material costs – ...and scrap is a volatile commodity,
which poses headaches for EAF mill buyers, as well as downstream buyers.

US$/t
$600

Scrap HMS #1&2 80:20 • Steel and ore price cycle amplitudes are
$500
(CFR Turkey)
increasing.

• 2004-2005 saw a 60% steel price
+29% movement peak-to-trough.
-26%
$400

• January 2009 to 2011 has so far seen a
121% increase trough-to-peak for
$300 scrap.

Hard Coking Coal
• Price volatility and future price
$200
(FOB E. Australia) uncertainty is detrimental to all
companies participating in the supply
chain in many ways:
- commercial negotiations
$100
Iron Ore 62%FE - relationship management
(CFR China)
- production planning
- raising finance, cost of capital
$-
Apr-10
Apr-09
Feb-09

Sep-09

Feb-11
Feb-10

Sep-10
Jun-09
Jul-09

Jun-10
Jul-10
Mar-10

Mar-11
Mar-09

Dec-10
Dec-09
Aug-09

Oct-09

Aug-10

Oct-10
Jan-09

Jan-11
Jan-10
Nov-09

Nov-10
May-10
May-09

Source: Scrap and Iron Ore - TSI, Coking coal - SBB


Raw Material Costs - Iron ore prices also correlate with
scrap.

$210 $600

$190
88% Correlation $500 US$/t
US$/t
$170

$400
$150

$130 $300

$110
$200

$90

$100
$70

$50 $-

Iron Ore 62%Fe CFR China - TSI Scrap HMS 80:20 $USD CFR Turkey
(RHS)

Source: TSI

Price volatility is set to continue in the future, with scrap and iron ore
prices likely to show an increasing correlation

Scrap Trade – There will be over 120mt of scrap traded
this year.

Trade flows At current prices of around
US$470/t, the yearly scrap
Countries with >50% trade is worth US$ 56 billion
EAF production
Source: BIR and TSI © Copyright The Steel Index

Scrap Trade – Russian EAF capacity expansion will curtail their
exports, while Asian demand stokes world export demand.

Top 4 countries with
upcoming EAF
capacity – up to 2013
+10 mt EAF

10 m/t EAF
4 m/t BOF

7 m/t mt EAF + 4mt EAF
+7 EAF

+10 mt EAF


Scrap Trade- An already structurally tight global market is set
to tighten further.

Country Tariff Rate on scrap
Will become major importers of Argentina 20%
ferrous scrap in the future. China 40%

Egypt 500-1500EGP/t

India 15%
Used to be key exporters of
Iran 50%
ferrous scrap. 15% min 20EUR/t and export
Kazakhstan
licence
Kenya 25% and export ban
10% and non-automatic export
Malaysia
licence
World Scrap Exports (mt)
Russian Federation 15%, min 15EUR/t
25
Ukraine 16.4EUR/t and export licence
20 Vietnam 25%

15 UAE Dirham 250/t
Argentina Temp. Export ban
10
South Africa Export permit
5 Russia Azerbaijan Export ban
CAGR
0 -38% Indonesia Export ban
2005 2006 2007 2008 2009 2010 Jordan Export ban
-5
Sri Lanka Export ban
USA EU Japan
Uruguay Export ban
Russia Ukraine Linear (Russia)
Source: OECD

Source: BIR World ferrous report

Scrap Trade – The world’s largest importer of scrap...

The US and Europe are the primary producers of steel scrap.
Turkey, as the largest importer of scrap in the world, is a key consumer of world scrap,
affecting domestic producers and consuming both EU and US origin material.
Top 5 Importers $USD/t
50 Imports (000's t) vs. Price
$600 2,500
45

40 $500
2,000

35
$400

30 1,500

$300
25
mt
1,000
20
$200

15
500
$100
10

5 $- -

Sep-09

Sep-10
Mar-09
Apr-09

Aug-09

Oct-09

Mar-10
Apr-10

Aug-10

Oct-10
Jun-09

Dec-09

Jun-10

Dec-10
Jan-09
Feb-09

Jan-10
Feb-10

Jan-11
Feb-11
May-09

May-10
Jul-09

Nov-09

Jul-10

Nov-10
0
2005 2006 2007 2008 2009 2010
Turkey Ferrous scrap imports (tonnes)
Turkey China South Korea India Taiwan
Scrap HMS 80:20 $USD CFR Turkey

Source: BIR World ferrous report Source: TSI, SBB and Turkey Statistical Institute


Turkeys’ Role – ...and an important regional marker...

All prices $USD/t. Turkish price: TSI, all other prices SBB.
TSI HMS 80:20 CFR Turkey Shredded N.Europe Dom. Del. Shredded Rotterdam Export Shredded N.Am export FOB E. Coast
Apr-10 456 422.5 447.5 396
May-10 381 347.5 367.5 344.5
Jun-10 324 308.5 324 312.5
Jul-10 349 306 338.5 312.5
Aug-10 395 338.5 367.5 335
Sep-10 399 354.5 382.5 364
Oct-10 377 350.5 345 337
Nov-10 401 342.5 357 356.5
Dec-10 460 396 409 399
Jan-11 515 472.5 480 453
Correlation to TSI Turkish Scrap: 93.00% 92.10% 95.80%

550

500

450
$USD/t
400

350

300
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11

HMS 80:20 CFR Turkey Shredded N.Europe Dom. Del.
Shredded Rotterdam Export Shredded / N.Am export FOB E. Coast

All prices $USD/t. Turkish price: TSI, all other prices SBB. © Copyright The Steel Index

Turkeys’ Role – ...its diverse scrap sourcing affects many
domestic markets.
Other
1%

2009 MENA
8%
Estonia Finland
France
Denmark

Bulgaria Holland
CIS/Balkans
15%

European Union Belgium
England Sweden
50%
Italy Turkish buyers have
Austria
Latvia
Lithuania
Malta
increasingly looked
US/Canada Germany
26%
Slovenia
Romania Hungary towards their neighbours
Poland
for their scrap supply.

The shorter lead times
Other
2% and familiarity with
2010
MENA European business
7%

France Estonia
Finland practises have lead to
CIS/Balkans
Denmark
Holland
closer relationships and
Bulgaria
13%
better contacts.
England
Belgium Sweden
European Union
56% Poland Latvia
US/Canada
22% Germany Hungary
Austria
Lithuania
Romania
Italy
Slovenia Malta

Source: TSI, SBB and Turkish Statistical Institute © Copyright The Steel Index

Composition of Turkish Data Series
As with all TSI indices, our methodology requires both buy and sell-sides to
contribute data to the series.

The current % make-up of contributors to the Turkish series is as below.

/27

The Steel Index (TSI)

The Premier Price Information Service

Weekly Daily Weekly

Prices You Can Trust


Introduction to The Steel Index (TSI)

• Prices compiled from verifiable industry transaction price data.

• Transaction data submitted to TSI confidentially by companies
buying and selling relevant products (over 500 registered ‘data
providers’).

• Fully transparent and verifiable processes.

• Unique consistent methodology applied worldwide.

• Available on-line and by e-mail.
Unique, fact-based and verifiable approach used to
compile all reference prices.

Introduction to The Steel Index (TSI)


• The Steel Index was launched in 2006 specifically to respond to the
need for:
− more frequent
− more precise
− independent
…reference price information
• Ferrous prices are gathered in a robust, reliable manner.
• The index is produced from actual physical market transaction data
points: a volume-weighted average. It is not a journalistic assessment.
• Pioneering approach to compiling steel price information – using only
transaction data, suitable for indexing and price risk management.


TSI’s Underlying Methodology

Data
The Steel LEGAL Provider
Index
AGREEMENT

Submits price
data to TSI
using secure
online system
Buy/Sell High & low Outliers
balance excluded excluded

Final Step3 Step2 Step1 Transaction
Data Set Data Sample

Volume-
weighted
averages TSI Publish
calculated Step4 Reference
Prices


TSI’s Scrap Price Publication

• Submissions of actual physical spot market transactions are
submitted to TSI throughout the week, up until the deadline of 11.00
GMT each Friday.

• The data set is then subjected to an analysis to remove outliers,
with the remaining data points being volume-weighted to produce a
single average price. This methodology firmly grounds the number
in the physical market.

• TSI publishes scrap prices to our subscribers each Friday at 12.30
GMT (apart from UK public holidays, in which case prices are
published the following UK business day).

• Prices are published online and by email, with associated market
commentary and other relevant market information.


TSI’s Scrap Price Publication


Ferrous Scrap (Tsi) April 11

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