UkrMet: The first shipments of scrap can be shipped to Turkey in March

Against the background of the registration of a bill to extend the increased export duty on scrap by 5 years, Ukrainian exporters may return to foreign markets to support scrap collection in the country and minimize their losses. In the opinion of Konstantin Bass, Chairman of the Supervisory Board of the UKRMET Group of Companies, the January overstocking of key consumers with this type of raw material prompted this to a greater extent, as a result of which Ukrainian metallurgists began to set quotas on purchases and urgently reduce prices without adhering to export parity. If the procurement policy of metallurgists in the near future does not undergo changes, it is likely that they will come out with proposals for the supply of scrap to the markets of Turkey, Moldova and European countries.

 

- Konstantin Anatolyevich, how justified are the demands of metallurgists today regarding the need to extend the duty on the export of scrap? Has the problem of scrap shortage worsened in Ukraine?

- We, like all Ukrainian scrap collectors, believe that there are no grounds for this initiative of metallurgists. Firstly, the duty allows our metallurgists to buy raw materials by $ 100-150 below the prices of European and Turkish producers and thereby receive excess profits. Whereas scrap collectors incur losses due to low purchase prices for scrap, which in turn leads to a decrease in scrap collection in the country.

Secondly, today in Ukraine there is a colossal surplus of ferrous scrap. And a striking example of this is the fact of scrap procurement: with an increase in purchase prices, its volumes in January - in the off-season - reached record levels over the past 10-12 years - about 300 thousand tons. Yes, the factor of a sharp increase in scrap quotations in foreign markets played here, which led to the establishment of scrap prices by Ukrainian metallurgists at the level of UAH 9000 / t. At the same time, if metallurgists are interested in scrap and offer adequate purchase prices for raw materials in accordance with changes in scrap quotations on foreign markets, the procurement of scrap and the volume of its supply increase.

But Ukrainian metallurgists do not need scrap in such volumes as it was, for example, in January, on an ongoing basis, since after large purchases, from February 1, they began to "close the gates" of their factories or set quotas on supplies, while simultaneously urgently reducing prices not adhering to payment agreements, thereby increasing the debt to suppliers. In fact, metallurgists in a short time reduced the price by more than UAH 2,000 / t, setting it much lower than the export parity of the market. In addition, if, according to the contractual terms, consumers must notify the scrap supplier at least three days in advance of the change in pricing, then in February notifications were received 24 hours in advance.

 

- How intense was the flow of scrap that it led to the "closing of the gate"? And when, according to your estimates, will the market return to its usual mode of operation?

- As of today, according to our calculations, scrap stocks, for example, at Zaporizhstal, allow us to work stably for several months. AMKR has scrap stocks at the level of monthly consumption, Interpipe does not have enough space for storing scrap, and they are forced to use warehouse space at scrap collection sites.

Accordingly, we assume that, at least in the near future, scrap purchases by Ukrainian metallurgists may remain at a reduced level, which in turn will have a negative impact on scrap procurement. Moreover, in March alone, Ukrzaliznytsia put up for auction more than 80 thousand tons of ferrous scrap.

- What are the Ukrainian scrap collectors planning to do in such a situation, and your company in particular?

- Ukrainian exporters of scrap metal, and our company is no exception, are considering the option of returning to export in order to minimize their losses and prevent scrap collection from stopping in the country. Probably coming out with proposals for the supply of scrap to the market of Moldova and European countries, plus a return to ports - for the export of raw materials to Turkey. Negotiation and organizational work for the resumption of shipments of scrap by sea in the process. And we do not exclude that the first consignments of raw materials may be shipped to Turkey in March.

 

- But why are you considering a return to export only now, if the rise in prices on foreign markets started in November-December, and since then quotations have remained very attractive?

- Over the years of high duties, we, like many exporters, “left” the ports so as not to incur additional costs and observed the situation for some time, wishing to be convinced of its long-term nature. Because it is not advisable for large exporters to restore all logistics, rent transshipment areas for the sake of several transactions. In addition, Ukrainian metallurgists maintained relative parity with export prices and paid for the supply of raw materials on time. But since February, the situation has changed.

 

- How do you see the prospects for foreign markets - can we talk about a stable renewal of exports?

- Markets continue to recover, respectively, there is a demand for scrap. After China returned from the New Year celebrations, prices in foreign markets are showing an increase. So, after falling by almost $ 100 / t in scrap prices, today they are approaching the peak values ​​of December-January. Based on the current situation, we see a trend towards maintaining high scrap prices - at about $ 450-480 / t at least until the beginning of summer. And then we do not exclude that the seasonal factor will also provide support.

As a result, for at least the next 2-3 months, the export direction for scrap sales will remain attractive, and will provide an opportunity to support the Ukrainian scrap collection industry, while the demand for scrap in the domestic market is expected to be reduced.

 

- You mentioned the proposals to Moldova and European countries. In accordance with the Association Agreement between Ukraine and the EU, the duty for such supplies was much lower (5 EUR / t), however, to apply such a tariff, a EURO 1 certificate is required, with the registration of which there were serious difficulties. Has the situation changed now?

- Yes, indeed, there are difficulties in obtaining the EURO 1 certificate in our country. It was simply not received by any company when exporting scrap ferrous metals by water transport, since this is the most common logistic scheme for deliveries to foreign markets. Customs does not issue it without giving reasons. Apparently, there is a ban on its issuance ... But the current level of prices in foreign markets is beneficial even if the duty is paid 58 EUR / t.

 

- Since January this year, China has canceled import duties on scrap, will this direction become attractive for export from Ukraine?

- China is not interesting because it is far away and the freight is expensive. It is easier and more profitable to export scrap from Ukraine to Turkey, where the price of raw materials is currently quite high. In addition, this market is traditional for us, understandable and with well-functioning sales channels and well-functioning logistics.

- How effective and profitable will export be compared to sales on the domestic market, taking into account the effect of the duty? And what should be the conditions in the domestic market so that scrap collectors are not interested in exporting raw materials?

- Simple calculation. Exporters' costs, taking into account the customs duty in EUR58, freight and port transshipment - about $ 110. At the beginning of March, the scrap price in Turkey was $ 450 / t. Accordingly, the parity price on the Ukrainian market, in order for the exporter to not be profitable to export raw materials outside the country, should be 340 $ / t or about 9400 UAH / t. And on March 1, the purchase price of scrap by Ukrainian metallurgists was set at 6700 UAH / t. Accordingly, a completely logical question arises: why work with Ukrainian metallurgists, if it is more profitable to pay the state duty in EUR58, ship scrap to Turkey and at the same time earn decent money per ton.

If the position of metallurgists changes and purchase prices rise in the near future, approaching export parity, large scrap collectors are ready to continue working in the domestic market. At the current levels of export prices for scrap, purchase prices on the Ukrainian market must be increased by 800-1000 UAH / t, bringing them closer to 8000 UAH / t.

 

- What volumes of export from Ukraine can we talk about? And won't the resumption of exports be a pretext for toughening restrictive measures?

- Everything is possible in our country: from increasing the duty to 70-100 EUR / t up to a ban on the export of scrap from the country. At the same time, in our opinion, the total export volume will not exceed 10-15% of the total scrap collection per month.

 

- If, nevertheless, the duty is extended, what will be the consequences for the market and scrap collection industry?

- We will continue to stagnate the market and reduce scrap procurement, which has been observed since 2016. By the end of the year, scrap collection may amount to approximately 2.5-2.6 million tons, and this is not enough to cover the needs of metallurgists.

Other countries also have examples of the consequences for the market from the application of regulatory measures. For example, Kazakhstan introduced a ban on the export of scrap, and scrap collection decreased by 3 times, because there was no adequate price, and it became unprofitable to work. We have the same thing. Metallurgists say there is not enough scrap. And this is not so, there simply must be a price for scrap that would cover the costs of its collection and allow scrap collectors to earn and develop. And costs have increased today: fuel, wages, logistics.

There is a certain point in the cost of collection, which in our country is at the level at which, given the low selling price of scrap, it is almost impossible to earn. And the low price of scrap is ensured by means of a duty.

 

- Does the company see a compromise solution for the current situation?

- If we consider the dynamics of the export shipment of ferrous scrap over the past 10 years, then the export of scrap for the most part did not exceed 10% of the total scrap collection. The sharp surges that were observed in 2014-2015 were caused both by a decrease in scrap consumption in the country while maintaining sufficiently high volumes of its procurement, and by the desire of players to realize maximum volumes on expectations of an increase in duty.

At the same time, I believe that there is a duty, but it should be much lower - at the level of 10-15 EUR / t. This would stimulate metallurgists to maintain export parity and purchase scrap in accordance with world prices. And scrap collectors - to increase the volume of scrap collection or keep them at the level necessary to meet the needs of the domestic market and the ability to export up to 10% of scrap. And only then will scrap collectors be able to earn and develop.

Let's say the duty will be reduced to 15 EUR / t instead of the current 58 EUR / t. The scrap price will rise by 43 EUR / t, or about 1400 UAH / t, which will allow a much larger number of scrap collectors to participate in the scrap collection process. As a result, with a reduced duty, scrap collection can reach 3.5-3.6 million tons, of which 350 thousand tons - about 10% - can be exported. The remaining 3.2 million tons would absolutely satisfy the needs of all metallurgists. But at the same time, the cost of these volumes of scrap becomes more expensive by EUR138 million. And precisely because of the EUR138 million increase in the cost of raw materials, metallurgical enterprises jointly advocate the extension of the duty.

 

Source: magazine "Metal-Courier" No. 1 (50) / 2021