Drop in steel prices works well in favour of Pakistan

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VIAUsman Hanif
SOURCEThe Express Tribune
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KARACHI: With inflation on the rise and no respite in sight, it is interesting to note that prices of imported steel scrap are going down due to a price crash in the international market following the US-China trade war. However, this development works well in favour of Islamabad.

“International steel scrap prices have crashed over the past five weeks by more than $50,” said JS Research analyst Arsalan Ahmed. Moreover, scrap prices have dropped by almost $100 per ton, down 30% in the past nine months, to $238 per ton, he added.

Steel scrap is a raw material for rebar steel, which is used in construction. Pakistan produces 4.5 million tons of rebar steel, of which around 3.5 million is made of scrap steel, locally known as sarya.

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“In the last three months, steel prices went up Rs90,000 to Rs112,000. However, gradually this price will go down as the price impact from the international market to the local market comes with a lag, as companies keep an inventory of at least two months,” said Ahmed.

“We expect the companies will pass on 50% to 60% price impact to consumers,” he said. “The price decline can be attributed to US import tariffs on steel Section 232, on which China retaliatory slapped tariffs on US steel scrap and by other countries.”

Besides the US-China trade dispute, weak global demand has also played role in falling prices, said the analyst.

From July 1, 2019, China has banned st’eel scrap import in order to lessen soil pollution, which is caused by steel scrap processing along with other solid waste. Two years ago, China had told the World Trade Organization (WTO) it would stop accepting shipments of scrap. China was one of the biggest scrap importers. When it stopped scrap coming from developed countries, the supply diverted to developing countries like Pakistan.

This battle has proved a success for the country, as the import of steel scrap fell to negligible levels in August 2019, according to customs figures of China, said the analyst. After this restriction, domestic prices of steel scrap have stayed high, averaging $373 per ton in September 2019 compared to $246 per ton at the London Metal Exchange, which would mark a disparity of $126 per ton.

Although Chinese mills can obtain an environmental license for scrap import, since the July 1 restrictions, only 20,918 tons of scrap has been allowed to enter the country, he said. Last year China’s total steel scrap demand was 188 million tons.

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Due to the US-China trade war and weak global demand scrap prices are expected to remain sideways or slightly up from existing levels of $238 per ton during the fiscal year 2020, said the analyst.

“Due to the decline in international price, Pakistan’s local steel industry has gotten a positive impact,” said Hammad Akram, an analyst at Topline Research. “The positive impact will appear in these companies’ books in 90 days as they procure three months earlier.” 

Published in The Express Tribune, October 8th, 2019

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