Higher conversion costs resulting from the graphite electrodes shortage will place increasing downward pressure on scrap prices. This is because EAF mills will look to contain variable costs in anticipation of falls in steel prices in the near future, according to consultancy CRU.

An acute electrodes shortage is also seen sharply reducing demand for scrap as EAF-based steel output declines.

Although EAF mills consume the majority of electrodes, producers using oxygen converters are also exposed to electrodes where they use arc-based, or ladle furnace route, secondary steelmaking.

Chinese electrodes production capacity closures have shifted production elsewhere, switching demand from coal tar pitch to calcined petroleum coke (CPC), the main source of carbon for needle coke outside Asia. However, there are only a small number of CPC producers globally as the quality of the crude oil required to produce needle coke limits supply.

Electrode spot prices have skyrocketed this year, with the latest prices heard at around $35,000/tonne, the equivalent of $60-85/t of liquid steel; an eighteen fold increase. 

CRU does not believe steelmakers’ attempts, such as in Europe, to cover electrodes via a surcharge are sustainable as this is possible only during a period of high global steel prices. “Steel prices are already falling in China and we believe these falls will accelerate in the near-term, through to early next year,” CRU says in a note seen by Kallanish.

EAF mills will put greater downward pressure on scrap prices to lower variable costs, using the threat of substituting scrap with billet sourced from BOF-based mills in the CIS and China, CRU says. “This means that scrap prices will fall faster than steel prices in the near-term,” CRU explains. “That said, there is some risk that scrap supply could become more restricted as inflows of the material slow.”

There is sufficient room for steel prices to fall to levels that, in conjunction with electrodes costs, could see scrap decline to $200/tonne cfr Turkey. This would be a level that would see scrap inflows dry up significantly, CRU continues. At this level scrap price falls would ease and mills could turn to merchant billet again. Chinese billet exports may be far less available than in 2014-15, but the CIS could absorb the demand.