In this Credit Suisse Connections Series report, our analyst teams examine the impact of rising steel scrap supply on the value chain through detailed scenario-based analysis of the global ferrous scrap market and the future role of ferrous scrap in steel pricing. We also quantify the impact of falling scrap prices on other sectors such as mining, utilities and capital goods— identifying key beneficiaries—and gauge the potential positive impact on the environment.

China’s industrialisation and the push for higher global environmental standards set to change how steel is produced: We expect the entire industrial value chain (from raw materials to the logistics sector) to see disruption over the next decade with the shift towards steel scrap. We believe this will also have a positive ESG impact, reducing global carbon emissions by 740-1,430mt by 2030 (vs 2019), cutting the current total CO2 emissions from steel by about 20-40%. We would expect companies with high exposure to blast furnaces or virgin raw materials to continue to de-rate as the theme materialises.

We view scrap as the material of choice for future steel production and an incremental cost driver for raw materials: Although the sharp rise in scrap supply and the long-term challenges facing the steel and mining industries are not new, we believe the market is still underestimating the magnitude of the impact on the entire supply chain. We estimate steel scrap supply will increase 22% by 2025 and c66% by 2030, replacing 213mt of iron ore supply—about 14% of the seaborne iron ore market. By 2030, steel scrap will likely have replaced iron ore and coking coal as the major cost drivers for steel prices. While the outcome will depend on many variables, our scenario analysis indicates that if steel scrap prices fall sharply by 2030 (CSe: US$120/t from US$430/t currently), the iron ore price could fall as low as US$50/t, >70% below current levels.

Key stocks exposed to a long-term scrap surge: Amid excess steel scrap supply, companies with high Electric Arc Furnace exposure—e.g. Nucor (O/P), STLD (O/P), Gerdau (N) and Hyundai Steel (O/P)—or equipment providers specialising in EAF technology look better positioned. For iron ore miners such as Rio Tinto (O/P), BHP (N), Vale (O/P) and FMG (O/P), a structural fall in iron ore prices and volumes hurts earnings.

In capital goods, lower steel input costs should benefit Electrolux (O/P), KONE (O/P), Schindler (O/P) and Caterpillar (O/P). Metso Outotec (O/P) and Alfa Laval (O/P) could be at a disadvantage owing to their higher bulks exposure.