Steel firms taking a massive bet on furnaces fed on cheaper scrap metal rather than more traditional iron ore could find themselves in trouble as scrap supplies become both more expensive and increasingly difficult to find.
Around 40 percent of the world's new steel capacity being built this year will be in the form of electric arc furnaces, double the share built last year. These so-called mini-mills are being forced to scour the world for new sources of scrap steel as traditional sellers like Japan and Russia reduce offers.
Scrap prices have doubled this year and are set to rise further, and unlike larger blast furnaces, which rely mainly on iron ore bought under long-term contracts with prices agreed once a year, mini mills are exposed to the volatile spot market.
"Aggressive capacity expansion by mini mills globally from Turkey to Russia and to South Korea will push scrap prices higher and that means they will be exposed to great risks," said Moon Jung-up, an analyst at Daishin Securities.
"They'll be able to pass on higher material costs, but when economies slow, it will be small mills, rather than bigger blast furnaces, who will be dealt a bigger blow."
The proponents of mini mills point out that they cost around a fifth as much as large mills to build, making it easier to add extra capacity to ease the current steel supply bottleneck.
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