Market Overview
The upward trend in iron scrap prices is becoming increasingly pronounced. On the 30th, Tokyo Steel raised its scrap purchase prices at all of its plants by approximately ¥2,000 per tonne. As a result, the benchmark H2 grade has broken through the ¥50,000 per tonne threshold. With this move, ¥55,000 per tonne is now coming into view as a realistic near-term target on the path toward the bullish scenario of ¥60,000 per tonne per tonne for H2 grade that this author had been projecting.
However, behind this surge in raw material costs, a particular set of risks is beginning to materialise in the steel product market. With geopolitical risks and currency movements intertwining, the steel industry is being forced into an unprecedented and highly complex navigation.
1. The Spillover from the Hormuz Shock into the USD/JPY Exchange Rate and Outlook
The yen weakness, which is one of the factors pushing up scrap prices, is likely to be further prolonged and entrenched by the Hormuz Shock. The exchange rate is projected to move toward the following mechanism and structure: a structural yen weakness (stable trading in the ¥160 to ¥170 per dollar range, with the possibility of further yen depreciation depending on the phase).
[USD/JPY exchange rate (TTS) trend chart]
[Tokyo Steel Tahara land-based H2 purchase price trend chart]
- Widening trade deficit due to higher resource prices: The surge in crude oil and natural gas prices caused by tensions in the Strait of Hormuz is fatal for Japan, which relies on imports for the majority of its energy. Real demand for dollar buying (yen selling) swells, pushing the exchange rate powerfully in the direction of yen weakness.
- Global inflation and the entrenchment of interest rate differentials: If energy-driven inflation reignites globally, the US Federal Reserve and others will have no choice but to maintain high interest rate policies. The Japan-US interest rate differential will be difficult to narrow, and speculative yen-selling pressure will continue as well.
2. The 'Cascade Steel Supply' Triggered by the China-Iran Situation
While raw material costs remain elevated, the steel product market is facing a 'risk of oversupply originating from China.'
Under normal circumstances, China ships approximately 20 million tonnes of steel products to Iran annually, but the deteriorating situation, including the Hormuz Shock, has rendered this export route effectively non-functional. China, which is already seeing domestic demand cool due to its own real estate downturn, has no capacity to absorb this surplus. There is an extremely high probability that the displaced steel will flow into Asian markets, including Japan, as cheap offers — a cascade shipment effect.
3. Impact on Steel Manufacturers' Performance (EAF vs. Blast Furnace)
This distorted decoupling phenomenon of 'high raw material (scrap) costs, and low product (steel) prices' will have a serious impact on the earnings of domestic steel manufacturers — a margin squeeze, or compression of profit margins.
- Impact on EAF producers (Tokyo Steel, etc.): [Severe] Since iron scrap is their primary raw material, they take a direct hit from rising scrap prices. Normally, they would pass the cost increase on to product prices through price hikes, but cheap Chinese material flooding the Asian market acts as a cap, preventing price increases from taking hold in the market. There is a high risk that the spread — the price gap between raw materials and products- will contract sharply and earnings will be severely squeezed.
- Impact on blast furnace producers (Nippon Steel, JFE, etc.): [Moderate to Significant] Since iron ore and coking coal are their primary raw materials, the direct damage from high scrap prices is more limited compared to EAF producers. However, the surge in logistics costs due to the Hormuz Shock and the increase in import costs due to yen weakness are unavoidable. Furthermore, the inflow of cheap, commodity-grade steel from China also acts as a drag on blast furnace producers' product prices, so this is by no means someone else's problem.
4. Market Forecast Data (Scenarios for the Next Six Months to One Year)
| Phase | Scrap Price (H2) | Asian Steel Market | USD/JPY Forecast | Overall Impact on Steel Industry |
| Current Situation | Reaching ¥50,000/t | Soft (sluggish demand) | ¥155–160 range | Difficulty passing through cost increases becoming apparent |
| Phase 1 (1–2 months out) | Rising to ¥55,000/t | Growing downward pressure (Chinese material inflows intensifying) | ¥160–165 range (resource prices, trade deficit) | Profit decline concerns for EAF producers; spread compression becomes pronounced |
| Phase 2 (3 months to half a year out) | ¥60,000/t in sight | Prolonged stagnation (supply glut normalising) | ¥170+ range (inflation remaining elevated) | Industry restructuring and production cut pressure; operational adjustments due to below-break-even economics |
Summary
As iron scrap charts an upward trajectory toward ¥60,000, the 'displaced Chinese steel with nowhere to go', created by yen weakness and geopolitical risk, will continue to cap the steel product market. Market participants and investors need to exercise the utmost caution not just regarding the surface-level 'high raw material costs,' but also toward the risk of earnings compression arising from the failure to pass cost increases through to product prices.
(IRUNIVERSE YT, Translated by Mehmet Gönültaş)
