Understanding Price Differentials in Steel Markets
Steel price differentials represent the mathematical relationship between two interconnected commodities in the steel supply chain. These differentials—specifically between Turkey's imported steel billet and US exported ferrous scrap—serve as crucial market indicators that reveal underlying value relationships and provide transparency in an often opaque marketplace.
Price differentials in commodity markets function as numerical expressions of the value spread between related materials. In the steel industry, they quantify the premium one material commands over another, reflecting fundamental supply-demand dynamics, production costs, and logistical considerations.
"This strategic launch is designed to better delineate the relationship between these two competing steelmaking materials." – Amy Hinton, Fastmarkets (July 16, 2025)
The differential between Turkey's imported billet and US exported scrap is particularly significant because it connects two major global material flows—Turkey's position as a leading steel billet importer and America's role as a premier ferrous scrap exporter. This spread measurement provides critical insight into the relative value relationship between primary and secondary steelmaking inputs.
For market participants, these differentials serve as decision-making tools that go beyond simple price tracking. They function as barometers of market efficiency, revealing when materials are potentially overvalued or undervalued relative to their historical relationship.
Strategic Importance for Market Participants
Steel differentials provide strategic advantages across the entire supply chain. For traders, these metrics reveal potential arbitrage opportunities when materials become mispriced relative to each other. A widening differential beyond historical norms might signal profitable trading positions where the spread is likely to mean-revert.
For steel mills, differential tracking enhances procurement strategy by indicating optimal timing for raw material purchases. When differentials compress, mills might accelerate scrap purchases; when they expand, billet procurement might become more attractive.
Scrap processors and exporters rely on these differentials to optimize their pricing strategies and evaluate alternative markets. The ability to benchmark US scrap exports against Turkey's billet imports creates a valuable reference point for negotiation.
Financial analysts and industry consultants utilize these differentials to gain deeper insights into steel market dynamics, helping them forecast price movements and advise clients on strategic positioning within the volatile metals marketplace.
How Do Turkey Billet Import and US Scrap Export Markets Interact?
The Interconnected Steel Materials Supply Chain
Turkey and the United States occupy pivotal positions in the global steel ecosystem, with their respective materials markets deeply intertwined despite geographical separation. Turkey has established itself as one of the world's largest steel billet importers, while the US maintains its position as a premier ferrous scrap exporter.
This relationship creates a natural economic connection between the two markets. Turkish steel mills can choose between imported billet (semi-finished steel) and imported scrap as primary inputs for their production processes. This substitutability makes the price relationship between these materials critically important for procurement decisions.
The interaction manifests through large-volume transactions, typically ranging from 10,000 to 30,000 tonnes per shipment, with delivery terms specified as "cost and freight" (cfr) to Turkish ports. These substantial material flows create pricing ripple effects throughout the broader steel supply chain.
"The differentials offer the market a single reference price denoting the spread between Turkey import billet and US ferrous scrap." – Fastmarkets (2025)
When Turkish mills increase billet imports, it often signals reduced scrap purchasing, affecting US export volumes and prices. Conversely, when scrap becomes the preferred input, billet imports may decline. This competitive dynamic makes tracking the differential particularly valuable for market participants.
Market Fundamentals Driving the Relationship
Several key fundamentals drive the relationship between these markets. Production economics play a central role, as Turkish mills constantly evaluate the cost-effectiveness of billet versus scrap. When energy costs rise, scrap-based production (using electric arc furnaces) may become less competitive against billet, widening the differential.
Transportation and logistics factors significantly influence the spread between these materials. Shipping costs from US East Coast ports to Turkey, bunker fuel prices, vessel availability, and port congestion all affect the delivered cost of materials and, consequently, the price differential.
Seasonal patterns also emerge in this relationship. Winter weather in the United States can constrain scrap collection and processing, potentially tightening supply and narrowing the differential during the first quarter. Conversely, construction slowdowns in Turkey during certain periods may reduce billet demand, affecting the spread in the opposite direction.
Regional supply-demand imbalances further complicate this relationship. When Chinese steel exports surge, they can depress global iron ore impact, narrowing the differential with US scrap. Similarly, when US domestic steel demand strengthens, reduced scrap exports can widen the differential as Turkish mills compete for limited material.
The currency exchange rate between the US dollar and Turkish lira adds another layer of complexity. Fluctuations can quickly alter the relative attractiveness of materials priced in dollars, creating additional volatility in the differential.
What Are the New Turkey-US Steel Differentials?
Key Specifications of the HMS 1&2 (80:20) Differential
Fastmarkets has introduced the Steel billet import differential to HMS 1&2 (80:20) export index (MB-STE-0937) to provide market participants with a transparent reference point for this critical price relationship. This differential captures the spread between imported steel billet into Turkey and exported heavy melting scrap from the United States.
The technical specifications for this differential are precisely defined to ensure consistent measurement. The underlying billet quality reference applies to square billets measuring 120x120mm to 150x150mm, ensuring standardization across assessments. The material quality meets commercial grade specifications for carbon steel billet suitable for re-rolling into long products.
Volume requirements stipulate transactions ranging from 10,000 to 30,000 tonnes, reflecting typical cargo sizes in international trade. Delivery terms are specified as "cost and freight" (cfr) to main Turkish ports, establishing a clear geographical reference point for pricing.
The publication schedule maintains weekly assessment on Wednesdays at 2:30pm Eastern Standard Time, providing market participants with regular updates to inform trading and procurement decisions. This timing aligns with established assessment schedules for the underlying price components.
Payment terms incorporated into the assessment reflect standard market practices: 30% prepayment with the remaining 70% secured through letter of credit. This standardization ensures pricing continuity and comparability across different market conditions.
Key Specifications of the Shredded Scrap Differential
Complementing the HMS differential, Fastmarkets has simultaneously launched the Steel billet import differential to shredded scrap export index (MB-STE-0936). This second differential addresses another major scrap grade imported by Turkish mills, providing a more comprehensive view of material value relationships.
The shredded scrap differential maintains identical specifications regarding billet quality, using the same 120x120mm to 150x150mm dimension requirements. Volume requirements similarly span 10,000 to 30,000 tonnes, reflecting standard international cargo sizes for bulk vessel shipments.
Publication frequency matches the HMS differential with weekly assessments released on Wednesdays at 2:30pm EST. This synchronization allows market participants to compare both differentials simultaneously, identifying potential value opportunities between scrap grades.
The calculation methodology establishes the spread between Turkey's imported billet price and the US East Coast shredded scrap export price. This spread is expressed in US dollars per metric tonne, providing a clear numerical representation of the value relationship between these materials.
Contract structures incorporated into the assessment reflect standard payment terms (30% prepayment, 70% letter of credit) and typical delivery windows (4-6 weeks), ensuring the differential accurately captures prevailing market conditions.
How Are These Differentials Calculated?
Methodology for HMS 1&2 (80:20) Differential
The HMS 1&2 (80:20) differential follows a precise calculation methodology designed to deliver consistent, transparent results. At its core, the differential represents the mathematical spread between two established price benchmarks:
- Base Price for Turkey Billet Imports: Fastmarkets' Steel billet import, cfr main port Turkey (MB-STE-0116)
- Base Price for US HMS Scrap Exports: Fastmarkets' Steel scrap HMS 1&2 (80:20), export index, fob New York (MB-STE-0418)
The calculation takes the midpoint of the Turkey billet import assessment and subtracts the US HMS scrap export index value, yielding a differential expressed in US dollars per metric tonne. This spread quantifies how much more expensive billet is compared to scrap at any given time.
Data collection involves gathering information from a diverse range of market participants, including mills, traders, and brokers. Fastmarkets' pricing reporters verify transactions, bids, offers, and assessments through a rigorous process that includes cross-checking information from multiple sources.
Quality control measures ensure the integrity of the differential. The methodology includes procedures for handling outliers, non-standard delivery terms, and unusual payment conditions. When necessary, normalization techniques adjust non-standard data points to maintain comparability across the dataset.
The verification procedures incorporate a multi-layered approach, with senior editors reviewing assessment inputs before publication. This oversight helps maintain consistency and accuracy in the differential calculation.
Methodology for Shredded Scrap Differential
The shredded scrap differential follows a parallel methodology, with its calculation based on two key price components:
- Base Price for Turkey Billet Imports: Fastmarkets' Steel billet import, cfr main port Turkey (MB-STE-0116)
- Base Price for US Shredded Scrap Exports: Fastmarkets' Steel scrap shredded, export index, fob New York (MB-STE-0419)
The mathematical process mirrors the HMS differential, taking the midpoint of the Turkey billet import assessment and subtracting the US shredded scrap export index. This calculation yields the premium that billet commands over shredded scrap in US dollars per tonne.
Data verification follows identical protocols to ensure consistency across both differentials. Market sources provide transaction data, bids, offers, and assessments, which pricing reporters then validate through cross-checking and market confirmation.
Quality assurance protocols maintain the integrity of the shredded differential through data normalization, outlier identification, and editorial review. These measures ensure that the published differential accurately reflects true market conditions without distortion from anomalous data points.
The robust methodology provides market participants with confidence in the differential's accuracy and reliability as a decision-making tool for procurement, trading, and strategic planning.
What Value Do These Differentials Provide to Market Participants?
Benefits for Steel Mills and Producers
For steel producers, particularly those in Turkey with flexibility to use either billet or scrap inputs, these differentials deliver substantial strategic value. Mills can develop more sophisticated procurement strategies by tracking the relative value relationship between these competing materials.
The differentials enable enhanced raw material cost optimization by identifying the most economical input mix. When the billet premium over scrap narrows beyond historical norms, mills might shift their purchasing toward more billet; when it widens, they may favor scrap inputs. This flexibility can significantly impact production costs and profitability.
Production planning capabilities improve with better visibility into material price relationships. The weekly differential publication schedule allows mills to adjust their production schedules and input ratios based on current market conditions rather than lagging indicators.
"This strategic launch is designed to better delineate the relationship between these two competing steelmaking materials." – Fastmarkets (2025)
The differentials also support more effective hedging strategies. As mills gain clearer insight into the material price relationship, they can develop more sophisticated approaches to managing price risk across their raw material portfolio.
Perhaps most importantly, these differentials provide mills with a competitive advantage through superior market intelligence. By understanding the historical patterns and current position of these differentials, procurement teams can make more informed decisions than competitors relying on less comprehensive price information.
Advantages for Traders and Intermediaries
For traders and intermediaries operating in the global steel supply chain, these differentials offer several distinct advantages. The most immediate benefit is more transparent price discovery, as the differentials provide a single, authoritative reference point for the value relationship between these materials.
This transparency facilitates better identification of arbitrage opportunities. When differentials move outside their historical ranges, traders can position themselves to profit from the eventual mean reversion by simultaneously trading both materials in opposite directions.
Risk management capabilities improve substantially with access to these differentials. Traders can more accurately assess their exposure to price movements in related materials and develop strategies to hedge this risk more effectively.
Contract negotiation positioning strengthens with reference to published differentials. Traders can use historical differential data to support their pricing positions in negotiations with both suppliers and customers, bringing objective market data to bear on discussions.
These advantages combine to enable more effective trading strategy development. Rather than viewing billet and scrap as separate markets, traders can approach them as interconnected opportunities within a unified strategy framework, potentially uncovering value that would remain hidden in a siloed approach.
How Do Global Market Conditions Impact These Differentials?
Economic Factors Influencing Price Relationships
Global economic conditions exert significant influence on the Turkey-US steel differentials through multiple channels. Economic growth trends, particularly in construction and manufacturing sectors, drive underlying demand for both billet and scrap, affecting their relative pricing.
When global economic activity accelerates, demand for finished steel products typically increases, pulling up prices for both billet and scrap. However, the differential may widen during such periods as limited scrap availability constrains supply more quickly than billet production can be ramped up.
Regional manufacturing activity creates geographical demand variations that impact these differentials. Strong manufacturing performance in scrap-consuming regions like Turkey can tighten the differential as competition for available material intensifies. Conversely, manufacturing downturns may widen the spread as scrap demand weakens.
Construction sector performance particularly affects long products, which represent a major end-use for both billet and HMS scrap. When construction activity surges in Turkey and surrounding regions, the differential often narrows as mills compete for inputs to meet increased rebar and structural steel demand.
Automotive industry demand significantly impacts shredded scrap availability and pricing. During automotive production peaks, the generation of prime scrap increases, potentially narrowing the differential with billet. During automotive downturns, reduced manufacturing scrap can tighten supply and widen the differential.
Energy cost fluctuations directly affect the economics of scrap versus billet usage. When electricity prices rise sharply, electric arc furnace operations (which primarily use scrap) become less competitive against billet rerolling, potentially widening the differential. Conversely, lower energy prices may compress the differential by making scrap-based production more economical.
Geopolitical Considerations Affecting Differentials
Geopolitical factors create additional complexity in the relationship between these materials. Trade war effects and policies, particularly tariffs and quotas on steel products, can dramatically alter material flows and price relationships. US tariffs and inflation concerns, for example, reduced domestic scrap supply for export, affecting differentials with Turkish billet.
Regional conflicts affecting key shipping routes can quickly disrupt the normal price relationship. Tensions in the Black Sea region or Eastern Mediterranean can affect freight rates and material availability for Turkish mills, potentially widening differentials during periods of heightened risk.
Sanctions regimes targeting major steel-producing nations can redirect material flows and alter traditional price relationships. When key suppliers face restrictions, alternative sources must be found, often at premium prices that affect the differential calculation.
Currency fluctuations between the US dollar and Turkish lira create additional volatility in the differential. When the lira weakens significantly against the dollar, the purchasing power of Turkish mills declines for dollar-denominated imports, potentially suppressing both billet and scrap imports but affecting their relative attractiveness.
Regulatory changes affecting material movements, such as new environmental restrictions or quality standards, can shift the competitive balance between billet and scrap. Stricter environmental controls on scrap processing or shipping can reduce availability and potentially widen the differential with billet.
What Historical Patterns Can Be Observed in Similar Differentials?
Seasonal Trends and Cyclical Patterns
Steel differentials typically exhibit predictable seasonal variations that create recurring opportunities for well-informed market participants. Winter months in the Northern Hemisphere often see compressed scrap collection due to adverse weather conditions, particularly in the US Northeast. This seasonal constraint typically widens the billet-scrap differential during the first quarter as scrap supply tightens.
Conversely, summer construction peaks in Turkey and surrounding regions tend to increase demand for both materials but often favor scrap due to its faster processing time. This seasonal pattern frequently narrows the differential during the second and third quarters as mills compete for available scrap to meet peak production requirements.
Cyclical economic patterns create longer-term trends in the differential. During expansionary phases, the differential often narrows as demand for all steelmaking inputs rises. Recessionary periods typically see the differential widen as reduced construction and manufacturing activity decreases scrap generation more quickly than it affects billet production capacity.
Long-term trends in material value relationships reveal evolving industry dynamics. The gradual shift toward more electric arc furnace production globally has increased structural demand for scrap, generally compressing the historical premium that billet commanded over scrap in previous decades.
These differentials also show strong correlation with other commodity price movements, particularly iron ore trends and coking coal. As these steelmaking inputs rise in price, the billet premium over scrap typically widens since billet production incorporates these costs more directly than scrap-based steelmaking.
Case Studies of Market Disruptions
The COVID-19 pandemic provided a dramatic case study of how supply disruptions affect steel differentials. When manufacturing activity suddenly contracted in early 2020, scrap generation plummeted while billet production facilities continued operating at reduced capacity. This supply imbal
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