Mike Marley Shredded Power #44 - Shanghai Metals Market (SMM)

By Paul Ploumis (ScrapMonster Author)

May 15, 2016 08:08:34 PM

All but the fluff – Commentary

Ferrous scrap prices rose again this month – following the across the board $50 increases from last month – but the gains among the grades were not uniform. Prices paid for bundles and busheling climbed by as much as $40 per gross ton in many regions while the increases for shredded scrap and other obsolete grades ranged from $15 to $25 per ton.

This disparity helped busheling and bundles regain their price supremacy over shredded scrap, a position they have not held in over a year. Strong sales of domestic sheet steel products have generated more demand for scrap, especially busheling and bundles. These grades account for as much as 60% of the metal that EAF-based sheet mills use to make their products.

Also, the mills will soon face seasonal cutbacks in the output of industrial scrap by their biggest suppliers – the auto plants and auto component makers. These manufacturers usually shut down for a week or more for summer vacation in either June or July. They use this downtime to retool their production equipment to make next year’s cars. During that hiatus, sheet steelmakers will lose about 25% of the industrial scrap supply in what has become a fiercely competitive sector of the ferrous scrap market.

Last month’s $50-per-ton increase had no impact on the overall supply of busheling and bundles. Nor will this month’s gains. Higher prices won’t generate an increased supply of bundles and busheling. That’s determined by the output of manufacturing industries. Yet some sheet mills and their brokers continue to search for more. They want enough prime industrial scrap on hand or enroute to their mills before the auto industry shutdowns begin. The mills have gotten what they need to fill this month’s steel orders, but they will readily accept more industrial scrap if it’s offered at current prices.

Higher prices are also helping dealers to restock the obsolete scrap reservoir.

In addition to needing more industrial scrap, U.S. mills needed to raise prices to revive the moribund obsolete scrap supply chain. It was low prices, the result of almost six consecutive months of declines in the mill buying prices last year (and not the winter weather), that had left the nation’s obsolete scrap reservoir at such low levels, according to several dealers. Many contend that they didn’t have extra scrap to offer to the mills in the past two or three months. That may be true, said a Chicago area broker, but some dealers also have been expecting a scrap price rebound. Because of the strength of flat-rolled steel demand and prices, he said they held scrap off the market with the hope that scrap prices would rise last month and again this month.

Now that some of last month’s higher prices have begun to trickle down the scrap supply chain, shredders are able to boost their output. First, said a shredder operator in the Southeast, he saw more car bodies coming across the scale at his yard, a sign that prices have reached levels where auto wreckers were willing to unload their inventories. Moreover, he believes the higher prices are now drawing out more demolition scrap and reinvigorating the peddler trade. That’s why mills in his region and the Midwest were able to buy heavy melt and shredded scrap with only modest increases of $15 or $20 per ton, he said.

But some domestic mills must also deal with a surge in export sales to steelmakers in Turkey and several Asian countries. The likelihood that more heavy melt and shredded scrap could be headed overseas and not to melt shops here persuaded smaller mills along the Eastern seaboard to raise their offers for heavy melt, shredded and five-foot plate and structural scrap by $50 per ton – double the increase the inland mills paid for these grades.

Price spreads for the same scrap grades are widening from region to region.

The divergent increases for industrial and obsolete grades were not the only price variances seen this month. Average mill-delivered prices are widening from one region to another. In the South and Southeast, where industrial scrap is in chronic short supply and normally commands a higher price, mills paid local suppliers more than $300 per ton for busheling, which is up by about $40 per ton from last month. By comparison, in Detroit where this scrap is more bundant, some mills paid $270 per ton for busheling. That increase of $30 per ton widened the price differential between these regions.

Higher prices prevailed elsewhere in the Midwest. A flat-rolled mill paid $295 per ton for No. 1 dealer bundles, $10 per ton higher than it paid for shredded this month. But that also included a $5-per-ton premium over its offers for busheling. Busheling is usually deemed a more desirable form of industrial scrap by EAF-based mills because it melts at a faster rate than bundles. But one Midwest trader said some mills wanted more bundles this month. Their goal may be to charge more densified scrap into their EAFs to increase raw steel output, he said.

While steelmakers managed to limit the increases for obsolete scrap and held industrial scrap prices under $300 per ton in Midwest markets, it is yet to be determined whether they will be able to slow the upward spiral in June. One integrated sheet producer hiked its price for hot-rolled coil to $600 per net ton this month, up almost $80 per ton from the prevailing price levels. That has encouraged other flat-rolled mills to cross out the current figures on their price tags and write in new, higher numbers.

If that $600-per-ton price sticks, a Midwest trader said, scrap suppliers will expect them to share their new wealth next month. For the EAF-based mills, he said, scrap costs are less than $300 per ton and it costs these mills about $150 per ton to convert that scrap into a hot-rolled coil. “That leaves them with a gross margin of $150 per ton,” he said. “Scrap dealers will do the math and figure out what they should be getting.”

Some Midwest mills paid as much as $285 per ton for shredded scrap from suppliers in neighboring regions, but limited their spending at local yards to about $275 per ton. Those springboard offers included higher freight costs, but those buys also helped to minimize the local demand and limit pressure on prices. Another trader said the higher shredded offers also were aimed at discouraging shredders in Ohio and western Pennsylvania from selling their output to East Coast exporters.

Some dealers in this region had expected the offers from the docks would surpass what they could obtain from local mills and those elsewhere in the Midwest. These scrap yards and shredders depend on mills that are serving weaker steel markets like the oil and gas drilling industries. Steelmakers there are not seeing the same resurgent demand that flat-roll mills are enjoying.

But any hope of playing the exporters off against the mills in the Midwest failed to materialize. These higher price expectations were based on reports that a bulk cargo exporter had paid one Midwest scrap supplier $295 per ton for heavy melt, but that turned out to be an emergency buy to fill one offshore order. That exporter and others have now lowered their offers, he said, probably because they are trying to preserve margins and maybe unsure that export scrap prices will continue to climb.

Offshore scrap prices may have peaked, and China’s steel exports are rising.

Prices of shredded scrap rose to $335 per tonne delivered to Turkish port. That is $5 per tonne higher than the price of 80/20 heavy melt, the main staple of the Turkish mills’ scrap diet. Backing out ocean freight and stevedoring expenses leaves the shredded price delivered to the U.S. East Coast piers at about $305 per tonne.

Both U.S. and European scrap exporters have seen a steep and steady rise in Turkish buying prices in the past month, but some now are worried that export prices have peaked. An East Coast trader noted that some Turkish mills turned down new offers at higher prices earlier this week because they may be looking for cheaper billet from China.

Chinese billet prices had risen to $450 per ton delivered to a Black Sea port, but have now slipped to $420 per tonne and could fall even further. Imported 80/20 heavy melt at $330 per tonne is still competitive with Chinese billet at those price levels and steel export demand in Turkey is still strong, he said, but lower prices and more offers of Chinese billet have driven scrap prices lower in some Asian markets.

Another cloud is the absence of the Indian traders who buy shredded scrap in containers along the East and Gulf Coasts. One East Coast shredder operator said Indian offers had risen to as high as $285 delivered to the U.S. docks, but now many have pulled out of the U.S. market altogether. They may be worried that they would have to bid up shredded prices in order to take away supply from U.S. mills and the bulk cargo shippers, while simultaneously facing the prospect of renewed efforts by Chinese steel exporters to flood the Asian markets again.

U.S. Shredded Scrap Thermometer: Shredded gets a spring cold.

“Nothing brings out more scrap like higher prices” is one of the oft-repeated mantras in the scrap trade, and it was shown to be true again this month. Some shredders in competitive areas were quick to pass along the increases obtained from the domestic mills last month, possibly because they desperately needed more feedstock, while others wanted to be able to offer more tons to the mills this month to boost their revenues. Or they simply realized that churning out fragmented scrap five or six days a week was better than one or two days as was the fate for some shredders last year. However, paying higher prices has drawbacks:

Many shredders have discarded any notion of making money on the shredded scrap they sell to steel mills and foundries, and focus on recapturing the more valuable aluminum and copper and sell it. Yet even here, the prices and demand for Zorba and other shredder-produced nonferrous metals have tumbled and provide shredders with less profits.

There are too many shredders in the U.S. Those within a few miles of each other are prone to engage in price wars for the local supplies of junk cars and other shreddables. That one has produced more tons than its nearby rivals this month might be an achievement as long as the mills need the tons. Long products steelmakers are the biggest consumers of shredded scrap, but several of these mills aren’t busy these days and aren’t buying much shredded.

Some steel mills have their own shredders and operate these as cost centers dedicated to one mill. In that role, they have an advantage over rival scrap dealer-owned and operated shedders. They aren’t required to produce profit and can spend more for feedstock if the mill wants more shredded, driving up feedstock prices in that area.

Steelmakers were able to buy all the shredded they needed this month without having to hike prices as much as some had anticipated. But shredded is still a commodity in which the supply is determined by price. That’s a key wild card in the scrap supply game. Others in the deck include:

Without adequate buying prices, feedstock suppliers will hold that material off the market, as was the case for several months last year and earlier this year. What’s worse, even when mills and their brokers realize that they need to raise prices to draw out more supply, it can take several months and a few price hikes to restart the flows.

Now that shredded is cleaner and accepted at more mills, it is often the “go to” material for the mills when they can’t get other comparable grades like busheling, and plate and structural scrap.

NASDAQ OMX Commodities (Stockholm) has rescheduled the start of trading in the Midwest US shredded scrap index futures to the end of the second quarter 2016. The contract will trade in 20-gross ton units with the prices settled on the 11th day of each month against the TSI Midwest US Shredded Scrap Index. For additional information about shredded futures trading, contact John Conheeney at WSEM. His phone number is 201-503-0922 and his email is jconheeney@wsemgroup.com.

Note: Each issue, Mike Marley gives his opinion on the one-month steel scrap price outlook. He explains the key reasons for his view and highlights the “wild cards” that might cause him to be wrong.

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