By Paul Ploumis (ScrapMonster Author)

March 10, 2016 11:36:34 AM

WSEM - World Steel Exchange Marketing

Mike Marley’s Shredded Power #35

Ferrous prices continue to rise because of late buys.

March 8, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary

Steelmakers started the week by trying to keep prices at the same level as last month, but that didn’t last. By midweek, the largest scrap users were paying up $10 per gross ton not only for the scarce supplies of obsolete grades like shredded, and heavy melt, but also for busheling and bundles. Those gains were soon replaced with even higher offers as the competition for melt material heated up. Some mills were paying $15 and $20 per ton more and calling on dealers in distant regions. These springboard buys hiked some mill-delivered prices by more than $40 per ton.

Stronger demand for flat-rolled products, particularly cold-rolled and galvanized sheet, as well as tight supplies of all grades of scrap, are driving prices higher. Steel supply has tightened up, in part because of the new tariffs on some imported flat-rolled steel products. Also, the shutdown of sheet production at some integrated mills has limited the supply. Steel users and service centers looking for more domestic sheet products are shifting to the EAF-based sheet makers. Order lead times for some cold-rolled and galvanized sheet products are out as far as eight weeks, according to industry sources.

Another indicator of how much demand has grown is the widening price spread between these higher-value sheet products and hot-rolled coils. There is now a $170 per net ton price differential, up from the traditional $100-per-ton spread. Some domestic mills have hiked prices for all sheet products. Higher scrap prices are being cited as one reason for the increases.

Steelmakers expect the new $600 per ton base price for cold-rolled and galvanized to stick because of the strength of demand, but are having a tougher time maintaining hot-rolled price tags at $430 per ton. Some industry sources said $400 per ton is still the prevailing price in many regions. Failure to see price gains in hot-rolled could squeeze margins. Some mills will spend $240 per gross ton for scrap bought from distant yards this month.   With the conversion cost at the most efficient EAF-based flat-rolled mills at $150 per ton, that leaves only thin, if any, profits for hot-rolled coil.

Both the EAF sheet mills and the integrated steelmakers are buying more scrap.

Flat-rolled steelmakers had a tough time finding enough scrap from local dealers and are battling each other for the available supplies in neighboring regions. This fight also included integrated mills in the Chicago area, which have been on the sidelines of the ferrous scrap market for much of the past year, and sheet steelmakers in industrial scrap surplus regions like Detroit. Many need more scrap for this month’s scheduled output and to refill their scrap inventories before April arrives.

A Midwest trader described the pace of trading last week as an endless up escalator. A few deals were made early in the week at last month’s prices, he said, but that ceased by about noon on Tuesday. A major EAF-based sheet producer raised the ante and started buying from both local and distant yards. Several transactions were hammered out by Wednesday, but the mills were looking for additional tons later in the week.

Some Midwest and Southern flat-rolled mills also reached out to suppliers in the western states, Canada and New England, and paid as much as $240 per ton for shredded scrap. That price included a $60-per-ton train ticket to the mills.

A Chicago-based trader said he booked orders for more scrap than he had planned to sell this month. Now, he said, he’s worried that he won’t get enough shredder feed and cut grades to fill those orders. This is not a new problem, though. Many dealers have been late in making deliveries of shredded scrap and other obsolete grades in the past two months. That has put a floor under scrap prices since many brokers and mill buyers are reluctant to cut prices and cancel the unshipped orders. They fear it would leave them with little or no incoming scrap in the first week of the month.

Busheling and other industrial steel scrap had been plentiful until this month, he said, but now those supplies have tightened up as well. Prices for machine shop turnings, perhaps the least desirable industrial scrap, are up by $10 per ton, but supplies of these are scarce.

Low prices have weakened scrap intake and slowed the pace of shipments.

Dealers said they can’t fill their orders because the flows of obsolete scrap are so poor. Most point to low prices as the main reason for the shortfall and not the cold weather. Peddlers and other suppliers have dropped out of the market, especially in rural regions.

Prices were unchanged for most in February. Thus, dealers weren’t able to increase offers to their suppliers last month without wiping out already thin profit margins, said a northern Ohio trader. Also, he added, even if they raised prices now, the supply shortfall won't change overnight. Still to be determined is whether the increases obtained this month will show up at their scales in coming weeks and bring in more scrap.

Prices paid for busheling jumped to $205 per ton in the Chicago area, up about $20 per ton from last month’s levels. Shredded scrap prices posted similar gains and are now at $220 per ton. Busheling prices in Detroit rose by $10 per ton initially to $185-$190 per ton, but mills there now face heavier competition from distant flat-rolled mills and are quietly raising their prices to match those offers and avoiding losing more scrap. Steelmakers in the South did this last year when they were unable to obtain much industrial scrap from their local suppliers.

Unlike Chicago and some other cites, busheling and bundles are still cheaper than shredded in Detroit. Also, some long products mills in that region, taking advantage of the oversupply generated by the automakers and their component makers, have been substituting busheling for the scarce and more expensive shredded scrap.

Only two mills—one in the Midwest, the other further west--cancelled unshipped scrap orders at the end of February. One trader characterized those decisions as miscalculations and said one of those mills now can’t find much scrap with its modest offers of up $10 per ton. Most dealers in the region are expecting and getting higher offers now, he said.

Given the heady pace at which some southern mills have been shopping for scrap elsewhere in the country, it would seem that they may be starved for scrap. Still, the prices there are at the same levels or only slightly higher than those in many of the northern cities. Busheling is being quoted at between $205 and $215 per ton delivered to the mills. Shredded scrap rose by the same amount and is now at $215 per ton.

Much of the shredded scrap coming from western states and New England will carry higher price tags by the time it arrives. While it is difficult to determine how much scrap was bought on these springboard deals, it’s believed that a substantial tonnage will be crisscrossing the country to help the mills to fill their current steel orders and keep the railroads and barge companies busy.

Export demand and prices are also rising.

Domestic mills are not the only scrap consumers with bigger appetites these days. Export activity, both the bulk cargo business and sales of containerized scrap, have picked up the pace. So have the prices at the docks.

Turkish mills have bought cargoes of scrap from their offshore suppliers and paid as much as $205 per tonne delivered for the 80/20 heavy melt, up almost $10 per tonne from the previous deals, and $210 per tonne for shredded scrap. With ocean freight charges from this side of the Atlantic to Turkey now as low as $11-12 per tonne and stevedoring costs at $15 per tonne, that lowers the price on the docks to about $180 per tonne for heavy melt and $185 for the fragmented scrap.

Prices of shredded scrap in containers have bounced back as well. These have risen to $185 per tonne loaded in a container at the docks on many of the U.S. East Coast ports from a low of $165 per ton two weeks ago. Much of the scrap is destined for the steel mills in India and elsewhere on the Asian subcontinent.

U.S. exporters may be relishing this offshore surge, but it could put a crimp in the supply pipelines to some U.S. steel mills. Several mills along the Eastern Seaboard, the Southeast, and in a few other inland areas have become regular monthly buyers of shredded scrap from the coastal dealers and exporters.

U.S. Shredded Scrap Thermometer: Mills are demanding more.

Shredded scrap has been tight throughout the winter months because of lower prices and the usual seasonal factors like snowstorms and colder temperatures. Now, however, even the more abundant supplies of busheling are under pressure. Flat-rolled mills are buying more, possibly because the new trade duties on imports are forcing some steel users and warehouses to shift purchases back to the domestic mills. That might be expected to ease pressure on shredded, yet overseas demand is stronger and is threatening to take more of the fragmented scrap away from domestic mills. Other factors putting new pressure on raw materials supplies include:

Dealers have seen little or no gain in the flows of scrap and shredder feedstock because they have not raised their buying prices. That could change this month if shredders choose to pass along the higher prices paid by the mills this month.

Even with higher buying prices for car bodies and other shreddables, dealers said there is no guarantee that intake will rise by leaps and bounds. Refilling that segment of the scrap stream will take weeks, not a day or two.

This month, as a result of the rising offers from the mills, some dealers may have sold more scrap than they will see coming through the gates of their yards now and later this month. If steel demand remains strong and they haven’t filled those orders, that could set off another battle for supplies and drive prices even higher in April.

The first substantial scrap price increases in several months have spurred dealers’ hopes that both demand and prices could continue to climb in coming months. But a pair of “wild cards” could undercut those expectations. These are:

Flat-rolled demand may be stronger, but that’s only one segment of the market. Pipe and tubing mills are still idle much of the time, and the construction market has not rebounded as much as expected. Also, many of the domestic rebar makers still face formidable challenges from their overseas competitors.

If domestic scrap prices keep rising and the dollar remains strong, U.S. scrap exporters will be less competitive in overseas markets and have few alternatives other than to offer more of their shredded scrap into the U.S. market, diluting demand and easing the upward pressure on prices.

NASDAQ OMX Commodities (Stockholm) will begin trading in the Midwest US shredded scrap index futures on Tuesday March 29.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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