By Paul Ploumis (ScrapMonster Author)

March 22, 2016 01:53:45 PM

All but the fluff - Commentary

Steelmakers are still shopping for ferrous scrap but are not having much luck finding much tonnage even with modestly higher prices. Such mid-month buying frenzies are unusual, but several mills chose to seek more because they failed to obtain all the tonnage needed during the buy week earlier this month. Shredded scrap, and five-foot plate and structural scrap are scarce, but some report trouble finding more busheling and bundles.

Tight scrap supplies looms as a serious challenge for mill buyers and brokers as they begin to plan their purchases for April. Some expect steel demand to rise further next month. They point to the recent $30-per-net-ton increase in hot-rolled band prices and longer lead times on sheet steel orders as indicative of the steel market’s uptrend. Consequently, some are buying not just to fill the month’s shortfalls, but also to ensure a steady flow of scrap to their mills when April arrives. Many have paid prices that included a premium for the scrap and not simply to offset higher freight costs.

Several dealers said they have sold all the scrap available this month, but are getting phone calls from both brokers and mill buyers looking for more. Some are being badgered to speed up shipments. Shipments from some yards are so sparse that the railroads and trucking companies are calling up dealers and trying to solicit more business. Other dealers have been told that they can add to their orders. In other words, explained a Birmingham area dealer, a mill buyer told him he could ship another 500 gross tons and be paid the same price that he got for the initial sale of 1,000 tons.

Even if he had another 500 tons, he said, he won’t sell it now. With so many mills trying to buy more, he believes they are short scrap and will be paid more next month. He’s not alone in anticipating an up market. Many brokers and dealers expect prices to rise by about $20 per ton, but some are looking for increases of as much as $50 per ton. Such a dramatic price spike could be reversed in May if the seasonal flows of obsolete scrap rise in April.

Thus far, however, even the springboard buys from remote suppliers have failed to draw out much scrap. Several major Canadian dealers offered less scrap to U.S. mills this month and probably will cut their offers again in April, a northern Ohio trader said. Steel demand in Canada is stronger too, he said. The weakness of the Canadian “loonie” versus the U.S. dollar has made Canadian steel cheaper and more appealing to some U.S. service centers and manufacturers.

Ferrous scrap is now a sellers’ market.

Steel demand, particularly for sheet products, has been the key driver of the stronger scrap demand and prices. There are several reasons for this. First, the U.S. government’s decision to impose duties on steel imports sent some steel users and warehouses back into the arms of domestic mills. Second, the steep drops in the scrap prices last year have reduced the intake of obsolete scrap. Now, both the integrated steel mills as well as the EAF-based melt shops are trying to boost their steel output, but can’t find enough scrap. Ironically, shutdowns of some integrated sheet mills may have bolstered sales for some EAF-based sheet producers. Third, the sudden and unanticipated rise in scrap demand by steelmakers in Turkey and Asia has put more pressure on obsolete scrap supplies.

In the U.S., smelters can’t get enough shredded scrap. This includes the structural steel mills, rebar makers as well as the sheet mills. Some long products makers have been substituting the still cheaper busheling for shredded and they will continue to do so as long as the price is right. By gobbling up more busheling, they are taking away the limited supplies of prime industrial scrap that flat-rolled mills need. Yet even with busheling and shredded at the same price, there are still some mills that prefer to use shredded and not higher quality busheling. Shredded is denser than busheling and easier to load into their charge buckets and furnaces.

Meanwhile, the integrated mills are adding more pressure on the buy side. They can’t get enough iron from their blast furnaces and are relying on scrap to boost their steel output. They typically use 20% or less scrap in a BOF, but a $20-per ton increase in scrap prices only raises their costs by $4 per ton. They absorb only a portion of the scrap price increases whereas EAF shops which melt close to 100% scrap, must swallow the entire price hike.

Many mills need more scrap, yet dealers have little or no excess to offer them now and are cautious about making commitments they cannot fill next month. Low prices and not the winter weather have discouraged their suppliers. Auto wreckers continue to pile up flattened car bodies in their yards instead of selling them to the shredders. Demolition contractors can’t offer much incentive for tearing down old facilities. In some instances, they have to charge for their work instead of relying on the sale of recovered metals and sharing the profits from those deals with the building owners.

The biggest loss has been the peddlers, many of whom have abandoned their collection efforts. This has been especially true in rural areas, said a Midwest trader who noted that some of these shredders are running one day a week. Shredders in the urban areas have felt the supply squeeze as well, he said, but most are operating only three days a week. Better than their rural rivals, but nevertheless producing about half of what they are capable of making.

Last but not least is the surge in offshore scrap buying; Two Turkish mills booked cargoes from U.S. exporters last week and paid as much as $232 per tonne delivered to a Turkish port for the 80/20 heavy melt that will make up the bulk of those shipments.

Also, sales of containerized scrap at U.S. East and West Coast ports continue to rise. Prices for shredded scrap in containers at U.S. ports are now topping $205 per tonne.

The export buying surge is a lose-lose situation for domestic steelmakers. First, it means the export yards probably will be raising their buying prices in the next week or two to gather enough scrap to fill those orders. One trader said the docks are now offering local dealers $150 per gross ton for heavy melt, but he expects that price to climb because they have little or no inventory. He also expects them to reach out to the bigger scrap processors who can provide thousands of tons of heavy melt. That would put the exporters in a bidding war with larger domestic steelmakers and not just the smaller coastal mills that are their usual rivals.

Second, if they are selling more scrap to their offshore customers, they will have little to offer to the domestic mills in the southeastern U.S. that have been their steadiest customers. These domestic mills rely heavily on the exporters to provide them with shredded scrap and not heavy melt. The 80/20 export heavy melt fails to meet the specs for most U.S. mills.

Dealers are raising buying prices, but flows into their yards are still weak.

Some shredder operators in competitive regions like northern and eastern Ohio have raised feedstock buying prices in an effort to draw out more material. Some are now paying between $145 to $150 per gross ton for car bodies and other shreddables. How soon this will refill their supply pipelines soon is uncertain. One dealer in the region said such increases won’t boost the flows overnight. Smaller scrap dealers and auto wreckers will still hold back material and play one shredder off against another to obtain a few more dollars for each ton of material, he said.

The strong pace of mid-month buying by one large broker was seen by some dealers as a possible “head fake” going into April. In other words, the more tonnage locked up on early purchases or through price to be determined orders (TBDs), could reduce the brokers’ immediate needs. They could avoid paying higher prices early in the buy week and possibly push prices lower later in the week.

But a Detroit-based trader rejected this suggestion and said he believes several mills and their brokers are desperately searching for more scrap. And, he added, his company unfortunately will not offer them more tonnage next month. Intake is still poor even though they have raised their scale prices. Also, he said he expects to owe scrap to several mills at the end of this month. That will minimize his offers to others.

Another Midwest broker said he expects shredded scrap and other obsolete grades to remain tight in April and prices to rise by at least $20 per ton next month, possibly higher. But he also believes this scrap sales bonanza could be short-lived. By May, he said, the higher prices and warmer spring weather will bring out more material. In particular, he sees the higher prices spurring some postponed demolition projects and persuading some auto wreckers to part with more cars.

U.S. Shredded Scrap Thermometer: Prices continue to rise.

Shredded scrap is the most widely used ferrous scrap. It’s the main feedstock for many long products mills. In fact, several mills in the South have captive shredders. It’s a close second to busheling for the EAF-based sheet mills. And now that it contains less copper and other non-ferrous metals, it’s a favorite of integrated steel mills as well. Twenty years ago suggesting that they use shredded in theirbig BOFs would have earned a scowl from melt shop foremen at the big mills. The widespread popularity of shredded scrap may explain why it is in short supply though there are plenty of powerful shredders to produce enough. Other forces are at work and include:

• A few shredder operators have captive feeder yards. Others don’t and must rely on smaller scrap dealers, auto wreckers and others to provide enough feedstock. When scrap prices decline as they did in the second half of last year that drastically reduces the flows of feedstock and the output of those shredders.

• Light weighting cars and substituting aluminum and plastics for steel has reduced the ferrous yield from shredding a car. Some wreckers and self-service auto junk yards have lowered that further by removing engines and selling these separately to iron and pipe foundries. Assuming that shredders tear apart about the same number of new cars sold each year, that represents a loss of several millions of tons of shreddable feedstock.

• The fragmented scrap is the largest single grade of ferrous scrap exported from the U.S. each year with the annual total ranging up to almost 8 million tonnes in 2011, the year in which U.S. ferrous scrap exports totalled a record 24 million tonnes.

Because of its sensitivity to price changes and more diverse supply chain, obsolete scrap like shredded and heavy melt and not bundles and busheling are the key “wild cards” determining scrap prices in the U.S.

• In the current tight supply situation, some traders believe shredded scrap has supplanted busheling in many regional markets and because Nucor Corp., the nation’s largest scrap user, now relies on direct-reduced iron as a substitute for busheling, shredded could remain the pricing bellwether for the foreseeable future.

• Old cars were and still may be the main feedstocks for many shredders, but some operators have shifted the mix and rely on other shreddable materials, which most call “light iron.” Others like Schnitzer Steel Industries have their own chain of auto junkyards which enable them to derive revenues from the sale of used auto parts as well as providing enough feedstock for its shredders.

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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