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Mike Marley Shredded Power #45
May 20,2016 09:15CST
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Prices of obsolete scrap could hit the skids in the coming weeks, initially at the docks and later at the domestic steel mills.

By  (ScrapMonster Author)

May 18, 2016 08:24:16 PM

Prices of obsolete scrap could hit the skids in the coming weeks, initially at the docks and later at the domestic steel mills. The decline stems from a new surge in exports of cheap steel billet from China and the consequent downturn in demand and prices in the offshore scrap market. Heavy melt and shredded scrap prices could drop by as much as $20 per gross ton when the next round of domestic mill buying gets underway in June, according to some early forecasters.

WSEM - World Steel Exchange Marketing - Mike Marley’s Shredded Power #45

Weak export demand could lower some domestic prices.

May 11, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

All but the fluff – Commentary

Prices of obsolete scrap could hit the skids in the coming weeks, initially at the docks and later at the domestic steel mills. The decline stems from a new surge in exports of cheap steel billet from China and the consequent downturn in demand and prices in the offshore scrap market. Heavy melt and shredded scrap prices could drop by as much as $20 per gross ton when the next round of domestic mill buying gets underway in June, according to some early forecasters.

The first inklings of a wavering market were seen in the Far East. Steel mills in Taiwan and other scrap importing nations in Asia slashed their offers for containerized 80/20 heavy melt scrap by about $40 per tonne last week, following a $30 per tonne reduction just a week earlier. Many anticipated a retreat in Asian demand because of seasonal factors, namely restrictions on electricity usage during summer months. But the back-to-back price cuts surpassed their expectations. Add to that the absence of many Indian traders who had been actively buying containers of shredded scrap from dealers on all three U.S. coasts.

Less offshore scrap demand has undermined the confidence of many U.S. scrap traders. Chinese steelmakers are offering billet at $325 per tonne delivered to ports on the Black Sea. That’s $5 per tonne below what Turkish mills paid for imported 80/20 heavy melt a week ago. Scrap is now grossly overpriced when taking into account the cost to convert it into steel billet, which is about $100 per tonne.

Export buying prices will fall, but dealers aren’t sure when that will occur.

A Philadelphia area dealer anticipates buying prices at the docks will be the first to fall, but he isn’t sure how soon that will occur. Late last week, he said, exporters were urging him and other dealers to sell what they have now because the prices will decline. But they have not cut their buying prices yet, which is an indication to him that the exporters don’t have enough scrap to fill the current orders from their offshore customers.

East Coast exporters have been offering local yards $225-230 per ton for export heavy melt and were paying some bigger inland suppliers $250 per ton. They have pulled back from the remote areas, but their offers to those nearby haven’t bought them much scrap. Coastal steelmakers are still paying $260 per ton for higher quality No. 1 heavy melt. That’s enough of a premium to encourage dealers to spend more time sorting scrap for delivery to the domestic mills.

Dealers in the Midwest and South said they are hearing the same tune about lower prices from the brokers and buyers at EAF-based mills in those regions. That, said one Birmingham-based trader, has persuaded him to get all that he sold shipped to the mills before the end of May. Whatever heavy melt and shredded scrap they fail to deliver by month’s end, he said dealers know they can expect to receive lower offers for it next month. 

A shredder operator in the South said the flows of scrap into his yards have risen as expected at this time of the year. Now with the weaker demand from the exporters, he believes the domestic shredded market could shift from a shortage to an oversupply. Much of the intake in the past two months came mainly from the auto wreckers, he said, but now more scrap from demolition work and from peddlers is coming across the scales.

The auto wreckers leaped into the market in the past two months when scrap prices rose. Indeed, many were encouraged by the speed and scope of the increases some shredders posted to draw out more feedstock ahead of rival shredders. Some paid as much as $190 per net ton for cars with motors, a price that yielded little if any profit on the sale of the ferrous metal. Many wreckers sold cars they had been holding back since the second half of last year when prices tumbled month after month. They have unloaded much of their excess inventory and the intake of junked cars at many shredders has slowed.

An Eastern trader said the output from his shredder and others in the region bounced back in the past two months. Some were producing as little as 3,000 or 4,000 tons per month. They doubled that output in the past two months, but are still running below capacity. Most are operating at about 70%, he said, largely because they haven’t been able to draw out more feedstock from scrap dealers and demolition business there is still slow.

A few dealers have cut their buying prices and more will likely do that this week and next if they believe prices will fall. “Nobody wants to be holding inventory these days and be stuck with scrap that he paid last month’s prices for,” said one trader.

If there is a surplus of shredded scrap and heavy melt available in the U.S. next month, it may be limited to the domestic dealers. Despite their threats to cut prices, the bulk cargo exporters still have orders from their offshore customers that must be filled. Several traders said it’s also unlikely that they will have much scrap to offer to the domestic mills next month. If the weak export demand persists beyond June, that could change the overall supply picture.

Heavy melt and shredded may fall, but will busheling come tumbling after?

Dealers may give back part of the gains they achieved on obsolete scrap, but they don’t expect to lose much on busheling and bundles. These prices rose $40 per ton in May while shredded and heavy melt prices were up by as little as $15 per ton. 

The flat-rolled steelmakers, particularly the EAF-based mills, are enjoying a sales boom generated mainly by the diminished output at some integrated mills and the new federal duties on imports of foreign steel products. This has provided some U.S. sheet mills with an opportunity to boost their output and raise steel prices. That has generated more demand for busheling and bundles from the EAF-based sheet mills. Industrial steel scrap typically accounts for as much as 60% of the materials they use to make their products.

Exporters and long products mills might have more success cutting the prices for heavy melt and shredded scrap because flat-rolled mills aren’t usually seen as the market makers for obsolete grades. Some flat-rolled mills, both the integrated steel producers and the EAF melt shops, use little or no heavy melt and limit their consumption of shredded scrap to about 20% of their melt mix.

Cutting the prices of busheling and bundles, on the other hand, might be more difficult. It could prompt some steel users to question the mills, especially if they raise sheet prices again. Domestic sheet steel prices have risen from less than $400 per net ton last year to more than $600 per ton now.

Some scrap dealers have other reasons to doubt that the EAF-based mills will push busheling and bundles prices lower in June. One is the likelihood that industrial scrap supply will tighten up in June and July. The automakers and their suppliers are headed for their summer breaks in which they shutdown plants to retool production equipment. These closures can reduce the output of sheet steel scrap and turnings by as much as 25%.

Steelmakers and scrap dealers don’t know which auto plants will close and when.

The automakers have not indicated which, if any, plants will be shut and when that will occur. Even the scrap companies that process scrap from their stamping plants and machine shops have yet to be told. Thus, steelmakers that depend on that material have no idea when and where the flows will be shut off. Rerouting shipments from one stamping plant to a mill that is short busheling can be expensive, if the shipments have to be switched to another railroad’s tracks. That could also delay deliveries. 

Steelmakers usually prepare for this seasonal shortfall by purchasing extra industrial scrap in the months ahead. Some have done that in the past two months, but whether they were able to obtain all they needed is unknown. One major millis bringing in scrap from western Europe, after it had little success trying to buy more from dealers in Canada. Sheet steelmakers there like those in the U.S. are busier and willing to paying higher prices to keep their local scrap at home.

Price increases and decreases have no impact on the overall supply of industrial scrap, that’s determined by the output of manufacturing industries. The only alternatives for some mills is either to raise the prices for this scrap and take its way from rival mills or increase their consumption of substitute raw materials like imported pig iron and direct-reduced iron.

U.S. Shredded Scrap Thermometer: A chillier shredded market.

The shredded scrap market has gone from shortages and soaring prices a month ago to worries about oversupply and price cuts of more than $20 per ton. Shredded scrap and other obsolete grades are price and supply sensitive. Too much scrap coming across their scales in a declining market and dealers will respond by slashing their buying prices to reduce the intake and conserve cash. Unfortunately, shedders are also creatures of volume and face some unique challenges these days. These include:

  • Cutting prices and limiting intake may be the best way to avoid building too much inventory in a weakening market, but most shredders need to run at least a few days each week, if for no other reason than to pay operating expenses like the electric bill and to buy replacement parts for what some operators call “the machine that eats itself.” There also may be bank debt incurred to buy and install these multi-million dollar machines.

  • Competition can be fierce because there are too many shredders in the U.S. They are also bigger and more powerful than their predecessors. Scrap demand has grown because of the expansion of the EAF segment of the steel industry, but many of these new mills make sheet products and thus use minimal amounts of shredded. The bigger consumers of shredded scrap are the long products mills and many of those own and operate shredders.

  • Many of the largest export yards operate huge megashredders to provide scrap for their offshore customers. They usually sell some of their shredded output to a few nearby domestic mills. When foreign demand declines, they shift more of that supply to the domestic market, selling to distant mills in the Midwest and South and becoming tougher competitors for many of the domestic shredders.

Despite the likelihood of less demand, shredded scrap remains a key part of the melt mix at most domestic steel mills and many iron foundries. Its availability is a critical factor and the forces that create scarcity can be wild cards that affect both price and supply:

  • Many scrap buyers and sellers have a short-term view of the market that usually extends to no more than 60 days. If steel and scrap demand continue to weaken in the second half of this year, some traders worry that they could see a rerun of last year’s “starve the shredders” market. Prices dropped steadily and intake slowed to a trickle going into the winter when supply is normally diminished. 

  • Offshore demand for shredded is often erratic. In addition to the bulk cargo sales to steelmakers in Turkey and elsewhere, there are a host of smaller independent Asian traders who move into and out of the U.S. market at will. They buy thousands of tonnes from coastal shredded producers and ship it overseas in containers. They can significantly and quickly alter the supply and price in some regions of the U.S. market.

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