By Michael Marley (ScrapMonster Contributor)

August 18, 2016 11:44:01 AM

The summer’s heat and humidity may be boiling the mercury, but it’s chilling activity in the ferrous scrap market. Domestic steelmakers aren’t buying more tons in the spot market and many dealers said that they have sold all that they intended to sell this month. Even the offshore market is lethargic. One Turkish steelmaker bought a single bulk cargo from a European supplier last week, but not a pound from U.S. exporters.

WSEM - World Steel Exchange Marketing - Mike Marley’s Shredded Power #58

Tight supplies and dealer resistance limit price cuts.

August 17, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

All but the fluff – Commentary

The summer’s heat and humidity may be boiling the mercury, but it’s chilling activity in the ferrous scrap market.  Domestic steelmakers aren’t buying more tons in the spot market and many dealers said that they have sold all that they intended to sell this month.  Even the offshore market is lethargic.  One Turkish steelmaker bought a single bulk cargo from a European supplier last week, but not a pound from U.S. exporters.

A mill buyer in the South and another in the Midwest said they could have bought more prime scrap last week at prevailing prices, but both have rejected new offers.  The dealers offered more busheling and bundles, said one buyer, and he characterized these as potential “panic sales.”  Dealers are worried they’ll be stuck with this scrap until September and that prices will fall again, he said.

Obsolete scrap, on the other hand, remains tight in most regions and there were no reports of dealers offering any of that scrap to the mills.  Intake at many yards is poor and the processing of scrap has slowed because of the 90-degree-plus temperatures.  Some dealers said they are able to get enough railcars and trucks and are shipping scrap to the mills on a timely basis.  But a few brokers in the Midwest disagreed.  Deliveries are slower and several mills are still owed scrap they bought in July.

Many mills in the Midwest did not cancel their unshipped orders from last month, particularly for the obsolete grades like heavy melt and five-foot plate and structural scrap.  It is now mid-month, said a Chicago-based broker, and several mills are still awaiting delivery of the balance from their July orders.

This may be the result of weaker flows in some yards, he said, but he is also concerned that some dealers may be diverting scrap owed to his mill customers.  Instead of shipping scrap to them, he said dealers may be making “quiet deals” at higher prices with other mills that are short scrap.  He doesn’t begrudge them making a few extra bucks as long as they have enough scrap to fill all of their orders, he said.  “Now,” he added, “I’m worried that they won’t fill our August orders until the end of September.”

Indeed, intake is so poor that many dealers said the flows into their yards are off by as much as 30% from June’s pace.  Most blame the weather, but add that the price on obsolete scrap in the two prior months have discouraged many suppliers.

No. 1 heavy melt and five-foot plate and structural scrap were sideways in many regions, largely because supplies are constrained.  It isn’t just reduced flows into the yards, said a northern Ohio trader, productivity has declined as well.  The high temperatures and humidity limit the output of many yard workers.  This is especially true for the torch cutters who prepare higher-value cut grades like five-foot plate and structural scrap.

Supplies of this scrap are so tight that mills in several key Midwest cities have raised their prices for it by $5 to $10 per ton and will accept new offers of this scrap.  Some are also battling over the diminished supplies in their home markets.  A few mills have tried to buy more tons from remote suppliers, said one Detroit area trader, but mills in those regions are making counteroffers in an effort to keep local supplies out of the hands of their distant rivals.

Shredded prices were unchanged in the Midwest and along the Eastern Seaboard and most mills are getting what they bought.  But the buying and availability were mixed in the South and Southeast.  Some mills there trimmed $10 per ton off prices paid to local shredders, but they booked bigger orders with Northern suppliers at prices that were unchanged from last month’s levels.  One Southeast trader said this was a carefully crafted strategy that had enabled those mills to fill their supply pipelines while buying from local dealers at lower prices.

Stronger offshore demand could be the next stimulus for the U.S. market.

Though there was little or no new business for the U.S. East and Gulf Coast exporters last week, several traders said the next uptick in prices in the domestic market could be driven by overseas demand.  But the first positive signs may be coming from the West Coast market and not the East and Gulf Coast shippers.

Exporters there have sold three bulk cargoes to steelmakers in South Korea and Taiwan in recent weeks, said a West Coast trader.  That’s no buying binge, he said, but these are the first major deals in more than two months and may presage an uptick in steel output in that region.  Also, China has cut back its semi-finished steel exports and increased the export price of its billet, he said.  That easing of the supply pressure from China and the end of the usual summer slowdown in EAF-based steel production could bolster the demand for imported scrap, he said.

Secondly, some of the East and Gulf Coast shredders have seen new, higher offers from Indian traders for containers of shredded scrap.  These are up from between $7 and $10 per tonne for the take-it-or-leave-it offers two or three weeks ago.  Those higher offers could account for the resistance some East Coast suppliers displayed in bargaining with the mills in the Southeast over the shredded prices.

Finally, less Chinese billets combined with the tight supplies of obsolete scrap in the U.S. has encouraged some U.S. exporters to resist lower offers from the Turkish mills.  The solo deal with a European exporter last week had an average price of $230.50 per tonne for a mixed cargo of heavy melt, bonus grade, busheling and shredded scrap.

While more than half of the cargo was 80/20 heavy melt, the price for the heavy melt portion of that deal nevertheless was lower than the average of $229 per tonne several Turkish mills paid a week earlier for 80/20 heavy melt.  The Turkish mills are hoping to buy at the $229 per tonne level or lower, said an Eastern trader, but U.S. exporters are seeking $235 per tonne for their heavy melt.  Buying prices at the docks are still at about $160 per gross ton for export heavy melt though a few large dealers may have gotten more.

An East Coast exporter said he believes Turkish mills will buy more from U.S. suppliers in the next few weeks and that prices will increase.  The European exporters, particularly in the U.K., are not offering much scrap to the Turkish mills.  They are displeased with the lower counteroffers, he said.  Also, he added, they are likewise aware of the higher prices that steelmakers in China and Eastern Europe are seeking for their billet.  As a result, they want higher prices for their scrap.

On this side of the Atlantic, he said the bulk cargo shippers are facing challenges filling older orders.   Demand from coastal mills is weaker and that should leave a surplus of material available for the exporters. That’s not the case, however, because many of the large scrap dealers in this area sold heavy melt, and plate and structural scrap to mills in the Midwest and South this month and not to the docks.

These are the yards that have rail sidings and can ship scrap out of the area.  Some also oversold what they had or expected to get last month and as a consequence still owe scrap to those distant mills.  Prying more scrap loose could be a problem even with a modest price increase in the docks’ buying prices.  Only the yards without access to rail lines are selling scrap to exporters these days, he said and those yards are likewise seeing less scrap coming through their gates each day because of the low prices and the hot weather.

Another Eastern trader said some Turkish mills may be holding back because of the ongoing uncertainty over the country’s political crisis and its impact on the purchasing power of the Turkish lira.  Also, export sales of their rebar have weakened.  Still, he argued, they have to replenish their scrap supplies soon and have few alternatives other than buying from offshore scrap suppliers.

Busheling could become more abundant if sheet steel imports rise.

Prices for hot rolled coils have inched downward at some domestic mills and order lead times continue to shrink.  They are now down to less than two weeks at some EAF-based flat-rolled mills.  Prices have slipped to $575 per net ton and a few mills are telling steel buyers that they have “holes” in their production schedules and can slip new orders into those spots.

Though that’s not a dramatic price drop, it nevertheless is beginning to trouble domestic steelmakers.  Some are worried that service centers and other steel users are looking for other foreign steelmakers that aren’t as heavily impacted by the U.S. government’s new anti-dumping and countervailing duties on hot-rolled coil.

More troubling is the possibility that additional offshore steel may be added to the supply pipeline at the same time that demand from the automakers, the steel industry’s biggest sheet customer may be slowing.

A Detroit-based scrap trader said the threat of a new surge in flat-rolled steel imports could be twice as much trouble for him and dealers handling prompt industrial steel scrap. Some mills are still hoping to trim busheling prices again next month, he said, and may have more imported bundles coming from Europe.  That dampened demand and prices in the South this month.  Now, he said, the domestic scrap market could be flooded with more industrial steel scrap from foreign steel at the same time that domestic EAFbased flat-rolled mill are reducing their scrap buys.

Shredded Scrap Thermometer:  Feeling the Heavy Melt Burden.

Shredded scrap isn’t feeling the supply squeeze as much as other obsolete grades like heavy melt, plate and structural scrap.  Both grades of cut ferrous scrap are regarded as less valuable than shredded scrap.  This month, however, despite declines in obsolete scrap flows, cut scrap seems to be drawing more attention from mill buyers.  Why are two grades of obsolete scrap, often seen as less desirable than shredded scrap and busheling, so actively sought by mill buyers and brokers?

• Heavy melt and P&S, as most refer to it, serve a special role independent of the chemical and metallurgical needs of the steelmaker.  Both are heavier and in the process of “layering scrap” in the charge bucket, they compress the other material and increases the volume of scrap loaded into the EAF.  That, in turn, boosts the amount of raw steel produced and lowers the overall cost of steelmaking.

• Buyers, brokers, and the so-called computer “optimizer” systems are seen as making the critical decisions about what scrap will be purchased and consumed.  In some instances, though, it is the melt shop foremen and superintendents that actually make that choice through the mix of scrap grades they are confident in using to make steel.

• Shredded scrap may be the most widely used grade of ferrous scrap in steel mills and foundries, but the cut grades like No. 1 heavy melt, which are normally priced from $20 to $50 per ton below the price of shredded, help to lower the overall raw materials cost.

• Another desirable quality of old I-beams and other heavier scrap is its age.  If these steels were made more than 50 years ago, they probably were produced from blast furnace iron and thus have fewer tramp elements than the structural steels now made from scrap in EAF melt shops.

Relying on lower cost and lower quality scrap like heavy melt can pose problems for some steel mills.  These are the “wild cards” that pose challenges to steel mills trying to cope with higher cost and apparent supply shortages.  Others include:

• Many domestic mills spell out specific requirements like length and thickness or will only buy No. 1 heavy melt from selected yards that prepare it to meet an individual mill’s specs.  Others that buy from a broad base of suppliers realize they’ll never be certain what they are likely to see.  They label the scrap mixed No. 1 and No. 2 heavy melt or No. 2 heavy melt and buy it at a discount to the prevailing published prices in that region.

• Most mills have installed sensitive radiation gauges at the entrance gates to eliminate problems with irradiated steel scrap. But they still get the occasional “sealed unit”.  These can include a discarded propane tanks from a backyard barbecue or compressors from a refrigerator.  These don’t melt easily in an EAF; they can explode.

The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures in the third quarter of 2016.  The contract will trade in 20gross 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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