By Michael Marley
Scrap dealers, emboldened by the recent increases in domestic sheet steel prices and reports that order lead times at those mills are lengthening, hope to recover what they gave up in October. Many expect scrap prices to increase throughout the country and average prices to rise by $30 per gross ton or more when the mills finish their buys this week.
WSEM World Steel Exchange Marketing
Mike Marley’s Shredded Power #69
Will steel price increases push scrap prices higher?
November 2, 2016
Mike Marley (484) 751-5600
Peter F. Marcus (201) 503-0902
Scrap dealers, emboldened by the recent increases in domestic sheet steel prices and reports that order lead times at those mills are lengthening, hope to recover what they gave up in October. Many expect scrap prices to increase throughout the country and average prices to rise by $30 per gross ton or more when the mills finish their buys this week. That would match what they gave up last month on the industrial steel scrap prices and recoup more than what they yielded on the obsolete grades. Those were off by about $20 per ton, while some later spot market purchases of shredded, five-foot plate and structural scrap were off by only $10 per ton last month.
The EAF-based sheet mills are feeling the supply squeeze more than other mills. Scrap imports and imported pig iron filled part of their needs earlier this year, but they are either unavailable now or too expensive when compared to ferrous scrap prices in the U.S. Also, some mills may be buying more scrap this month not only because their order books are fatter, but also because they want more tons at their mills or in the supply pipeline to cover their needs during the upcoming holidays.
Sheet mills may be short busheling and bundles and dealers may offer fewer tons.
More important, is the fear that prompt industrial steel scrap supplies like busheling and bundles are diminishing while scrap demand is rising. The spike in orders for sheet steel products following the recent $30 per net ton price increase comes at the same time output of busheling and bundles may decline. Availability of this scrap is determined largely by auto sales and production. In October, however, sales of sedan autos – not sport utility vehicles (SUVs) – declined by about 8%. One automaker, Ford Motor Co., scheduled a week or two-week shutdowns of assembly and stamping plants to bring car inventories in line with sales. Other automakers may do the same soon.
The consequences of such actions are manifold in a market in which steel and scrap prices are expected to rise. First, several EAF flat-rolled mills are battling each other for additional supplies of industrial scrap to meet the increased demand for their steel products. An EAF-based sheet mill can consume between 80,000 to 120,000 gross tons of industrial scrap each month when it’s running well. Second, they may want more now to provide an inventory cushion, i.e. it offsets potential shortages of shredded and other obsolete grades, and diminishes the impact of late or missed deliveries of industrial scrap. Some have their own scrap units or contracts with stampers and other industrial plants that produce this scrap. These fill some of their needs, but most months they still buy thousands of tons from outside suppliers.
Third, dealers are concerned that supplies of bundles and busheling may be reduced this month and in December, in part because of the holidays but also because of weaker auto sales. One strategy automakers use when sales are weakening is to extend holiday shutdowns for an extra week or two to avoid adding to their inventories of unsold cars.
That brings into play a different and unwritten rule for scrap traders. It says: Never sell all of your own inventory in an up market unless you are sure you can replace it. In other words, they won’t sell scrap they don’t have or are not sure they will have. That reasoning may arise from the recognition that they can sell scrap bought at a lower price this month, at a higher price next month. It also may arise from some steelmakers’ practices of demanding dealers fill unshipped orders from a previous month at the previous month’s prices even if the current month’s prices are higher.
Also, year-end is approaching and supplies of obsolete scrap will shrink in December and January. Colder weather and snowstorms slow deliveries and interrupt scrap processing at dealers’ yards. If sheet steel orders continue to rise, the mills may have to outbid each other for the limited supply of industrial scrap. Shredded is the only scrap grade that to some degree can be substituted for busheling; and has the advantage over busheling in that the mills can increase the available supply by raising the price.
Sheet steel price increases have spurred a buying binge.
Other forces may drive scrap prices higher, but the strongest is the mills’ need for melt material. They have new orders to fill since announcing increases of $30 per net ton for their sheet steel products two weeks ago. Much of this demand may be coming from service centers and other steel users who are quick to place orders after price increases are announced. They typically try to buy before the dates when mills say the higher prices will be effective.
Whether this new buying binge will continue is uncertain at this point. If it does and the steel price hikes stick, some traders believe another price increase may be forthcoming in a few weeks. Scrap dealers probably will be expecting the mills to share those gains, not because of any feelings of largesse on the part of the mills, but more as a means to boost scrap flows through the winter months and to limit exports.
Steel warehouses have been operating with minimal inventories in part because of the decline in scrap prices in the past three months. When scrap prices fall for several months in a row, steel prices usually come tumbling after. Scrap prices dropped for five months in a row in the second half of last year, for example. Flat-rolled steel prices slid as well and by year’s end, hot-rolled coil prices were down to $350 per net ton.
Seen another way, the steel price hikes are an effort to end the downward spiral of sheet prices. That includes both cold-rolled and hot rolled coil, though the hot-rolled prices seem to be under more pressure. They have slipped to as low as $440 per net ton.
More troubling for some mills was the growing spread in spot market prices. Notably, most mill announcements stated only that prices would increase by $30 and did not specify a precise dollar-per-ton figure. Some steelmakers are still quoting hot-rolled coil at $470 or $480 per ton while others were selling at $440 per ton. These deeper discounts were offered by mills trying to fill idle time in their production schedules.
Overall domestic raw steel production has been slipping since mid-year. Last week, according to the American Iron and Steel Institute, raw steel output totaled 1,575,000 net tons and the industry’s capability utilization rate was 66.4 percent. That is down 1.4 percent from the previous week when production totaled 1,597,000 net tons and the operating rate was 67.3 percent. Steel production averaged 1,700,000 tons per week at mid-year.
Dealers are likely to offer less tonnage and export demand has rebounded.
Halting the steel price slide was one issue. Next is whether the mills have enough scrap on the ground or in their supply pipelines. In October, several failed to buy as much as they had expected. Some mills and their brokers had to backpedal from those down $20 per ton offers for obsolete grades like shredded and five-foot plate and structural scrap. Even before mid-month arrived, they were buying or trying to buy with offers that were only $10 below the previous month prices.
The driving forces for the scrap market have shifted from buy-side to supply-side. The matching price cuts of the past two months coupled with regional declines in August have reduced the flows of scrap into dealers’ yards. They have been whittling down the tons of obsolete scrap offered to the mills during the past two months.
One Chicago area dealer said he finished shipping all he sold last month by Oct. 2. A broker in the same region said the pace of shipments is “mixed.” Deliveries of busheling and bundles are on time at most of the mills, but most shipments of shredded and fivefoot plate and structural scrap are behind schedule. He went on to say that some dealers in many areas ended the month still owing scrap to several mills. Intake of obsolete scrap is off by as much as 40% from the mid-year pace. The mills won’t cancel those unshipped orders, he said. Dealers will be expected to deliver the agreed-upon tons and be paid last month’s lower prices.
The decline in intake at his yards has leveled off in recent weeks, said an Eastern trader, but now the demand from the export market is stronger. Prices paid for bulk cargoes are up about $10 per tonne and the export yards have upped their offers to local scrap dealers by that amount. Most of the smaller coastal scrap yards and the exporters’ own feeder yards are being drained to fill the offshore orders for both bulk and containerized cargoes.
Scrap supplies in the region have tightened, he said, despite the modest buying by three mills in the Northeast that are the exporters’ nearest rivals. Two are running slower these days and the third mill’s melt shop is down until mid-November for maintenance work. Though these steelmakers aren’t buying much scrap now, the exporters may be forced to raise their prices again. They may need to draw more scrap from dealers in the inland regions to fill the new offshore orders. That could put them in direct competition with mills in western Pennsylvania and eastern Ohio later this month.
Shredded Scrap Thermometer: A shredder shakeout.
Gerdau stunned industry members and observers when it announced last week that it was shutting down some of its shredders and farming out the operation of a captive shredder in Florida to a rival steelmaker’s scrap unit. The move abandons Gerdau’s long-held practice of running its own shredders as it does at its mills in Brazil and that it carried over when it came to North America and acquired long products mills in Canada and the U.S. It also raises the question of whether more shredders would close. In other words, is this a shredder shakeout?
• Actually, says a veteran scrap trader, a shakeout of sorts has been underway for years. Only, it isn’t a complete closure of a shredder. Steelmakers and scrap processors have “idled” their least desirable operations. They cut the workforce and only operate the shredder when they have enough cheaply acquired feedstock. They run the machine for a day or two, then it goes back into hibernation for a few weeks.
• Some dealers have long argued that steel mills should not own and operate shredders because they, a) operate them as cost centers; b) don’t have to show a profit; and c) often overpay for feedstock. But many mill-owned shredders are suppliers to both the parent company’s mills and other scrap consumers like mills and foundries, especially if selling to a rival steelmaker.
• Old autos are still the main feedstock for most shredders and a few auto wreckers have gotten into the shredded business. Even Ford Motor acquired a chain of auto junkyards and mulled plans to run its own shredders, but few have had much success or extended their roles in the shredding business. And Ford junked its plans for being an auto recycler plan after a year or two in the business. Perhaps the sole success has been Schnitzer Steel Industries Inc., which acquired a chain of auto wrecking yards in the Pacific Northwest that it has run as a separate profit center as well as a feedstock supplier to its shredders on the U.S. West Coast.
Shredded scrap is the most commonly used ferrous scrap and its consumption will rise in the future as emerging economies like China generate more obsolete scrap and look for ways to use it in their own steel mills or export it to mills in neighboring countries. As such, they could become the wild card that will influence both the supply and the price of scrap and other steelmaking materials in coming years.
• Shredded scrap has become a more desirable scrap because new separation methods have reduced the percentage of tramp nonferrous elements like copper and aluminum, and because of its density. Thus, it is now even used by many integrated steel mills that once regarded it as too dirty and contaminated to use in making higher quality formable steel products like cold-rolled sheet and wire rod.
• Shredders come in various shape and sizes—from huge 10,000-horsepower megashredders that can tear a car apart in seconds or shred heavier gauge material like ¼ inch-thick plate. There are also smaller shredders that can be hauled by truck to a scrap yard and process its shreddables. These eliminate freight costs from scrap yard to shredders. These have no huge upfront capital costs for the small or mid-sized dealers, yet can put them in the same supply chain as some of their largest rivals.
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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