By Michael Marley

They didn’t promise to repeal Obamacare or jail their rivals, but the domestic steel industry’s biggest scrap consumers settled this month’s price election by the end of last week. Instead of the up $20-per-ton offers touted earlier in the week by a few rivals, the bigger mills bought late last week and raised scrap prices by as much as $40 per ton.

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #70

Ferrous scrap prices rise by as much as $40 per ton.

November 9, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

They didn’t promise to repeal Obamacare or jail their rivals, but the domestic steel industry’s biggest scrap consumers settled this month’s price election by the end of last week.  Instead of the up $20-per-ton offers touted earlier in the week by a few rivals, the bigger mills bought late last week and raised scrap prices by as much as $40 per ton.  That was enough to overcome dealer resistance to the earlier offers and persuade some scrap suppliers to come up with more tons this month and in December.

Dealers as well as mill buyers and their brokers are talking about a 45 to 60 day buying period largely because worries about scrap supply now are trumping price considerations.  Supply of heavy melt and shredded scrap usually decline in the winter because colder temperatures and snowstorms discourage scrap collection.  Add to that the price cuts obtained by the mills in the past two months.  Shredded scrap and heavy melt prices declined by $50 per ton in September and October.

Making the supply situation more troubling is the recent and unanticipated rise in offshore scrap demand and prices.  This could siphon the few excess tons that might be available to U.S. steelmakers this month and next.  Scrap export prices have risen sharply in the past month.  The last bulk cargo sale by a U.S. East Coast exporter saw the price of 80/20 heavy melt climb to $260 per tonne delivered to a Turkish port.  That’s up more than $20 per tonne from the deals made a little more than a week ago.

Cutbacks in coking coal output has spurred a worldwide scrap buying binge.

And this isn't simply a few Turkish rebar mills building inventory for the winter.  A worldwide scrap buying binge has arisen because of the cutback in the supply of coking coal and the steep rise in its price.   Integrated mills in Turkey, India and, yes, even China are facing steel production challenges because of the coke shortage.  Simply put, they are buying more scrap from Western Europe and the U.S. and charging it into their BOFs to supplement the reduced output of iron from their blast furnaces.

As an indicator of how desperate some mills are, a British scrap exporter sold an allshredded cargo to a Turkish steelmaker last week, probably an integrated mill there.   Turkey’s rebar mills buy much of the foreign scrap that is brought into the country.  These are bulk cargoes composed mainly of 80/20 heavy melt which is bought at a discount of $5 per tonne from the shredded scrap price.  Thus, a $260-per-tonne heavy melt sale might also include a few thousand tonnes of shredded scrap with a $265per-tonne price tag.  Sales of all shredded cargoes are exceptions and often are bought only by integrated mills.  They want denser and cleaner melt material, i.e. denser and cleaner than what they expect to get with the 80/20 heavy melt.

Also, it isn’t just the bulk cargo shippers who are feeling the demand pressure from Turkey’s integrated mills.  Indian traders are paying as much as $245 per tonne for shredded loaded into containers and dropped off at the U.S. East Coast docks.  These shipments are destined for both the EAF mills and integrated steel producers in southern Asia.

Competition has become more intense between the exporters as well, some industry sources said.  In addition to matching offers from his rivals, one East Coast exporter is sending its own trucks to pick up containers at dealers’ yards.   That, said one Eastern trader, not only reduces the cost for the dealers, but it also solves the problem of finding and hiring a trucker to transport that scrap.  “That eliminates a big headache for many of these smaller dealers,” he explained.

One consequence of this is that steel mills in Ohio and in the Southeast have fewer pipelines to tap for additional scrap unless they are willing to pay sharply higher prices.  In past years when their local shredded producers didn’t have enough material or demanded higher prices, these mills could turn to the East Coast shredders.  That supply pipeline may be empty now.  And they can't get as much from scrap exporters in Europe as they did earlier this year.  Offshore sales and prices are spiking there as well.

Overseas demand may be putting more pressure on supplies of shredded scrap.

This offshore buying affects mainly the domestic market’s supply of shredded scrap and not the heavy melt.  U.S. mills normally don’t buy much heavy melt from the exporters and the coastal scrap yards that are their (the exporters’) main suppliers.  The 80/20 heavy melt does not meet their specs.  Shredded scrap, whether it is produced at an export yard or a coastal shredder, is more uniform and most domestic mills will use it if the pricing is competitive.

It costs scrap yards on the U.S. East Coast about $10-12 per tonne to haul a container filled with shredded to the docks.  The buying price at the major East Coast docks is now at $245 per tonne.  That puts the cost of shredded at $230-$235 per tonne at dealers’ yards.

Rail or barge freight costs to Ohio or to the Southeast are about $30 or $40 per ton.  Thus, a mill in Ohio or in South Carolina would have to pay between $255 to $265 per ton to buy shredded from the coast and keep it from going offshore.  Delivered to the mill prices for shredded scrap averaged between $200 to $210 per ton in these regions last month.  Will they pay $50 to $60 per ton more this month?

Added to that, is the recognition that year-end is approaching.  Some mills are trying to buy enough to meet their scrap needs for the next 45 to 60 days, but dealers are saying “no deal”.   They may be seeing blood in the water, said a Chicago-based broker.  In other words, they suspect that some mills may not have enough scrap on the ground or in their supply pipeline.

Consequently, some dealers see an opportunity to recover from the price cuts of the past two months by holding some scrap off the market this month.  They expect prices to rise in both December and January.  Some mills won't buy much in December, because its year-end and the mills’ scrap buyers have been told to keep inventory in check.  Other mills will have outages to do maintenance work or because their steel sales are weaker and therefore may not buy much scrap.  By January, some dealers believe these mills will be starving and pay more to get the scrap they need.

But others question that long-held belief that January will bring a boom in scrap sales.  A Midwest scrap trader said dealers forget that all four of the major EAF mills have their own scrap yards now and one has two DRI plants.  Indeed, he noted that the buyers for two of the largest EAF-based mills were very active in buying scrap late last week, both from nearby suppliers and those in remote regions.  Their critical question was how much tonnage was available this month and in December.  They may have resolved those concerns.  This week, he said, they were not as troubled about supplies.

Flat-rolled mills are moving their busheling prices in tandem with shredded.

Supplies of industrial scrap like busheling and bundles may be sufficient to meet the needs of the EAF-based flat-rolled mills.  Yet, some dealers and traders in Chicago, northern Ohio and the South are posting matching price hikes of $40 per ton for these industrial scrap supplies.  Busheling prices in Chicago have risen to $240 per ton, said a Midwest trader.  That matches or surpasses what most mills in the region paid for shredded this month.

Price changes usually have little or no impact on the availability of industrial scrap because that supply is determined by the pace of manufacturing output.  Heavy melt and shredded scrap, on the other hand, are price sensitive.  Busheling and bundles have been stable and are likely to remain so, unless one or another flat-rolled mill desperately needs more and begins jacking up the price offered to a rival mill’s main suppliers.

Other factors could be playing a role to maintaining price stability of the industrial scrap supplies.  First, the sheet mills raised the prices of both their hot-rolled and cold-rolled products by $30 per ton last month and three major sheet mills followed that up this week with another $30-per-ton price hike.  If these increases stick, they will offset the higher prices the mills are paying for scrap this month.  Domestic raw steel production rose to 1,602,000 net tons last week, the American Iron and Steel Institute said, while the industry’s utilization rate inched up to 67.5%.  That is up 1.7% from the previous week when steel output totaled 1,575,000 tons and the operating rate was 66.4%.

Last and certainly not least, the flat-rolled mills have learned that letting the busheling and bundles prices drift below the shredded scrap prices has encouraged some of their own long products mills and rival producers of rebar and structural steel products to use more busheling in place of the seasonally short supplies of shredded scrap.

Shredded Scrap Thermometer:  Finding more shredded scrap.

Because of the rise in offshore demand from many of the foreign integrated mills, there is growing concern that some U.S. mills won’t be able to obtain all the shredded scrap they need this month and in December.  Integrated steelmakers often are not as troubled about a $10 or $20 per ton spike in scrap prices.  Since scrap usually accounts for no more than 20% of their melt, such price increases average out to a $2 or $4 per ton upward bump in that portion of their raw material costs.  The more important question is what steps domestic EAF mills can take to cope with a supply shortfall. These could include:

• Making “quiet deals” with a few independent shredders, i.e. paying say $10 over prevailing prices under the condition that that price does not become public.  This practice: a) secures a “guaranteed” scrap flow for the mill; b) enables the processor  to pay more for feedstock (car hulks and other shreddables); and c) increases the flow of feedstock into the scrap processors yard which it then sells to the mill.

• Other mills that own and operate shredders will raise their own feedstock prices above the levels offered by the independent shredders.  These may be captive suppliers to only one or two mills.  Their only goal is to produce enough shredded to satisfy the mill’s raw material needs, since they do not worry about making a profit on the shredded they produce.  The mills make money on their steel products not scrap.

• If there are excess supplies of busheling in major industrial regions like Detroit or northern Ohio, some mill-owned scrap processors may ship a portion of those tons to nearby long products mills and use materials like imported pig iron or direct-reduced iron at the sheet mills.

• One step some dealers take, but rarely admit to, is to add lower quality industrial scrap like machine shop turnings to their shredded.  Normally, said a veteran broker, this is done while the shredded scrap is being loaded into a railcar or a truck.  Some buyers will complain if they see turnings at the bottom of the railcar, he said, but others may be satisfied they got enough material for the melt shop.

Shortages in shredded supplies are usually short-lived. There are two wild card reasons that account for the brevity of such tight supply situations. These include:

• Shredders operate on the economy of scale principle and are most efficient when producing as much tonnage as they can six or seven days a week.  If they don’t have their own feeder yards, they cultivate close relationships with suppliers – auto wreckers, smaller scrap dealers and even the peddler driving an old half-ton pickup truck – to keep a steady flow of shreddable materials coming across the scale each day.

• The next decade could see a significant spike in shredded scrap output and consumption.  Developing economies like China and India will consume more autos and other durable goods.  These will be shredded and sold to the steel mills in those and neighboring countries.
 
The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures in the first half of 2017.  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 published by Platts.  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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