Plump, well-cooked turkeys and Black Friday shopping sprees may be the main attraction this week, but the real centerpiece for many scrap dealers is their hopes that prices will rise by $30 per gross ton or more next month.
WSEM World Steel Exchange Marketing
Mike Marley’s Shredded Power #72
Offshore weakness may dim dealers’ hopes for December.
November 23, 2016
Mike Marley (484) 751-5600
Peter F. Marcus (201) 503-0902
Plump, well-cooked turkeys and Black Friday shopping sprees may be the main attraction this week, but the real centerpiece for many scrap dealers is their hopes that prices will rise by $30 per gross ton or more next month. Their heady wishes stem from the strength of export demand in the past two months and its impact on the domestic ferrous scrap market. Offshore prices in Turkey and Asia have pushed higher for several weeks, though some traders are urging caution and note that both bulk cargo and containerized scrap sales are slowing.
Many mills would accept more scrap if dealers were offering it at current prices, but none are doing so. Instead, many are already talking about increases of $30 per ton or more for most grades in December and the likelihood of additional price hikes in January. But the gains, if any, will not be uniform and could vary from region to region.
Mills like those in the Detroit area, which managed to get some of their scrap needs this month filled with modest increases of $20 per ton, may have to compensate with higher offers in December. These would bring their prices closer in line with the $30 per ton and higher increases paid to dealers in neighboring regions. Likewise, some mills in coastal areas may be locking horns with exporters that have several bulk cargo orders to fill for their offshore customers and will be buying more heavy melt and shredded scrap.
Offshore demand has been the key driver for the domestic market this month. It spurred increases of $20 to $30 per ton in the first week of the month. Several mills sought additional tonnage from suppliers to ensure adequate stocks would be on hand next month and slow the price climb. Those efforts yielded little additional scrap and now, according to some industry sources, brokers for one major mill are quietly trying to make early deals for December with selected scrap suppliers for as much as $30 per ton over the prevailing prices.
Much of this buying activity is for mills in the South, said a Midwest trader. The brokers are taking a low-key approach. They are looking for “packages” of several thousands of tons of both busheling and shredded scrap that will be delivered in December. Their goal may be to restock the supply pipeline as well as increasing the tonnage on the ground at the mills. The assumption that the mills have little inventory – and even less on order – would encourage dealers to demand higher prices next month, or, even worse from the mills’ standpoint, hold more scrap off the market with the expectation of seeing even higher offers in January.
Steelmakers may not be the only scrap handlers and users without much inventory. Despite the increases of $20 and $30 per ton in mill buying prices this month, several dealers said the flows into their yards have not risen as much as they expected. A northern Ohio trader said he believes the smaller dealers and auto wreckers may be holding back more of their shreddables because they believe another price increase at the shredders may foreshadow the mills’ price moves next month.
Others question whether the dealers will enjoy much of a year-end buying bonanza. Several large Midwest mills have enough inventory on the ground, said a Midwest trader who often conducts a drive-by of these mills in the last week of each month. Others have scheduled maintenance outages after the Thanksgiving Day holidays or prior to their Christmas week shutdowns. Not to be forgotten are smaller mills in states like Pennsylvania that usually shutdown for several days or a week in early December when many of the mill workers take off at the start of the state’s deer hunting season.
New challenges: Big River, no imported scrap and high-priced pig iron.
Several other factors could drive the market, said another Chicago area trader. First is the announcement by Big River Steel Inc., the Osceola, AR-based sheet maker and newest member of the flat-rolled steel fraternity, that it will begin melting scrap in December. Big River CEO David Stickler was a keynote speaker at the AMM Scrap and DRI Conference in Chicago last week and outlined the mills buying plans.
Busheling and shredded scrap will account for half of its annual requirement of 2 million tons of scrap, pig iron and hot-briquetted iron, Stickler said. Big River has no plans to be in the scrap or virgin metallic businesses unlike two or of its main competitors. The company will remain a pure steel play, he said.
Second is the lack of much imported scrap from western Europe at competitive prices. Some U.S. steelmakers had bought both bundles and shredded scrap from European suppliers earlier this year, but that pipeline has dried up in recent months. Stronger demand in Europe and the now higher prices paid there and elsewhere in the world has kept more of that scrap at home and sent it to other nearby scrap importing nations.
The bellwether 80/20 heavy melt has been selling for as much as $275 per tonne delivered to Turkish ports. That would put the price of shredded scrap shipped to mills in Turkey at close to $280 per tonne and bundles at about $290 per tonne. That’s $50 per tonne higher than the average mill-delivered prices in the U.S.
Last is the skyrocketing price of imported pig iron. Ukrainian ironmakers are asking $320 per tonne at their ports. That would put the price delivered to New Orleans at close to $350 per tonne. Brazilian suppliers are looking for matching offers for their iron.
Raw material prices and demand may be driving sheet steel prices higher.
Others, however, believe some mills already recognize the boom in overseas scrap demand and acknowledge the threat of an even tighter supply when the colder winter weather arrives and limits the flows, processing and transport of scrap. That and the rise in orders for flat-rolled steel may be part of the reason for the series of prices increases posted by domestic flat-rolled steelmakers in the past month. Sheet steel prices have climbed by $100 per net ton in three separate moves—two earlier $30-per-ton raises and a $40 per ton hike last week.
One Midwest steel trader said the price for hot-rolled coil is now at about $540 per ton and cold-rolled coil has risen to about $750 per ton. Order lead times have stretched out as well, he said, to four or five weeks for hot-rolled and seven or eight weeks for coldrolled coils. This, he added, could reflect: a) a slower pace of steel production and deliveries because of the upcoming holidays; and/or b) a rush from major steel users and service centers seeking to put in their purchase orders before the new $40 per ton sheet prices increase take effects at some mills.
Though it may not reflect this buying flurry, domestic raw steel production nevertheless rose to 1,606,000 tons last week and the capability utilization rate inched up to 67.7%, according to the American Iron and Steel Institute. That is up 1.6% from the previous week when production totaled 1,580,000 tons and the operating rate was 66.6%.
Offshore scrap demand and prices soared, but could they now be reversing?
Much of the enthusiasm for domestic ferrous scrap has been stirred by the rise in offshore demand at integrated steelmakers in Asia and Turkey. This has come on top of the added sales of scrap to foreign EAF mills. They are relying more in scrap because it is cheaper than steel billet produced by integrated mills in China, Ukraine and Russia. The BOF melt shops are trying to cope with the reduced supplies and higher prices of coking coal. Coking coal prices tripled earlier this year after China, the world’s largest steelmaker and user of coking coal, limited coal mining to 276 days in a year.
Spot market coal prices topped $300 per tonne and iron ore doubled to $80 per tonne. This coal crunch limited the iron output from blast furnaces, and integrated steelmakers began scooping up scrap from Europe and the U.S. Their aim was twofold – stretch out the supply of iron from blast furnaces and lower steelmaking costs.
With this rise in demand, prices paid for 80/20 heavy melt, the bellwether grade for ferrous scrap exporters, soared from $210 per tonne two months ago, to $275 per tonne. If the offshore demand and prices begin to decline, as some now anticipate, it’s unclear how soon that will affect U.S. scrap prices. Major scrap exporters are still filling many of these bulk cargo orders and are paying their largest local suppliers $200 per ton for export heavy melt. Suppliers further inland can command premiums of an additional $20 per tonne to offset higher freight costs from these regions or to provide enough tons needed to finish loading a ship.
But a decline may come sooner than some expect. West Coast traders are urging caution and said and the offshore scrap market may have peaked. Coking coal shortages may end because Chinese authorities last week reconsidered their decision to limit mining activity to 276 days a year, and have reinstated mining operations to the previous level of 330 days a year. Both coke and iron ore pries could begin to decline in the coming weeks.
Consequently, overseas scrap demand and prices may already be wavering. There have been no bulk cargoes sold to Turkish mills since last week, container sales to Indian mills and others in southern Asia have stalled and prices paid for containerized scrap shipped to Taiwan fell by $10 per tonne last week.
Shredded Scrap Thermometer: Shredded arbitrage opportunities.
Ferrous scrap dealers attending the AMM Scrap and DRI Conference were urged to think price about arbitrage opportunities beyond their local market and how it impacts their buying and selling. “Literally,” said Peter Meyers, vice president of ferrous sales and marketing at Metalico Inc. Cranford, NJ, “what Turkey paid in the morning will affect what we pay in Ohio Valley later in the day.” In other words, the buying and lack of supply elsewhere can impact prices and sales of ferrous scrap in seemingly isolated regions of this country. Meyers offered one example of such opportunities, although there have been others lately:
• In a falling export market, Meyers noted, U.S. exporters are apt to offer their own tons into an already soft domestic market. When offshore prices started to rise a few months ago, however, that boosted their demand for scrap to sell overseas which helped raise prices in the inland U.S. where the exporters can be buyers of scrap as well as sellers.
• The coking coal supply crunch has persuaded several offshore integrated steelmakers to increase the amount of scrap they add to their BOFs as a coolant. Many are substituting shredded scrap because it is available at a discount of more than $100 per tonne compared to the cost of hot metal from their blast furnaces.
• Some U.S. EAF-based mills have exploited trade opportunities between the scrap-rich regions of the world, namely the U.S. and western Europe. When shredded scrap and No. 1 bundles were available at competitive prices and the U.S. dollar was stronger versus the Euro and U.K. pound, they bought heavily and used the imported scrap as leverage in the bargaining over prices with dealers supplying their mills in the U.S.
Despite these opportunities, there are still limitations that scrap dealers must accept, said another panel member, Joel Denbo, chief manager of operations at Tennessee Valley Recycling LLC, Decatur, AL. Two such hurdles he cited might be regarded as the “wild cards” in the scrap trading game. These are:
• The export 80/20 heavy melt, which some in the Southeast label as mixed No. 1 and 2 heavy melt, might be bought and used at some mills in the region but are regarded as unacceptable at any price at other mills there and in neighboring regions, thereby limiting the scope of the market for the dealers who produce that grade.
• Freight costs, particularly rail rates, are still a significant portion of the costs of ferrous scrap versus the transport costs of higher-priced metals like copper and stainless steel. Thus, brass turnings and aluminum clips can be loaded in a container and shipped across the country for a smaller percentage of the overall cost whereas shipping expenses for a lower-value ferrous scrap like machine shop turnings might be as much as one-third of the overall price that a mill must pay for that material.
The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures in early 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 email@example.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.
This report includes “forward-looking” statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, international currency movements, technological developments, governmental actions and/or other factors. The information contained in this report is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any action is neither authorized nor warranted. WSD does not solicit, and avoids receiving, non-public material information from its clients and contacts in the course of its business. The information that we publish in our reports and communicate to our clients is not based on material non-public information.
The officers, directors, employees or stockholders of World Steel Dynamics Inc. do not directly or indirectly hold securities of, or that are related to, one or more of the companies that are referred to herein. World Steel Dynamics Inc. may act as a consultant to one or more of the companies mentioned in this report.