By Michael Marley

Obsolete and industrial steel scrap may be harder to find for domestic steel mills. The $50 per gross ton increase in ferrous scrap prices this month was expected to be an incentive that would draw out more scrap, but dealers report that their inventories and the intake are still low despite the higher mill prices.

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #75

Scrap supply is still tight despite price increases.

December 7, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Obsolete and industrial steel scrap may be harder to find for domestic steel mills.  The $50 per gross ton increase in ferrous scrap prices this month was expected to be an incentive that would draw out more scrap, but dealers report that their inventories and the intake are still low despite the higher mill prices.  If flows have dried up, some mills may have to raise prices even further and buy more from remote suppliers.

Another concern for many is that scrap processing and transport will slow prior to and during the Christmas holiday week.  Auto plants, the major producers of bundles and busheling, will be closed; and as a result, reducing shipments to the EAF-based flat-rolled mills that plan to operate that week.  This could also cut industrial scrap supply to a trickle in the first week of January.  Snow and colder temperatures could exacerbate the situation by limiting scrap processing operations in dealers’ yards and hampering truck and rail transport.  The Midwest and Northeastern regions were hit with snowstorms and temperatures in the teens this week.

At the same time, dealers have been cautious about the amount of scrap they are offering  to the mills this month.  Several were unwilling to commit to bigger orders because they didn’t want to be oversold.  Some are worried that they won’t have enough scrap to fill December’s orders by month’s end and that prices could rise by as much as $20 per ton next month, the third increase in as many months.  Thus, they could be shipping this month’s orders in January but paid lower prices.

Higher prices have failed to draw out more scrap and shredder feedstock from smaller scrap yards, auto wreckers and the peddlers.  A Midwest shredder operator said he has raised prices in line with the market, but many of his usual suppliers are unwilling to sell much at year’s end.  They claim to be worried about paying a heavier tax bill if this year’s revenues are higher.  He called that a “baloney” excuse and instead argued that most are holding back material. They believe prices will rise higher in January and they hope to take advantage of that.  “Why not,” he added, “scrap dealers have bragged to them in the past about how much they made by holding back and now they want to do it too.”

Also, some dealers have not raised their own buying prices in line with the increases in mill buying prices.  Mill-delivered prices rose by $30 per ton last month and another $40 this month, but some have only raised their scale prices by between $20 and $25 per ton, said a Chicago-based dealer who sells shreddables to local shredders.  Some may be slow to raise their offers, he said, because they are trying to recoup what they lost two or three months ago, when mill prices were tumbling.

Some mills may be able to pay higher prices for scrap; others may not.

Some buyers including those at mills that own scrap yards, acknowledge that they may not get all they hoped to obtain from independent scrap providers this month and have taken steps to find additional supply.  Part of the reason why the mills are scrambling to find more raw materials is due to the spike in steel demand, especially for the flat-rolled mills.  Many are aware of the first commandment for those assigned to buy scrap. Simply stated, it says the mill and its melt shop must never be without scrap.  They can pay more for scrap, but they can’t run out of it.

Most of the domestic sheet mills have the financial wherewithal to pay higher prices, several scrap dealers said.  They have raised their steel prices by $140 per net ton in the past month, and the pace of new steel orders has risen as well.  One sign of that strength is the increase in domestic raw steel production.  It rose by 2.4% to 1,674,000 net tons last week, according to the American Iron and Steel Institute, and the industry’s capability utilization rate climbed to 70.6%.  That topped the 70.0% threshold for the first time in several months and was the second increase in output in the past two weeks.

Dealers contend that the mills need to pay more to incentivize obsolete scrap suppliers, so that they in turn can encourage peddlers and others to collect more discarded iron and steel and bring that material into the scrap supply stream.  While the flat-rolled mills may be able to absorb three months of scrap price increases, it’s unclear whether the plate producers and long products mills can as well.  Most of the plate and long product makers have raised their steel prices by anywhere from $30 to as much as $100 per ton in the past month.  In many cases, they are reacting to the $70-80 per ton scrap price hikes of the past two months and to the anticipated increases in January; and not because they are seeing a significant increase in demand for their steel products.

Some domestic mills are reaching out to more distant scrap suppliers. 

One major EAF steelmaker, for example, has seized on the lull in Turkish overseas buying and purchased four or five cargoes of bundles and shredded scrap from western European exporters.  That mill has made no effort to keep those deals secret.  The goal may be to tell some U.S. dealers that they won’t need as much scrap in January.  That might persuade them to sell more scrap instead of hoarding it.

Still, those imports from Europe may total only 150,000 tonnes.  That may not be enough to offset potential shortages this month, especially if much of that tonnage doesn’t arrive here until January.  As a result, the mill’s buyers have also been shopping for added supplies of busheling and bundles from industrial scrap processors in the upper Midwest and are paying the same prices on an F.O.B. basis that the dealers got from local mills.

The key difference here is the pricing on an F.O.B. basis is at the dealer’s yard.  That matches the local delivered-to-the-mill price and is designed to avoid sparking a bidding war for the fixed supplies of busheling and bundles.  Sometimes when distant mills are making these so-called springboard buys, they pay a premium to take scrap away from local mills.  Since the supply of bundles and busheling are limited by the output of, say, cars produced by automakers, that can set off a bidding war and raise prices without generating additional scrap.

The shredded scrap produced at that yard may yield a better return, however.  It is produced at the scrap yard and doesn’t require the additional loading and handling costs that are involved in picking up scrap from an industrial plant.  And indeed, industry sources said some mills have paid as much as $300 per ton and higher for shredded scrap bought through “quiet deals’ with several remote suppliers.

The big, multi-site mills with their own home-grown scrap supply may be having supply headaches, said a northern Ohio trader, but some of the smaller steelmakers with only a single mill are having migraines.  Several in the Midwest are still trying to buy more scrap – not for January, but for this month’s production programs − and they’re not having much luck finding more, he said.

A Birmingham-based broker doubts that any of the mills in that region are short of scrap yet, but noted that many tried to purchase as much as 150% of their usual monthly buy and failed.  Most were trying to make sure enough scrap would be in their supply pipeline during the first two weeks of January, he said.  They are worried there won’t be enough scrap on hand while they are bargaining with dealers over January prices.

Also, alternative materials are not available at competitive prices or require longer delivery timelines.  Prices for imported pig iron, as an example, have climbed to $350 per tonne delivered to U.S. Gulf Coast ports and the materials bought now probably won’t arrive until late January or early February.  Likewise, the prices for higher quality iron pellets used to make direct-reduced iron (DRI) and hot-briquetted iron (HBI) have risen as sharply as the basic iron ore prices.  That has made even the captive production of DRI and HBI more expensive.

Will U.S. exporters rescue the domestic mills?

Ferrous exports may be sailing off in different directions both literally and in terms of demand from different regions.  West Coast exporters said demand in Asia has rebounded both for bulk cargoes and containerized shipments.  The major yards are sold out through January on their bulk cargo business, and are seeing steady sales and higher prices for their containerized shipments.

Turkish steelmakers, on the other hand, remain conspicuous by their absence from the U.S. scrap market.  They have defied the prediction that they needed to buy more and pay higher prices.  Thus far, European suppliers sold two cargoes at about $270 per tonne which h is unchanged from two weeks ago, but not a pound was bought from this side the Atlantic. U.S. traders are certain the Turkish mills have no alternative other than to buy imported scrap. Billet prices at $410 per tonne delivered to a Turkish port make re-rolling it into rebar more expensive than buying scrap from the U.S. suppliers at $270 per tonne delivered. Considering the conversion costs for scrap versus billet, scrap is about $50 per tonne cheaper.  Yet, Turkish scrap buyers and the U.S. sellers have not been able to make new deals lately.

One reason may be the disparity between what U.S. exporters want and what the Turkish mills are willing to pay. One U.S. East Coast trader said the exporters are now looking for $290 per tonne for 80/20 heavy melt. This is the price they believe they will need to be able to compete with domestic mills for scrap now and in January, he said.  But the Turkish mills are reluctant to pay much more than $280 per tonne, because offshore demand for their rebar and other long products is faltering.  Another concern is the changes in trade policy that the incoming Trump Administration is likely to adopt. A tougher team of pro-domestic steel trade officials could block their exports to the U.S.

Some East Coast yards are still filling orders for the Turkish mills and other overseas scrap consumers.  Without a new surge in buying by the Turkish mills, they may have no choice but to offer more of their shredded scrap to the domestic mills in the Midwest and the Southeast.  That would echo the exporters' domestic sales bonanza in the winter of 2013-2014 when export demand collapsed and winter weather shrunk scrap supply in several regions of the country.  U.S. mills turned to the docks and the exporters were happy to fulfill that demand even it if took two months or longer to deliver that scrap.

Shredded Scrap Thermometer: Finding enough shredded.

A shortfall in the availability of feedstock and seasonal afflictions like snow and colder temperatures could shrink the supplies of shredded scrap and drive up prices.  It's questionable whether higher prices would solve the problem for the mills and their local scrap yards.  Three years ago, a polar vortex plagued the Northeast and Midwest, and domestic mills turned to idle U.S. East and Gulf Coast exporters for added supplies. Unfortunately, that solution had its own unique problems.  These included:

• Most U.S. export yards can provide only a single grade of ferrous scrap that the domestic mills will accept - shredded.  Their heavy melt, regardless of the low price, is unacceptable either because it may contain too much nonferrous metal or it may be too thick or too thin. The docks handle some P&S (plate and structural scrap), but P&S commands a premium price to shredded.  In the domestic market shredded is the pricier of the two.  Little or no industrial steel scrap is ever exported and so none is to be found on the docks.

• Unlike many of the major scrap brokers and processors, the exporters have few railroad gondola cars of their own. Those they have are used mainly to haul their shredder residue to landfills.  They instead must rely on mills, brokers or the railroads.  This was a severe problem in the winter 2013-2014 when operations at the two major railroads in the East were crippled by the severe cold and snow. Scrap that was bought in February and March didn't arrive until May for some mills in Ohio and elsewhere in the Midwest.

Despite the threats posed by winter weather, there are nevertheless at least two wild cards that some mills have in their hands and can play.  These are: 
 
• Some have captive shredders or shredders that also supply other nearby mills and foundries, but can be commandeered to supply only the corporate parent’s mills in times of scrap droughts.  Most of the major EAF-based mills which own scrap yards and shredders also own or lease rail cars that can likewise be rerouted to serve their mills.

• Despite all of the reports of poor flows into their yards and weather-related problems, a significant price increase often mysteriously draws out huge amounts of scrap.  Veteran scrap buyers often recognize this phenomenon and buy more than they need.  By overfilling their supply lines and cutting price the next month or two, they recoup part of the extra spending. 


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 20-gross 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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