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Mike Marley’s Shredded Power #79

iconJan 20, 2017 09:24
January was the sell-everything month that many dealers and brokers had expected. Three consecutive months of price increases have lifted most scrap prices by about $100 per ton and persuaded dealers

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ScrapMonster Contributor

January was the sell-everything month that many dealers and brokers had expected. Three consecutive months of price increases have lifted most scrap prices by about $100 per ton and persuaded dealers that it was time to unload. Domestic steelmakers, according to several brokers and traders, have gotten all the tons they wanted to buy this month.

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #79

Lack of export sales darkens the outlook for February.

January 19, 2017

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

January was the sell-everything month that many dealers and brokers had expected.  Three consecutive months of price increases have lifted most scrap prices by about $100 per ton and persuaded dealers that it was time to unload.  Domestic steelmakers, according to several brokers and traders, have gotten all the tons they wanted to buy this month. 

A few dealers who failed to clean out all the excess inventory amassed in the past few months were still offering more scrap, but there were mixed reports about whether the mills were buying more.  One Midwest broker said a few were accepting new offers.  They may be doing that because of concerns about potential winter transport problems, or out of a need to rebuild inventory.  Others said most mills were turning aside any new offers even at lower prices because they are expecting East Coast shredders and exporters to have more scrap available for the domestic mills again next month.

Their decisions to do an about-face and sell their scrap at home was a response to the absence of Turkish steelmakers who are bulk cargo buyers from their offshore scrap suppliers, but also the downturn in containerized shredded scrap sales to Indian traders.  One East Coast trader said the Indian buyers were active throughout October and into November, but abandoned the U.S. East and Gulf Coasts ports when the domestic scrap prices started to climb.

Getting all the tonnage sold this month to the mills is the main goal.

Dealers are busy shipping all the ferrous scrap they sold to the domestic mills as quickly as possible.  That haste may be driven by fears that the market and price trends will decline in February.  If they do, dealers can expect to see their undelivered orders canceled and the prices lowered.  Indeed, pessimism is already emerging in some regions.  Dealers in Ohio and western Pennsylvania, which enjoyed the steepest price increases this month, are worried that another tidal wave of unsold export scrap could be headed their way in February and further undercut the gains they made this month.

No bulk cargo sales to the steelmakers in Turkey is at the core of their concerns.  The last sale from this side of the Atlantic was about three weeks ago.  Turkish mills have bought scrap in the interim, but only from exporters in western Europe and the Baltic areas.  They have been adamant about resisting higher prices sought by North American exporters, said a U.S. trader. They have paid less than $285 per tonne delivered for 80/20 heavy melt from European scrap suppliers while U.S. exporters are said to be demanding at least $295 per tonne for the same scrap.

The problem for the U.S. exporters, said an Eastern trader, is their need to attract enough scrap in the coastal regions while preserving profit margins.  Most have been paying as much as $235 per ton for export heavy melt, he said, though smaller dealers who have no outlet other than the docks are getting less.  Offshore sales at $285 per tonne minus stevedoring and ocean freight costs of about $35 per tonne would net U.S. exporters only $250 per tonne at their piers.  Thus, selling at $285 would leave them well short of the $40-per-tonne margin they hope to see, he said.

The export sales drought will end, but shredded could overhang the U.S. market.

Another trader said that he expects the export standoff to end this week or next.  He believes one or more of the U.S. exporters will cut their price demands to $285 per tonne or to a level that the Turkish mills will accept.  What remains uncertain is how much scrap will be sold overseas.  The export yards will sell much of their heavy melt, he said, largely because they can’t sell that scrap to the domestic mills.  The cargoes will be top heavy with 80/20 heavy melt and have only a few thousand tonnes of shredded scrap, he predicted.

Instead, the docks will again offer much of their shredded scrap to the domestic mills, possibly before February arrives, he said.  He anticipates an “end run” around the local scrap suppliers in some regions like the Southeast, western Pennsylvania and northern Ohio.  Even if the domestic prices fall by $10 per ton, he said, what they get from the U.S. mills might still be more than they can expect from Turkish mills.

A northern Ohio trader said he wouldn’t be surprised if some exporters and Eastern shredders undercut offers from local suppliers.  They did that this month, he said and he also expects them to return in February.  That and the added output from two area shredders that had been idle, but are now running, could cut prices by $10 or $15 per ton in February, he said.  That would bring the prices there in line with the $305-310 per ton delivered-to-the-mill prices paid in regions like Detroit and Chicago this month.  Some of the Ohio mills had paid remote suppliers as much as $345 per ton for shredded scrap earlier this month.

Initially because of the early bidding war for shredded scrap and busheling in northern Ohio, some traders expected that prices would soar by more than $50 per ton, but that lost its momentum near the end of the buy week when the exporters and other suppliers on the East Coast began offering big packages of shredded scrap at competitive prices.  Another moderating factor was the mild temperatures and lack of any significant snowstorms in regions like Chicago despite the threat of ice and snow from the West.

Eastern dealers may already be factoring into their expectations the likelihood that the exporters will retreat on the price sought from the Turkish mills.  That could quickly change the buying prices at the docks.  One possible sign of that, according to a Philadelphia area broker, is that two area mills put their scrap suppliers on strict delivery schedules last week – an indication that they may be swamped with deliveries from dealers.

In other words, dealers are delivering more tons than the mill bought or they are delivering earlier than expected.  That could be a sign that some dealers are expecting the docks to lower their buying prices.  The dealers want to sell excess heavy melt—even if it’s only 40 or 50 tons—where they can get a higher price.  The price increases obtained from the mills in the past three months have trickled down to the dealers’ scale prices and their intake has risen.  Some may be worried they will have excess scrap in their yards when January ends.  That would leave them with high-price inventory in a potentially weaker market.

Domestic steel prices are still rising and so is production.

Not all are giving in to the gloom, however.  Steel prices continue to rise driven in part by higher scrap prices and stronger overall demand for steel. Hot-rolled coil prices have risen to an average of about $630 per net ton and lead times on orders are out to as long as six weeks. Cold-rolled coils are at $830 per ton and their lead times are as much as 10 weeks.  Sheet prices are not the only grades climbing.  One pipe and tubing maker this week hiked its OCTG (oil country tubular goods) prices by between $125 and $200 per ton and its line pipe prices by $125 per ton.  These increases highlight the rise in steel demand from the oil and gas drilling industry from a year ago when oil prices collapsed.

And not just prices are moving up.  Domestic raw steel production climbed to 1,716,000 net tons last week, the American Iron and Steel Institute said, while the industry’s capability utilization rate rose to 72.3%. It is the second increase in as many weeks and is up by almost 2% from the previous week when raw steel output rose by 6% and the industry’s operating rate moved up to 71.0%.

In the Midwest, one trader said most mills got what scrap they needed this month, but some are still willing to buy more at unchanged prices.  Also, Big River Steel, the newest member of the nation’s steel fraternity, continues to make its presence felt in the scrap market, he said.  Scrap from the Chicago area was shipped down river to Big River and its flat-rolled rivals in that region.  That has put more pressure on industrial steel scrap.  At the same time, he added, dealers in those areas of the Midwest are not feeling the same pressure from exporters and East Coast dealers.

Many brokers and mill buyers believe that obsolete scrap is overhanging the market in the East and will impact supply and prices there and in the Southeast in February, said a trader in the South.  Shredded is abundant, but busheling and bundles are in tight supply because of the steady pace of sheet steel output, and increased scrap demand from the oil country steel suppliers and specialty bar makers.  Some dealers are hoping that the rebar mills and others in the construction market will also get busier, he said.  This may be based on an expected increase in output to meet the spring and summer construction demand including promised spending on infrastructure projects like highways and bridges.

Shredded Scrap Thermometer:  Is shredded piling up?

It may not be falling off the docks into the New York Harbor or Delaware River, but too much shredded scrap is piling up along the U.S. East Coast.  Some Eastern dealers were aggressive sellers this month, said one local trader, undercutting his deals as well as the offers from other exporters and Eastern shredded producers.  Prices slipped from a high of $345 per ton early in the buy week to $325 per ton by week’s end.  Still, shredded prices there were at a premium of $15 to $20 over the mill-delivered prices in several other Midwest cities.  Some traders are worried that the effort to dispose of excess supplies will only further “fragment” the fragmented metal market:

• Three months of scrap price increases have trickled down to the scales at many yards and now several shredders are paying $220 per net ton and higher for shredder feedstock.  Indeed, one Eastern operator posted a picture on social media that showed a long line of peddlers in pickup trucks leaving his yard after unloading and noted that it is January and that he had not seen this much January traffic there in two years.

• When overseas demand is weak, U.S. exporters have few choices other than to sell their shredded scrap to domestic steel mills.  Their heavy melt, the so-called 80/20 heavy melt, is not accepted at most U.S. mills and spending the time sorting it to meet U.S. mill specs may not be economically worthwhile.

• Shipping scrap from an exporter’s wharf to a domestic steel mill is not a simple task. Most export yards are equipped to load ships, not railcars and trucks. Yet, it is hard to ignore the premium that shredded can command in the U.S.  Foreign steelmakers typically pay only a $5 per tonne premium over 80/20 heavy melt for shredded scrap, but the premium in some U.S. regions this month ranges from $20 to as much as $35 per gross ton for shredded versus the higher quality No. 1 heavy melt.

Despite fears that excess supplies of shredded scrap could send its price tumbling next month, there are a pair of “wild card” market factors that could reverse those potential declines. These include:

• Busheling and bundles are tight and some traders believe their prices will either be unchanged next month or move higher.  If that’s true, the computerized scrap buying programs that many mills use these days may recommend minimizing consumption of industrial scrap and substituting cheaper shredded.

• Colder temperatures and snows are the seasonal variables that affect not only the delivery but also the processing and output of obsolete scrap like shredded and No. 1 heavy melt.  The weather has been moderate in much of the Midwest and the East thus far, but winter still has two months to run.


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.


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.  
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