By Michael Marley

ScrapMonster Contributor

Inconsistent supply and demand and varying price changes are the prevailing trends in the ferrous scrap market this month. Along the U.S. East and Southeast Coasts, domestic steelmakers have slashed their prices for shredded scrap by $40 per gross ton, while buyers from India have boosted their offers by $15 per tonne. .

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #82

February’s price moves range from sideways to down $40.

February 8, 2017

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Inconsistent supply and demand and varying price changes are the prevailing trends in the ferrous scrap market this month. Along the U.S. East and Southeast Coasts, domestic steelmakers have slashed their prices for shredded scrap by $40 per gross ton, while buyers from India have boosted their offers by $15 per tonne. In some areas of the Midwest, meanwhile, busheling and bundles offers are down by a modest $10 per ton but unchanged in other

Midwest cities and in the South where flat-rolled mills have been trying to buy additional tons.

At the core of the chaos is weaker demand from Turkish steelmakers and a steep drop in the prices they are paying for imported scrap. A decline in their export sales of rebar is the source of the slowdown. Consequently, prices for the bellwether 80/20 heavy melt slumped to about $220 per tonne delivered to a Turkish port in deals with their European scrap suppliers. U.S. prices dipped to about $240 per tonne for the same grade. That’s better than what the Europeans were getting, but scrap shipments from the U.S. include higher loading and ocean freight costs.
 

And since the Turkish mills only pay a modest $5 per tonne premium over heavy melt for imported shredded scrap, several U.S. exporters and East Coast shredded producers have shifted their marketing to the homeland. One U.S. East Coast exporter booked a sale to a Turkish mill last week that included only heavy melt and bonus grade (five-

foot plate and structural scrap) and not a shred of shredded scrap. He and others are peddling that material to U.S. mills.
 

A New England export yard sold a cargo to a Turkish mill this week at $248 per tonne for the 80/20 heavy melt and that deal included several thousand tonnes of shredded scrap at $253 per tonne. This is up almost $8 per tonne from last week’s mainly heavy melt and no-shredded deal. But one Eastern trader noted the New England yards rarely sell much scrap to Southeast mills because of higher freight costs to the region.

Domestic shredded prices are off from the delivered-to-the-mill average of $305 per ton last month, but are higher than the offshore offers, even on a shipping point basis. Mills in the Middle Atlantic region are paying between $260 and $265 per ton delivered for shredded scrap, while they counterparts in the Southeast are buying at about $240 per ton F.O.B. a railcar or barge from coastal suppliers. Comparable F.O.B. prices to Turkey would be about $210 per tonne.
 

The decline in U.S. scrap prices this month was anticipated and is a reversal from the rising pace of the past three months. But the decline may have bottomed last week and is now rebounding. Oddly, it has also re-energized Indian traders who abandoned U.S. East and Gulf Coast scrap dealers late last year when prices began to soar. Their offers for shredded scrap in containers had sunk to $220 per tonne at the docks. But one U.S. trader said he is now getting offers of $240-245 per tonne. That may be high enough to pose new competition for some U.S. coastal mills.
 

Is stronger flat-rolled demand or lack of scrap firming up busheling prices?
 

That’s not the only region where prices are strengthening. Early deals in the Detroit area saw shredded and cut grades off by about $25 per ton. That cut the delivered to the mill price for shredded scrap to $280 per ton and about $260 per ton for No. 1 heavy melt. Busheling and bundles prices dipped by $10, down to about $300 per ton, but that reduction has not been obtained in transactions with some mills elsewhere in the Midwest this week and none in the South, said a Birmingham-based trader.

Later deals on industrial grades were at unchanged prices, according to several industry sources. There were reports that many of the big EAF steelmakers had cancelled their unshipped orders at the end of January, but that was not the case. They canceled the undelivered orders for cut grades like heavy melt and shredded orders, but not the busheling and bundles buys, particularly for their mills in the South.

There are differing explanations for this according to several brokers and dealers. First, January was the third month in a row that prices rose and many dealers assumed it might be the last, so they oversold. As they say, they sold "paper"–i.e. scrap they didn't have and only hoped to get at cheaper prices. This included both obsolete and industrial grades.

Scrap dealers by nature are short sellers. They sell not only what they have on the ground, but what they expect to see coming through the gates that month. When, that scrap doesn’t arrive or they have sold some of it on "quiet deals" to other mills, they end up short material.

At the end of January, brokers were cancelling those unshipped orders with plans to offer $10 or $20 per ton less this month for the same material, but dealers responded by saying they probably won't have much to offer for another week or two. Realizing their mill inventories were low, several mills backpedaled on those cancellations, at least for those involving the industrial grades. Instead, they left the prices at January levels and told dealers that they still wanted the balance of the undelivered industrial scrap from January as well as the tonnage bought this month.

At the same time, some sheet mills from the South eere making springboard buys outside their region. They are bidding up the prices of busheling in Cleveland and Detroit, paying the same prices as last month unlike some of the local mills who cut their offers by $10 per ton. Consequently, they may be taking prime scrap away from the local mills who fail to match their offers. Indeed, one Ohio mill that’s been a late buyer this month, paid $340 per ton for busheling this week, unchanged from last month.

EAF flat-rolled mills have new and added competition for industrial scrap.

Industrial scrap like busheling and bundles has a fixed supply. Steel mills and scrap dealers can't generate more by raising the price as they do with shredded scrap and other obsolete grades. All they can do by raising the price is buy more tons from scrap suppliers to rival mills.

Though many mill buyers and brokers were expecting a price correction this month, the EAF-based sheet mills are still busy. But they now have more competition for industrial scrap from other steelmakers who are seeing a rise in their orders. That includes the special quality bar makers, the oil country tubular goods producers and their newest rival, Big River Steel in Osceola, AR.

Unlike Nucor Corp. and Steel Dynamics Industries, Inc., Big River does not have its owns crap yards, but has been buying busheling throughout the South. Several traders said it has been reaching as far east as Alabama and as far north as Chicago.The region has little or no excess industrial steel scrap, and now has a big new buyer claiming a share of that supply.
 

At the same time, sheet mills have been enjoying price stability in the past few months because of the steady demand for their products. Their margins are good. Do they want to disturb that by cutting the busheling prices and face calls for lower steel prices from their customers? One chief executive told analysts that he thought industrial steel scrap prices would be unchanged to off by only $10 per ton this month. Hence, if scrap prices, particularly industrial scrap prices, are unchanged, steel users would hardly be able to ask for a price cut.

And, several major Canadian scrap dealers sold a huge share of their industrial scrap into the U.S. in January because of higher offers from some U.S. flat-rolled mills. This month, however, they pulled back and have not offered much to U.S. mills because of a sharp increase in both the price and demand at one large Canadian steel mill.

Lasty, dealer resistance to lower price offers has increased this week as they realized that some mills were seeking additional supplies to offset the shortfalls from last month’s purchases. Along with the growing chorus of dealers looking for better offers, some may be holding back some tons from the market this month, hoping that colder winter-like weather will arrive in the thus far balmy Midwest, and bolster concerns about potential shortages because of transport problems or reduced output at some scrap yards.

Railcar shortages were an issue for many of the Eastern yards last month because the exporters were booking them from the railroads to deliver the shredded scrap they had sold to inland mills. That’ now a growing problem in the Midwest, said a Chicago-based broker, possibly because the mills in the South are using more railroad-owned gondola cars (gons) as well as their own. When February, already a short month, ends, some mills may still be awaiting scrap shipments, but not because dealers have oversold again.
 

After back-to-back increases, domestic steel production dropped last week to 1,723,000 net tons, down 0.7% from 1,736,000 tons produced the previous week, according to the American Iron and Steel Institute. The industry’s capability utilization rate was 72.7% The decline occurred in the Great Lakes region. Production was unchanged in the AISI’s other four regions of the country. 

Shredded Scrap Thermometer: Export sets the pace.
 

The steep drop in offshore demand and the prices Turkish mills were willing to pay sent U.S. shredded producers scrambling to find new homes for much of their output. Few U.S. mills like the potpourri that the exporters call 80/20 heavy melt, and which many regard as light iron and little more than shredder feedstock. They have a higher opinion of the shredded scrap produced at the docks and have few reservations about using it to make even sheet steels that require higher quality industrial steel scrap. There are several reasons for this and they include:
 

• Most export yards operate modern mega-shredders that are equipped with advanced non-ferrous metal recovery systems. Like many other shredder operators, the goal was to capture the valuable aluminum and copper, and sell that mix of metals to the overseas refiners. But these systems have the additional benefit of producing a cleaner, more uniform ferrous product which meets the specs at both EAF melt shops and BOF-based integrated mills.
 

• Because most export yards load large ocean-going vessels, they can easily load the ocean-going barges that ply the intra-coastal waterway and carry thousands of tons of shredded scrap to mills on the Southeast Coast, often at a lower per ton cost than the railroads.
 

• Several U.S. steelmakers now depend on shredded from export yards and coastal shredders to fill a portion of their raw materials needs each month. This gave the exporters the incentive to shift their sales efforts to more U.S. mills in January and again this month. Prices paid by U.S. mills were off by as much as $40 per ton, but

were still more profitable than the offers from the Turkish steelmakers. 

Even easier access to the domestic mills doesn’t save some coastal shredders from the oversupply problems that serve as the “wild cards” in their market outlook each month. These are:
 

• Most export yards and major processors have a network of feeder yards that they depend on for a steady stream of shreddables. When mill and offshore demand are weak, the flow continues unless the headquarters cuts their buying by drastically lowering prices. But some are reluctant to do that because rebounding from steep reductions can take several weeks.
 

• Loading a barge may not be troublesome, but getting gondola cars from the railyards is a challenge. Exporter

s are not the main users of rail services and thus their requests for extra “gons” may get less attention than the

scrap dealers who regularly ride the rails.

The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures early in 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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