Steelmakers hiked the prices they paid for busheling and bundles by an average of $60 per gross ton and obsolete scrap grades came along for part of the ride, with initial increases of $35 and $40 per ton.
WSEM World Steel Exchange Marketing
Mike Marley’s Shredded Power #86
Demand and tight supply drive industrial scrap prices higher.
March 7, 2017
Mike Marley (484) 751-5600
Peter F. Marcus (201) 503-0902
Steelmakers hiked the prices they paid for busheling and bundles by an average of $60 per gross ton and obsolete scrap grades came along for part of the ride, with initial increases of $35 and $40 per ton. The price rises were expected and driven by stronger demand for the industrial scrap in the face of fixed supply of the material. Steel mills, in other words, hiked their prices to take prime industrial scrap away from rivals in some regions
Several factors are driving the gains in demand, not the least of which is the steady pace of domestic sheet steel sales by both EAF-based steelmakers and integrated mills. Meanwhile, availability of some key alternative materials that mills use to supplement or substitute for industrial scrap has declined
Nucor Corp.’s Convent, LA, direct reduced iron (DRI) plant was taken down for repairs recently. The big steelmaker said the plant will be back on line this week or next, but the loss of that material occurred at a time when overall raw materials supplies have tightened. Production of DRI at merchant plants in Venezuela has not been reliable for several years, pig iron output in northern Brazil has declined and the on-going conflict in eastern Ukraine has interrupted its pig iron exports.
Prices driven by higher steel output, a new sheet mill and increased scrap demand.
Steel production in the U.S. has risen throughout the past year. In January of last year, U.S. mills were producing less than 1,500,000 tons per week and the industry’s utilization rate was about 60%. Foreign sheet steelmakers were selling their products at below cost in the U.S. The federal government levied import duties that boosted the demand for home-grown sheet. Last week, domestic raw steel production totaled 1,760,000 tons while the capability utilization rate was 74.3%, the American Iron and Steel Institute said. Although down 10,000 tons from the prior week, it is well ahead of last year’s pace before the import penalties were imposed.
As the industry’s operating rate creeps closer to 80%, said one trader, it increases the arbitrage opportunities and the likelihood that scrap will travel farther. One mill’s local busheling becomes another mill’s remote supply, in other words. Sometimes when the operating rate is hovering at 70 or lower, he said, mill buyers become complacent and assume that they have enough local supplies. But as steel output rises and no additional prime scrap is available, mills will reach out even further for additional scrap. In some instances, they have turned to exporters in the UK and western Europe in addition to those in remote areas of the U.S.
Some U.S. sheet mills aren’t waiting for the operating rate to hit the 80% mark. They are reaching out to suppliers on the U.S. East and West Coasts where busheling consumption is lower and they are paying competitive prices there as well. U.S. mills are also taking advantage of the weakness in the Canadian currency versus the U.S. dollar, bringing more bundles and busheling across the border. A Canadian dealer said the mills there may have to raise their prices for shredded scrap and cut grades by $50 (Canadian) and $70 for the industrial scrap. It isn’t simply Detroit, Chicago and other industrial areas in the nation’s Rust Belt where the competition for industrial scrap has become more intense, he said.
Another source of demand is from a new sheet mill, Big River Steel in Osceola, AK. The mill produced 63,000 net tons of sheet in January, but is expected to scale up its output to about 130,000 tons per month later this year. Unlike rivals Nucor and Steel Dynamics Industries Inc., Big River has no scrap yards of its own. It relies solely on dealers for busheling and shredded scrap, the two grades that account for 50 percent of its melt mix.
Having their own scrap suppliers might ensure a supply of prime industrial scrap for some EAF sheet mills, but it doesn’t make that scrap any cheaper or plentiful. Much of the auto and appliance industry’s sheet scrap is sold on long-term contracts and these are tied to the published price indices. Thus, if the busheling price rises by $60 or $70 per ton in one region, the mill-owned scrap processor must pay that increase in its contracted price next month without any expectation that it will produce more busheling and bundles. That output is determined by the auto and appliance sales.
Even those mills with their own scrap supply don’t have enough to fill all of their furnaces. Otherwise, why are rival sheetmakers in the Midwest and the South shopping for more busheling in scrap surplus regions like Detroit? Mill-delivered prices paid to local scrap yards this month range from $360 per ton to as high as $400 per ton. That reflects the intense competition for this material. Some mills in that region must match competing offers from distant rivals that are paying the mill-delivered price ($360 per ton), but on an F.O.B. basis at the dealers’ yards. That makes it more lucrative to sell that scrap to them instead of local mills.
Another driver is the incremental increases in scrap demand from mills other than the EAF-based sheet producers. This includes the plate mills that are supplying the oil and gas drillers and the integrated steelmakers. The oil and gas pipe producers were starving for orders last year because of weak oil prices. This year, energy prices are higher, more drilling rigs are running, and pipe and tubing demand is better. They are also users of industrial steel scrap and have increased their intake. Mills that were buying only 2,000 tons of busheling per month now are taking in as much as 10,000 or 15,000 tons.
Integrated mills use mainly their own blast furnace-produced iron to make steel, but when they need to increase output, the simplest step is to buy more scrap and use it to replace some blast furnace iron in their BOFs. Since they normally use no more than 20% scrap in a BOF, the $60 per ton increase in busheling and bundles prices this month amounts to only a $10-$12 per ton hike in their raw material costs. That is a cheaper fix than restarting an old blast furnace and coke ovens and may be quicker than buying more slabs from foreign steelmakers.
And a trader in the South said he is also seeing a higher demand from some of the merchant bar mills in that region as they prepare for the spring construction season. These mills buy shredded scrap, heavy melt and lower value industrial steel scrap like mixed machine shop turnings. They were busheling consumers in 2015 when it was selling for less than shredded scrap.
This month, some Southern mills have managed to limit the price hikes for local busheling and bundles to $50 per ton. One broker in the region said flat-rolled mills there had left their industrial scrap prices unchanged last month while the mills in the North were slashing their offers by $10 per ton. Also, he added, Nucor will rest art its Louisiana DRI plant earlier than expected and may have several cargoes of bundles enroute from western Europe.
Shredded and heavy melt’s modest increases make these attractive to some mills.
The steeper increases in the prices of busheling and bundles this month has widened the price spread or the so-called busheling premium over shredded scrap to as much as $60 per ton in some areas. Several traders said the sympathetic $40-per-ton rise in the prices of shredded and heavy melt will also impact some buyers. The export price for the bellwether 80/20 heavy melt remains at about $285 per tonne delivered to Turkish port and shredded scrap at $290 per tonne. That puts the price on the docks at a U.S. East Coast port at between $250 and $255 per tonne, respectively.
Even with a huge railroad freight bill of, say, $50 per ton to a mill in the upper Midwest or the South, export yards and coastal shredders are more likely to look homeward for sales of their shredded scrap and possibly for more heavy melt. The delivered prices for shredded scrap at some coastal mills are between $305 and $310 per gross ton, lower than the $320-325 per ton paid at several Midwest mills, but still more attractive than the offshore market.
But one Eastern trader said the absence of export activity has spurred some coastal dealers to spend more time separating their heavy melt and trying to sell it to domestic mills. Normally, these yards sell lighter gauge cut scrap to the export yards as mixed No.1 and No. 2 heavy melt. The exporters, in turn, sell it to Turkish mills as 80/20 heavy melt, but the Turkish mills have not bought much from the U.S. lately. Prices here were too high versus what they were paying European scrap suppliers. With the docks not buying much, the coastal dealers have few options other than to improve the quality of their heavy melt and offer it to the domestic mills. U.S. mills usually buy only shredded scrap from the exporters and coastal yards because export 80/20 heavy melt doesn’t meet their requirements.
A Chicago-based broker said he expects the $60 per ton increases in the busheling and bundles prices will persuade many dealers to sell all of the prime scrap that they can get and even some imaginary tons. When prices rise so sharply in one month, dealers want to take advantage of those gains. They’ll offer all the scrap they have in their yards, all they expect to see coming across their scales and a few extra tons that they hope to buy from other dealers who lack rail sidings and can’t ship scrap to distant steel mills.
If they have “sold paper” (i.e., scrap they don’t have and can’t deliver this month), some dealers could owe that tonnage to the mills next month if prices rise again. They are expected to fill those older orders before they can sell at the newer, higher prices. They could lose money on those deals if they end up paying higher prices for scrap.
Some are willing to take the risk, he said, because they believe the mills will be overstocked with all the scrap bought this month. That could reduce demand and encourage the mills to cut their prices in April. If that occurs, the dealers won’t have to fill the old orders. Many mills cancel unshipped orders at the end of each month if prices are likely to drop. Only when prices are climbing will they demand that old orders be filled first.
Shredded Scrap Thermometer: A shredded/heavy melt surplus?
Busheling and bundles may be in tight supply, but shredded scrap and other obsolete grades like No. 1 heavy melt may be more abundant than anticipated. High prices don’t affect the output of industrial scrap, but they can draw out more junk cars and demolition scrap. That plus the mild winter throughout the Midwest may be bring ing more scrap into dealers’ yards. Chicago has gone a record 75 days without a snowstorm this winter. This could generate a late winter tsunami of scrap unless dealers react.
• When flooded with feedstock, shredders typically cut their scale prices. In some instances, they will cut these twice a day or more if the intake continues unabated. Such price cuts may not produce an immediate decline, in part because some suppliers fear another reduction is coming and want to sell before that occurs. Eventually, though, the tidal wave ebbs. This is unlike industrial scrap which will continue to flow into scrap yards whether the price is $800 per ton or $8.
• Shredded scrap’s price sensitivity derives from several factors. This can include weather which has been moderate this year. That may be keeping the peddlers busy and the flow of junk cars and demolition scrap into dealers’ yards high. Shredders consequently see no reasons to raise their feedstock prices. That may be discouraging scrap dealers who can’t get much for their heavy melt at the docks and little or no increase in the prices shredders are offering. They may be looking for other outlets for that scrap.
• Some scrap yards keep two piles of heavy melt. One includes metal that can be shipped to domestic mills without much fear of rejection. The other may be a mix of what some call light iron. If the export yards won’t buy it, it might be sold to shredders as feedstock. If neither are buying, it might be time to put some of the yard crew to work sorting the wheat (heavier material) from the chaff (lighter gauge steel).
Shredded, despite its name, may be the most versatile form of ferrous scrap. Virtually all mills use it, regardless whether they are making steel sheet for the skin of a Mercedes or rebar that will be buried in concrete for the next 50 years. That versatility is what makes shredded a wild card in the scrap supply deck.
• If busheling is in tight supply, some mills can shift the melt mix, use more shredded and add more pig iron or DRI to improve the chemical composition and meet the specs for certain grades of steel.
• Integrated mills shunned shredded scrap in the past because it contained too much copper and tin. Shredders adopted advanced metals recovery systems, not simply to clean up their shredded, but to recover the more valuable copper and aluminum. Unfortunately, as shredded has gotten cleaner, EAF-produced sheet steels have become more contaminated because they are made from scrap and not purer blast furnace iron. Now, EAF-based sheet mills must use more blast furnace-produced pig iron to dilute the residuals in their sheet products.
The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures mid-year 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 firstname.lastname@example.org.
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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