The ferrous scrap market is providing a truly mixed picture for some of its participants. Some foresee sideways to lower prices for industrial scrap next week and unchanged to higher price for shredded and other obsolete scrap grades.
WSEM World Steel Exchange Marketing
Mike Marley’s Shredded Power #93
Obsolete scrap prices are expected to rise in May.
April 27, 2017
Mike Marley (484) 751-5600
Peter F. Marcus (201) 503-0902
The ferrous scrap market is providing a truly mixed picture for some of its participants. Some foresee sideways to lower prices for industrial scrap next week and unchanged to higher price for shredded and other obsolete scrap grades. Oddly, this is their outlook despite strong evidence that the prime scrap grades like busheling and bundles are in tight supply. It is also the time of year when
the obsolete grades are usually pouring into scrap yards and dropping in price.
The alternative view stems from the better than expected sales of cut grades like heavy melt and shredded scrap earlier this month. Domestic mills sought to slash those prices by $30 per gross ton or more, but in several regions, they were only able to push these prices down by between $10 and $20 per ton because supplies of the obsolete scrap were scarce.
In addition, the absence of excess material from the U.S. East Coast exporters to the inland mills, and the suspicion that some dealers were holding back tons and exacerbating the shortages, firmed up the prices. These factors also may have firmed up the dealers’ resolve to look for higher offers next week.
Busheling and bundles, on the other hand, continue to be in demand from the busy EAF-based flat-rolled mills and the integrated steelmakers. There are also new threats that those supplies could tighten even further if automakers reduce production of smaller cars to match the slower pace of their sales. Yet, rumors that Nucor Corp. has bought as many as 12 cargoes of bundles and shredded scrap from western European scrap suppliers and more imported pig iron has chilled the outlook for any gains in those prices domestically. The nation’s largest steelmaker doesn’t publicly comment on its scrap and raw materials purchases so it is difficult to determine how much is actually en route.
However, several industry sources said they believe these supplies will be arriving at U.S. Gulf Coast and Southeast ports during May and June. If the dozen cargoes guesstimates are correct, that would mean Nucor is bringing ashore about 500,000 tonnes of foreign scrap (prime and shredded). Dividing it up among the company’s five sheet mills over those two months would mean each would likely get an extra 50,000 tonnes of scrap each month in addition to the material from its local suppliers and its own scrap gathering and processing operations. That may be enough to minimize much of Nucor’s springboard purchases of industrial scrap from some upper Midwest suppliers next month and during June.
Obsolete supplies are tighter because much of the spring scrap flood arrived early.
A Midwest trader doesn’t anticipate a lot of movement in either obsolete or industrial scrap prices next month. Bundles and busheling are still tight in many regions because all the flat-rolled mills are running at capacity, he said.
Even if their demand begins to waver in June and July, finding enough prime scrap could still be a problem. In addition to a potential slowdown in sales and production of smaller cars, those are the months when the automakers and many of their component suppliers shut down for summer vacations. Normally, they close for a week, but softer sales of some cars could mean extended shutdowns at some plants, he said. Thus, the usual 25% reduction in these industrial scrap output could rise to 30 or 35%.
And like several other dealers, he said heavy melt and shredder feedstock has not been flowing into dealers’ yards at the levels they normally see in the spring. This is because the winter weather in the Midwest was so mild and there were few snowstorms. Obsolete scrap intake was higher than expected earlier this year. “We had record inflows in both December and January,” he said, but added, his intake for much of April was far lower than it was in January. That’s unusual.
Some shredders in that region are still paying too much for car bodies. That’s no surprise, said one Chicago area trader. He and others pointed to the mill-owned shredders and said they are paying as much as $200 per net ton for car bodies, and still aren’t getting as much as they expect. They are shredding all they take in each day and have no inventory on the ground, either feedstock or prepared shredded. Because demand is so strong they are shipping it to their mills as quickly as they can produce it; and unlike the independent shredders, they may be operating as cost centers without needing to turn a profit on their output.
Another Midwest trader said most shredders are shredding out every day. One independent had to pay a premium price over what the mill-owned shredders were paying for 1,000 tons of car bodies just to produce enough to finish an order for one mill this month, he said. Flows from demolition projects in the region are lackluster as well, he said. His yard is holding its buying price for cut grades at the same levels as the previous month and not cutting them to match the drop in local mill prices for these grades. The goal is to get more heavy melt into their yards because the existing inventory is so low. He expects to lose about 10% of this month’s orders simply because he doesn’t have the material to ship to the mills.
Dealers aren’t worried about prices going down, because they don’t expect to have much excess scrap to offer to mills next month. Though shredded prices at the mills fell by between $25 and $30 per ton at the beginning of the month, most of the shredders in the Midwest have only cut their prices by $20 per ton at most.
Scrap demand was stronger as well. January was an up market and steelmakers hiked prices and the tonnage of purchased scrap. That ate up part of the unanticipated winter inventory that had accumulated in dealers’ yards. The phenomenon reoccurred in March and drained out the remainder of the material that dealers had managed to accumulate in late January and February.
Flows during the first three months of this year were unseasonably strong and that is going to affect the supply in May and June, said an Eastern trader. He saw feedstock from his suppliers improve in March as they realized that prices would rise. Flows for April, consequently, are disappointing. The result may be that the mills will be looking for heavy melt, and plate and structural scrap cut grades
and have a problem getting what they need next month. “They may get all the shredded they need,” he said, “but not the cut grades.”
Another Eastern dealer said he would be happy if prices are unchanged in May. Intake of obsolete grades is not as robust as it should be by this time of the year, he said and added that he hears much the same from many of the smaller dealers that he buys scrap from each month.
Yet another problem may be access to railcars. The springboard deals that many mills pursued in March took many gondola rail cars out of the local transport fleets in several regions during March. They have displaced a lot of the cars, particularly from the Eastern region, into the Midwest and the South.
One Midwest trader said he has told several mill buyers and brokers that they may have been too clever for their own good last month when they tried to keep a lid on local prices through their springboard buys from more remote regions. It takes 60 days or more to get the railroad-owned cars back to the East Coast and enable the yards there to ship to the Midwest again. He noted that even the mills and brokers who own large fleets of gondola cars now are short cars in some remote regions where they had been active buyers in the past two months. Hence, the mills have significantly diminished their leverage when negotiating prices with their local dealers for at least the next three months.
Exporters are paying less to maintain profit margins on their export sales.
Exporters are very pessimistic, said an East Coast trader. They won’t be able to offer much to the Midwest mills next month because of the absence of railroad-owned gondola cars. Also, they had taken several orders from overseas mill at cheap prices. As a result, they have trimmed their buying prices by as much as $15 per ton. In some areas, he said they are quoting smaller dealers who have no rail facilities only $210 per ton for export heavy melt. That’s as much as $50 per ton below the average price for domestic No. 1 heavy melt, he said.
A northern Ohio trader said the dealers in that region have more than enough demand from local mills, but can’t come up with enough scrap to meet their needs. They will have to pay higher prices in May and reach out to dealers on the East Coast again. It will have to come from the coast, he said, and many of the coastal scrap suppliers won’t sell for the same low prices that they sold for last month. “They know by sheer demand that there is not enough supply in Ohio to take care of demand and the short supply of railroad cars could also be a problem,” he said.
Another Midwest dealer said the exporters and other Eastern scrap dealers offered scrap into the Midwest, but backed away when the export price rose from $260 to $275 per tonne. Once it rose to $275, he added, exporting it became the better deal.
Shredded Scrap Thermometer: Finding more in a tight market.
Money is the one thing that usually brings out more scrap, dealers are fond of telling their steel mill customers. That’s not true for busheling and bundles unless you are a steel mill buyer or another dealer trying to coax out some prime scrap from a rival dealer. It does work for obsolete grades like shredded scrap regardless whether it’s a dealer trying to buy more junk cars from an auto recycler or alley scrap from a pickup truck-driving peddler. What brings out higher offers and such deluges of scrap flowing into dealers’ yards varies. Other factors besides money can drive the supply train. These include:
• In 2011 when the offshore market was very strong and U.S. exporters shipped some 23 million tonnes of obsolete scrap abroad, trucks carrying flattened old cars or appliances would sit outside shredders for an hour or two waiting to drop off their loads.
• Warmer weather brings out many of the peddlers who collect discarded metallic items from dumpsters and bring these to scrap yards. A noteworthy lack of snow storms and mild weather in the Midwest allowed the spring scrap flood to arrive early this year.
• Building booms create new demand for steel rebar and girders, but also produce plenty of work for demolition crews that must clear old factories from sites ingentrifying sections of the older cities. If prices are high, they’ll sell everything quickly; and even if prices are low, they still need to sell some of this material to pay workers’ wages and other operating expenses.
When scrap prices climb too high and too quickly, mills look for alternate raw materials. These can be the wild cards in the supply picture. For example:
• Because of cheaper steel imports, domestic sheet steel demand was weaker in 2015, and busheling became cheaper than shredded. Several mills, that seldom used such high-quality steel scrap, substituted busheling for shredded to lower their raw materials expenses and not necessarily to produce a higher quality rebar.
• If U.S. exporters don’t pick up any new orders from overseas steelmakers either because prices are too high or they are being flooded with scrap from other offshore suppliers, they may have no choice but to offer more of their scrap to domestic mills. Railcars may be more readily available in the East by that time and inter-coastal barge shipments have become a regular share of the monthly purchases by EAF mills along the Southeast Coast.
The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures on June 15, 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 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.
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