May 04, 2017 06:48:34 PM
By Michael Marley
WSEM World Steel Exchange Marketing
Mike Marley’s Shredded Power #94
Ferrous scrap prices are both unchanged and rising in May.
May 4, 2017
Mike Marley (484) 751-5600
Peter F. Marcus (201) 503-0902
Some ferrous scrap prices could rise from $5 to $15 per gross ton when the domestic steel mills buy their scrap needs for this month. But the gains, if any, are unlikely to be uniform. Obsolete grades like heavy melt, and plate and structural scrap are in tight supply, while others like shredded scrap are more readily available in some areas.
And despite the slowdown in car sales, the flat-rolled mills’ demand for busheling and bundles is still strong. A key Detroit area flat-rolled mill hiked its busheling prices to $360 per ton this week, up $10 per ton from last month, but left its offers for shredded scrap unchanged at $300 per ton and five-foot plate and structural scrap at $285 per ton. Other mills in the region are expected to follow that pattern this week, although one integrated mill has blast furnace problems and will take a 28-day outage beginning at mid-month to make repairs. That, naturally, will lower its steel output and scrap consumption.
More troubling, perhaps, is the threat that the region’s industrial steel scrap supply could be shrunk this month if the automakers cut production of some slower selling models like compacts and mid-sized sedans. These are not selling as well as light trucks and SUVs. In addition to less scrap output from its stamping plants, several of the industry’s component makers could reduce their production as well.
This foreshadows June and July when the automakers and their parts suppliers typically take off a week for summer vacations and retooling. Some scrap traders said they are worried that the automakers may extend those summer shutdowns for an extra week or two to bring inventories of unsold cars in line with sales forecasts.
There were a few early bird buyers in the ferrous scrap market this week. One Eastern long products mill bought its shredded scrap, five-foot plate and structural scrap, and No. 1 heavy melt needs at the same prices it paid in April, industry sources said. Those were $280, $260 and $250 per ton, respectively.
Also, steelmakers in the Pittsburgh area and in eastern Ohio were scrambling to find more five-foot plate and structural scrap. They paid as much as $310 per ton to some local yards, an area trader said. That is up by about $15 per ton from the $295 per ton that these mills paid their local suppliers last month, but matched what they shelled out to distant scrap yards. Springboard buys were made because many of the local yards couldn’t provide these mills with the tonnage promised in April.
The price spike also stems from a combination of higher demand at mills that make steel products for the now-busier oil and gas drilling industries and a lack of much demolition work in the region. Structural and plate scrap is usually drawn from the major teardowns of old industrial plants and bridges and not the smaller residential demolition work. Demolition contractors and scrap dealers refer to the razing of houses as “sticks and stones” work since the material produced is mainly wood, bricks and plaster.
Several dealers said their pricing expectations firmed up in the past week. Many have gone from expecting a “soft sideways” market this month. (That’s scrap speak for unchanged prices or drops of between $5 and $10 per ton). Now, they expect a “firm sideways.” (Conversely, that’s unchanged to up by as much as $10 per ton.)
Undelivered scrap and no order cancellations also point to firmer scrap prices.
Several factors played roles in this shift in their outlook. First, like their counterparts in Pittsburgh and Ohio, scrap dealers in the Midwest and the South failed to deliver all the tons promised the mills in those regions last month. Again, this involved mainly obsolete grades like heavy melt, and plate and structural scrap.
Some overestimated the volume of scrap that they expected to see coming into their yards. A Chicago area dealer said he could not deliver about 10% of the orders he had taken. The mild winter weather that prevailed through the first quarter and absence of severe snowstorms in the Midwest accounted for the spring scrap drought, he said. Instead, obsolete scrap had flowed steadily into his and other
dealers’ yards throughout the first quarter and was sold to the mills. Prices rose by as much as $50 per ton in January, slipped by about $35 per ton in early March before rising by $60 to $70 per ton in late March. Dealers sold all they had accumulated and did not stockpile, he said.
There were other indications that obsolete scrap supplies had tightened. Domestic mills tried to slash those prices by as much as $30 per ton or more in April, but only succeeded in knocking down shredded scrap prices in a few areas. Reductions in heavy melt and P&S prices were limited to about $10 per ton and in a few regions where mills couldn’t buy as much tonnage as they needed and had to consume mill inventories of scrap.
Second, no mills cancelled unshipped orders at the end of April. They normally cancel these orders when they expect scrap prices to drop in the next month. But if scrap supply is tight, as many now contend, cancelling such orders could leave the mills in a bind. During the first week of the new month, when mills are negotiating prices and tonnage, they probably would get no late shipments and risk running out of scrap. If they leave prices unchanged or increase them, however, dealers would be required to complete the old orders at last month’s prices before they begin shipping this month’s purchases.
Third, domestic steel output has been trending upward for the past few months. In its latest report, the American Iron and Steel Institute said production rose to 1,750,000 net tons last week while the
industry’s capability utilization rate was 75.1 percent. This is a 3.1% increase from the same period
of last year and a 2.0% rise from the previous week when steel output totaled 1,715,000 tons and the operating rate was 73.6%.
Though steel output has risen, one mill buyer said they may be seeing some weakening in flat-rolled prices and demand. Hot-rolled coil prices have drifted to as low as $620 per net ton in spot market sales and order lead times had shrunk to about three weeks. Cold-rolled coil prices have slipped to as low as $800 per ton and lead times are between four to six weeks. President Trump has announced plans to begin an investigation to determine whether steel imports are threatening national security, but it’s unclear what impact that will have on overall steel demand. The flat-rolled segment has been sheltered from unfair foreign competition for much of the past year.
Last, according to one Eastern mill buyer, is the “dealer euphoria” that frequently follows the week-long Institute of Scrap Recycling Industries (ISRI) annual convention. The industry gathering was held in New Orleans this year and ran from April 22 to April 28. “Put a few thousand scrap dealers together for a week and they’ll convince each other that prices are going up next month,” he said.
Export prices to Turkey sank by a few dollars per ton, but have rebounded.
A U.S. East Coast exporter sold an all-shredded cargo to a Turkish mill this week at $280 per tonne delivered, a U.S. trader said. This follows a deal last week in which a smaller U.S. exporter sold a mixed cargo in which the bellwether 80/20 heavy melt was priced at $267 per tonne delivered, down about $7 per tonne from a deal booked a week earlier.
U.S. exporters have little or no material to offer to their offshore customers, said another East Coast trader. The exporters had trimmed their buying prices more than a week ago in the wake of lower sales to Turkish mills by several European exporters and word that Chinese mills were again offering cheaper billet to offshore steelmakers. Those price cuts followed drops of $20 to $30 per ton for shredded scrap prices at many inland domestic mills in April.
Though the domestic prices ranged from $280 to as high as $300 per ton delivered to the mills in the Midwest, the exporters and other coastal scrap processors were unable to take advantage of those offers. The springboard deals they had made with the inland mills in March had required them to use up many of the railroad-owned gondola cars that were available in the East. Some railcars may still be sitting on sidings waiting to be unloaded.
Other “Gons” freed of their freight are being used to carry scrap from local Midwest dealers’ yards to the mills there. Gondola cars owned by railroads are what the American Association of Railroads calls general purpose cars and allows all railroads to use each other’s cars. Railroads own their tracks and locomotives, but they share the fleet of about 1.5 million general purpose freight cars until a backhaul order, say, takes a CSX railcar that has been on the NS Group’s lines back to the CSX tracks. Otherwise, the railroads would waste time and fuel moving empty cars around the country.
That has left the exporters and many of the smaller Eastern dealers with no means of shipping their scrap to the Midwest unless the mills and/or their brokers supply them with railcars that they own or lease. Some major coastal scrap dealers own or lease gondola cars and can use those. The exporters probably will offer most of their shredded scrap to the overseas mills or those in the Southeastern U.S. The mills along the coast can take deliveries by barge or provide scrap dealers with mill-or broker-owned railcars.
Shipping shredded to eastern Pennsylvania northern Ohio or the other cities like Detroit and Cincinnati, on the other hand, is more expensive and could be delayed because so few railcars are available in the East. The country’s aged canals are no longer viable freight routes for barges, and trucking costs from the coast are prohibitive.
Shredded Scrap Thermometer: P&S is setting the prices.
Five-foot plate and structural scrap is heavy scrap and provides more density when loaded into the furnace’s charge bucket atop lighter material like busheling and shredded. It is rare that a less widely used obsolete material like P&S establishes the prices for the ferrous scrap market over more common grades like shredded scrap, but that may be the trend this month. This is not to say that all grades will either rise or fall by the same amount as P&S this month, but the higher prices paid for this heavier cut scrap may firm up both the demand and pricing for heavy melt and shredded scrap. There are valid reasons for this “tail wagging the dog” behavior. They include:
• The absence of much nonresidential demolition work in recent months has left dealers with few piles of old I-beams and steel plate. In April, several yards had expected to see the usual spring rise in the flows of all obsolete grades, but it didn’t happen. Several were unable to fill those orders and reached out to other dealers with the hope of obtaining more P&S. They also came up short there.
• A few mills consider P&S a critical part of their melt mix. But they had to go without, or like the dealers, find more from distant suppliers. They paid an added $15 per ton to offset the higher freight costs, and they were back in the scrap market early this week–the May buy week–offering higher prices
of about $310 per ton to local dealers to have enough this month and restock scrap inventory used last month.
• Steel mills are not the only metal producers with an appetite for P&S. Iron foundries and pipemakers consume it and usually specify material no more than two-feet or three-feet in length for their smaller furnaces. They pay a premium of about $10 per foot for the shorter cuts. That usually means more work for the torch cutters and isn’t a tough requirement in the spring and fall when temperatures are more moderate.
Shortages force mills to substitute other grades. There are no huge reservoirs of alternate materials for grades like P&S that can adequately or fully meet these needs. But there are several that can serve as the wild cards in the short-time and immediate supply crunch. These include:
• Railroad scrap like rail crops and steel car wheels are perhaps the most widely used alternatives when they are available at competitive prices. But these can also be hard to find when supplies are tight as some EAF and integrated mills often substitute wheels for No. 1 bundles on a regular basis.
• Unstripped motor blocks or “dirty blocks” yanked out of old cars are another alternative widely used by many of the pipe foundries. Shredders have been trying to discourage auto wreckers from that practice, however, because it drastically reduces the ferrous metal yield from cars.
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.
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.