By Michael Marley

ScrapMonster Contributor

Instead of uneventful sideways pricing in the ferrous scrap market in July, there could be a mixed set of moves – unchanged prices in some regions...

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #102

Dealers look for an uptick in industrial scrap prices.

June 30, 2017

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902
 

Commentary:

Instead of uneventful sideways pricing in the ferrous scrap market in July, there could be a mixed set of moves – unchanged prices in some regions, but increases on certain grades in other areas. Shredded scrap and cut grades like No. 1 heavy melt, for example, are overhanging the market in some regions, but those excess supplies could evaporate in July. Export demand and prices on the U.S. East Coast rose by $10 per tonne this week.

Consequently, mills in the Midwest and South may have to raise their offers if they want to keep that scrap from going overseas. The lack of railcars in the East and several other regions is another critical factor.  A western Pennsylvania dealer said inland shredders are aware of their own transport obstacles as well as those elsewhere.  If they can guarantee delivery of their shredded scrap in a timely manner, he said, they may be able to reject lower offers and demand higher prices for their shredded.

Similarly, some dealers in the Chicago area and the South are looking for increases of more than $10 per ton for their bundles and busheling. U.S. EAF-based sheet mills are headed into the tightest supply month for industrial steel scrap, their main raw material. But the summer supply drought will be more constricted this year.  The auto industry has extended its vacation closures from the usual one-week shutdowns to two weeks or longer.  The industry is trying to reduce its inventories of unsold cars and trucks.

But some dealers in Chicago and in the South believe this may be an opportune time to bring their prices closer in line with what is being paid for this scrap in other areas.  Mill-delivered prices for busheling and bundles slipped by $10 per ton in the South in June, and the reported prices in Chicago now lag mill-delivered prices in other Midwest cities by as much as $40 per ton. A Chicago area trader said some EAF-based flat-rolled mills, that want to take busheling and bundles away from rival mills, will have to pay higher prices to get that scrap.

For the EAF-based sheet producers, the auto production cuts mean the loss of as much as one-third of the prime industrial steel scrap supply. Accordingly, some have boosted their imports of bundles and busheling from foreign scrap suppliers in Europe and elsewhere.  “Elsewhere” includes purchases of shindachi, factory bundles from auto stamping plants in Japan.

All are concerned about the likely shortfall of industrial steel scrap, a northern Ohio trader said, but the mill reactions have been mixed. Several acknowledged the expected supply drop early and bought more busheling and bundles during the past two or three months as a supply hedge. They have enough tonnage and won’t be buying more than their usual volume next month, he said.  Others, however, have been asking Detroit area dealers for estimates of how much tonnage will be available in July.

One Midwest broker said several integrated and EAF-based sheet mills are facing a squeeze because they have less than two weeks’ inventories on the ground at their mills.  Also, they are uncertain about the estimates of how much may be still enroute to their mills because of the lack of railroad gondola cars that deliver much of that scrap.

Steel mills are cautious about early offers because of the message it sends.

Still, most mills are reluctant to make early buying forays. Such actions are seen by dealers as an indicator that mills desperately need scrap.  That is the case in the Chicago area already, said a trader in that region.  Two dealers got offers last week at $10 per gross ton over the current local prices, he said, but rejected those.  Local mills reportedly paid $355 per ton for bundles and $350 for busheling in June. Those are lower than the average national price of $370 per ton for busheling.

Instead, steelmakers and their brokers have offered price-to-be-determined (TBDs) purchase orders this week. The mills’ main goal is to ensure that enough tons are in their supply pipelines for next month’s scheduled steel production.  An added benefit of TBD purchases for the mills is the potential to limit the number and tons of spot market purchases next week (the “buy” week).  This not only reduces overall demand but it also can limit price increases. The buying for July is not likely to get underway until the day after the July 4th holiday.

But a few Midwest traders said some larger EAF-based sheet-makers were aggressive in issuing TBDs this week.  A Chicago area trader said he expected the onslaught, but won’t accept any of these offers.  He still owes some mills a lot of scrap because of the problems getting railcars and trucks.  “We will still be shipping scrap well into next week,” he said.

Another said that if dealers are swamped with such offers, they may regard that as a sign of the mills’ anxiety about prime scrap supplies. It will encourage them to demand higher prices, he said. It also could pit the distant EAF mills in a battle with the integrated mills for the diminished supplies of busheling and bundles.

Industrial steel scrap is a fixed output commodity where its supply is determined by the production pace at metal manufacturing and stamping plants. Paying more won’t increase the overall supply.  Mills instead must outbid each other for the available tons.

That’s not a severe cost problem for the integrated mills since industrial steel scrap is only 5% or 10% of their melt mix.  Thus, a $10 or $20 per ton increase in the bundles price translates into a $1 or $2 per ton hike in production costs. EAF sheet mills, on the other hand, use as much as 40% busheling and bundles. That’s a $4-per ton increase or $400 overall for a 100-ton furnace. If doubled it becomes $800 for those with 200-ton EAFs.

Some of the smaller mills in Ohio and Pennsylvania have scheduled maintenance outages coming up in July and August, but several dealers said the reduced purchases by these mills won’t be enough to offset the limited supplies of automotive scrap.

Railcar shortages continue to limit and delay scrap shipments.

In addition to no early buying binges, there are no reports of order cancellations as the end of June approaches. This includes both industrial steel scrap and those abundant supplies of obsolete scrap like shredded and No. 1 heavy melt.   The issue here is transport, particularly rail transport aboard the CSXT lines which serve much of the country east of the Mississippi River.

This has created two distinct problems.  First, many of the dealers on the CSXT lines can’t get enough gondola cars. Several brokers complained that dealers still owe the mills thousands of tons of scrap.  Secondly, CSXT wants to put many of its older low-sided gondola cars in storage and instead use its newer high-sided cars. These carry bigger payloads and thus can generate more revenue per mile.

Unfortunately, some steel mills can’t accept delivery of scrap in the high-sided cars because of the configuration of the equipment on their rail sidings.  Consequently, even if a dealer can get more cars, they must be the older cars with low-sides. And the on-going shortage of certified truck drivers makes it difficult to rely on trucking instead. Telephone calls and e-mail messages to CSXT offices seeking a response to scrap dealers’ complaints were not returned.

Some market observers have questioned why the mills aren’t using more shredded scrap and pig iron instead of bundles and busheling, especially since shredded is in excess supply and its price is as much as $100 per ton lower. But another Ohio-based trader said such a substitution isn’t so simple.  First, much of the imported pig iron was bought several months ago when the price delivered to the port of New Orleans was $390 per ton and higher.  It required another $50 per ton in barge and rail freight charges to bring that material to the upper Midwest.

More importantly, he said, price is not the primary issue. This is a supply and demand-driven market and the demand for busheling is not changing regardless of the price.  The EAF melt shops want more busheling, he said.  It melts quickly and it has a better, cleaner chemistry than shredded scrap. That enables them to produce more steel.  “If I had more busheling to offer,” he added, “the mills would jump on it.”

Rising export demand and prices could shrink the shredded supply as well.

There are now questions about how much tonnage Eastern shredders and export yards would be able and willing to ship inland.  Two Turkish mills bought cargoes from U.S. exporters earlier this week at prices that are up by $10 per tonne. That and any additional purchases in the coming weeks could sop up any excess supplies of shredded scrap in that region.

One was a 30,000 tonne mixed boatload of heavy melt, shredded and bonus grade scrap (five-foot plate and structural).  The 80/20 heavy melt was priced at $290 per tonne delivered to a Turkish port. Shredded’s share of that cargo sold at $295 per tonne. That is up about $10 per tonne from a sale two weeks ago. Another exporter booked a bigger cargo with even more heavy melt. It paid $287 per tonne for heavy melt, up about $10 per tonne from the last deal two weeks ago. Shredded in that cargo was priced at $292 per tonne.

Turkish steelmakers are not the only offshore buyers with bigger appetites. One Eastern exporter said Indian traders are showing more interest in containerized supplies of shredded scrap.  Prices for loaded containers dropped off at the docks have risen to between $270 and $275 per tonne, he said. Even if domestic steelmakers are willing to up their offers for shredded from the East Coast, there are still questions about how much tonnage would be available and when they were likely to see it.  The East Coast yards can ship by barge to mills in the Southeast, but require those hard-to-find railroad gondola cars to deliver scrap to Midwest mills.

Shredded Scrap Thermometer: Trade rules.

The unanswered question at the “Steel Survival Strategies XXXII” conference in New York City this week was: “What would be the Commerce Department’s recommendation in regards to the steel industry’s request for action on its Section 232 unfair trade complaint?” The industry wants the U.S. Commerce Department to tell President Donald Trump that steel imports pose a national security threat to the nation’s steel supply.  They contend that: a) the imports could force some domestic mills to close; and b) the U.S. military and the overall economy could be without a domestic supply of some critical steel products. Earl W. Comstock, Director of the Office of Policy & Strategic Planning at the U.S. Department of Commerce, begged off on answering any questions about the probe.  That didn’t put an end to the questions that many conference attendees had.  These included:

• Would an affirmative recommendation and an approval by President Donald Trump boost steel prices and what impact would this have on the now-slowing sales of autos and light trucks?

• If approved, would other U.S. industries that rely heavily on export sales be targets of 
retaliation?  This could include the corn, wheat and soybean growers whose products have much shorter shelf lives than steel rebar and hot-rolled coil.

Those questions went unanswered, but the discussions at other times spurred a few disputes and unanswered inquiries that might be seen as wild cards.  These included:

• An Italian steel executive endorsed free trade policies and questioned the wisdom of using trade restrictions to protect the domestic steel industry.  Contrarily, the leader of the U.S. steelworkers’ union argued that free trade is a misnomer and that foreign nations were dumping steel into the U.S. market to maintain employment in their own mills, which in turn was costing American steel workers their jobs.

• An unidentified audience member wondered aloud whether the 232 action might have some impact on ferrous scrap trade, both exports as well as imports, but the question hung in the air in silence for several minutes before the discussion moved on to other topics.

 

The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures on September 15.  The contract will trade in 10-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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