Mike Marley’s Shredded Power #42

WSEM - World Steel Exchange Marketing - Mike Marley’s Shredded Power #42

Demand for industrial scrap could drive its price higher.

April 26, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

All but the fluff – Commentary

EAF-based flat-rolled mills are pressing their suppliers for more industrial steel scrap. As one indication of the strength of demand, prices of hot-rolled coil have risen to $525 per net ton and could climb higher in the coming weeks. The CME’s June futures is trading at $560. Order lead times for hot-rolled extend out to six weeks, while cold-rolled and galvanized sheet orders go out to eight weeks or more. Auto sales and stronger steel demand from that industry has set the market’s pace.

It isn’t simply the auto business driving demand for the EAF mills; they are also selling hot-rolled coils to domestic integrated mills that shut down their own steelmaking operations. The integrated mills have abandoned about 5 million tons of the iron and steelmaking capacity in the past year, yet their sales and those of the EAF flat-rolled mills have improved, thanks in part to the federal government’s new duties on sheet steel imports.

In addition to the EAF-made hot-rolled coil, some mills are also importing more semi-finished steel slabs. The decisions not to restart idled furnaces and coke ovens at the integrated mills probably reflect doubts about how long this steel boom will last. It could take several weeks or months to get those facilities up to speed and by that time the sheet sales could be weakening as some forecasters have predicted. Also, while sales to automakers and their suppliers are strong, agricultural, oil and gas drilling, and heavy equipment markets are weak and dampening scrap sales to steelmakers supplying those users.

Dealers anticipate the return of the “busheling premium.”

The busheling push could produce bigger price gains for industrial scrap versus the obsolete grades, some traders believe, even taking into account the strong offshore demand and its potential for boosting heavy melt and shredded scrap buying prices at the docks and in the seaboard regions. Indeed, some believe the busheling premium over shredded scrap could be restored in May. That disappeared in February of 2015 when busheling and bundles prices plunged by as much as $100 per ton while shredded and heavy melt prices slipped by $80 per ton.

For much of the past year, prices paid for busheling and shredded have been “upside-down.” Traditionally, mills paid a premium–usually about $20 per ton, but sometimes as much as $200 per ton or more for industrial steel scrap because it is cleaner and provides a better metal recovery rate than shredded. In many regions, however, busheling and bundles have been selling at prices that are $10 to $15 per ton below shredded scrap, and not just for one or two months, but for more than a year.

When flat-rolled mills started buying less busheling last year, its price slipped. But unlike shredded and heavy melt, output of busheling and other industrial scrap generated by manufacturers isn’t affected by price changes.Roll-offs loaded with sheet scrap kept arriving at the same pace, leaving dealers with little choice other than to cut the price and offer that scrap to other mills. Rebar makers and structural steel producers normally don’t consume much busheling, but they switched their melt mixes. The cheaper-than shredded price was one reason, along with the higher metal recovery rates.

Most traders are sure that other ferrous scrap prices won’t decline in May. At worst, said one trader in the South, they could be sideways for some grades, but probably will rise in most. Some traders estimate the prices will be up by between $30 and $50 per ton for busheling and bundles, but shredded scrap and heavy melt might only rise by $10 per ton for Midwest dealers that can’t sell their scrap to exporters.

Shredded might not enjoy the same dollar-for-dollar gains that most anticipate for busheling and bundles. One reason is the increased tonnage of fragmented scrap likely to be offered to the mills next month. Some shredder operators in competitive regions have already taken the extra $50 per ton they got this month and passed it along to some of their suppliers, said one Midwest shredder operator. Some are paying as much as $190 per net ton for junk cars.

A trader in the South said few if any shredder operators can pay that much for a junk car and expect a profit. These operators must be selling on the basis of their forward price expectations, he said. All shredders have fixed costs like labor and utility expenses as well as the money owed the bank that financed the purchase of that machine. That’s why most have to keep their shredders running despite the higher cost of feedstock. “You can die a quick death if you don’t put something through that shredder,” he said.

Meanwhile, there could be intense battles for industrial scrap, not only in regions where demand is robust but also in remote areas. In the past two months, some mills and their brokers have been more active in the western states and in Canada. But there are fewer manufacturing plants in the West as well as higher freight costs to bring that industrial scrap east. Some major Canadian scrap yards sold much of their industrial scrap and shredded in the U.S. market earlier this year but trimmed their offers this month because of improved sales to Canadian mills. They are expected to do the same in May.

Less sheet steel imports, but scrap imports are on the rise.

To counter the prime scrap shortfalls, one major U.S. broker has bought several cargoes of busheling and shredded scrap from UK exporters. These will be delivered in May and June. One U.S. trader said buying scrap from Europe has become common practice in recent years. One major mill has been bringing in two cargoes each month, but that will rise to three next month and in June. These added tons will offset the loss of industrial scrap when U.S. auto plants shutdown for summer vacation in July.“I wouldn’t be surprised if they let dealers believe they were bringing it all in May,” he said. “That might improve the mills’ bargaining position.”

The automakers used to shut down all of their plants at the same time each year. Now, they conduct rolling shutdowns in which they alternate the closures from week to week. It’s less disruptive, but still trims the industry’s overall scrap output by about 25% for the month. Steelmakers deal with this seasonal supply squeeze by trying to purchase more industrial scrap in the two months prior to July. They also boost their intake of pig iron and direct-reduced iron.

Another trader in the South said he is not aware of any mills making new or higher offers for scrap in the past week. Dealers won’t sell much now because they expect higher offers next week. At the same time, he added, most are focused on getting scrap they sold to the mills this month shipped by the end of the week. None of the mills are likely to cancel unshipped orders as they often do at the end of some months, he said, but noted that the dealers nevertheless don’t want to owe scrap to the mills. They would have to deliver that next week at this month’s prices.

Higher scrap demand and higher prices are not found solely in the U.S. these days. A U.S. exporter booked a sale to a Turkish mill late last week with the 80/20 heavy melt portion of that cargo at $312.50 per tonne delivered to a Turkish port. That’s up more than $30 per tonne from a sale earlier in the week. Though U.S. exporters haven’t sold much scrap to the Turkish mills, this deal also reinforces the belief that export demand will put a floor under the domestic scrap prices in May. Also, the U.S. dollar has weakened and that could encourage more U.S. exports of scrap.

U.S. bulk cargo scrap shippers haven’t sold much to Turkey despite the steadily rising prices there. An East Coast broker believes they may be taking a harder line on their sale prices. That may account for the steep $30-per-ton spike in the deal last week. At the same time, he added they have been reluctant to raise their offers to many of their suppliers in the U.S., both those nearby and the inland yards as well. The exporters who some dealers regard as industry brothers or at least first cousins, have become more adversarial in the price negotiations lately, said one Eastern dealer. “They’re acting more like mill buyers these days,” he complained.

U.S. Shredded Scrap Thermometer: Generous offers for old cars.

Higher scrap prices and expectations that demand and prices will rise have encouraged some shredders to raise their offers for feedstock. Some now are paying as much as $190 per net ton for car bodies. That equals about $250 per ton for the ferrous metal recovered from the wrecks, the same as the delivered-to-the-mill prices for shredded scrap in some regions.

These shedders may be hoping to recoup their generous outlays by a) offering more tons to the mills; and b) obtaining significantly higher prices. But this largesse and the hoped for payoffs might not meet their expectations:

• Shredder operators may have no choice other than to boost the prices for car bodies. The wreckers are the only suppliers with much feedstock these days. Demolition work remains in a rut and probably will not rise until the non-residential construction gets more active. Building owners have been loath to accept bids for teardowns because the offers are so much lower than two or three years ago.
  
• Peddlers, the other segment of the obsolete scrap stream, have not re-emerged. Either the recent mill price increases have not trickled down to the smaller dealer yards,which buy much of peddler scrap, or the peddlers themselves may be holding back material in anticipation of higher offers next month. Prices dipped so low that it has discouraged many of these scrappers.

• Inbound flows from auto junkyards have risen this month from the anemic level of the past several months. Higher scale prices account for those gains, but some shredder operators complain that they have been forced to raise prices higher to meet the more aggressive offers by rivals. Typically, said one, car bodies usually account for less than 50% of the input for his shredders, but that ratio is higher now.

Shredded scrap prices may not climb as much as some expect busheling and bundles prices to rise; but few, if any, operators and traders expect them to decline. There are two wild cards that could produce, if not a royal flush, at least a winning hand for some shredded players. These include:

• Domestic steelmakers have raised their flat-rolled prices by as much as $100 per ton in recent months. The main reason they often cite is Higher scrap prices. Cutting the shredded price while asking for yet another steel price increase might seem a bit disingenuous to some steel users.

• The big exporters usually can’t produce enough shredded to meet the demand from both their offshore customers and the handful of domestic mills that buy from them on a regular basis. They buy from nearby shredder operators who are well aware of the higher offshore prices. Likewise, the shredded exporters, who ship shredded in containers, have yet another group of buyers from southern Asia who have been competing for shredded in the U.S. East, Gulf and West Coast.

NASDAQ OMX Commodities (Stockholm) has delayed the start of trading in the Midwest US shredded scrap index futures until June 2016. The contract will trade in 20-gross ton units with the prices settled on the 11^th day of each month against the TSI Midwest US Shredded Scrap Index. 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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