Mike Marley’s Shredded Power #43

WSEM - World Steel Exchange Marketing - Mike Marley’s Shredded Power #43

Could industrial scrap repeat last month’s price increases?

May 4, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

All but the fluff – Commentary

Busheling and bundles prices are expected to post gains of $40 per gross ton or more in the Midwest and South this month. That won’t match last month’s $50 per ton and higher increases, but it could raise industrial steel scrap prices close to $300 per ton in some regions, a level not seen since January of last year. It also could put busheling back on top of shredded prices. Flat-rolled mills, both the EAF-based producers and the integrated steelmakers, want more, but the domestic supply of industrial scrap can’t meet their increased demand.

The on-going strength of domestic auto sales and the anti-dumping duties imposed on several foreign sheet steel producers by the U.S. government has set the market’s pace. Hot-rolled coil prices in the spot market have risen to $530 per net ton and order lead times are out to six weeks or longer. Cold-rolled and galvanized sheet order times are eight weeks or more with those prices averaging between $690 and $700 per ton.

Seen another way: Hot-rolled coil prices have risen by more than $150 per ton since the start of the year. U.S. mills have posted several increases in that period, and many industry observers believe yet another steel price hike will be forthcoming once the mills and scrap dealers have finished haggling over the prices to be paid for scrap this month.

Will the mills accept another scrap price increase of, say, $30, $40 or even $50 per ton? That’s possible, as long as they can pass the increase along to their steel customers. Some scrap traders expect the integrated mills to show less resistance to higher scrap prices and that could undermine any efforts by the EAF-based mills to hold prices down. Scrap is only 10% to 20% of the material the integrated mills use to make steel. Thus, they are better able to absorb an increase, said one Chicago area trader. Second, some believe the EAF-based mills will avoid a repetition of last month’s ill-fated price battle. Detroit area mills anted up the $50 per ton increase on April 1. Others resisted, but ultimately ended up paying that increase and more a week later.

Sheet mills must refill their industrial scrap pipelines before July.

It isn’t simply that the sheet mills have more new orders for their products. They are headed into the midsummer when the output of the industrial scrap declines. Auto industry stampers and other manufacturers shut down for a week for summer vacations. They use that downtime to retool their presses and other production equipment to make the new parts for next year’s new cars. If the mills don’t restock their prime scrap piles by this month or next, in July they’ll be competing to buy into a scrap market with 25% less available supply.

Busheling and bundles are the main steelmaking material for most of the EAF-based flat-rolled mills. It accounts for 60% or more of the scrap they use. Cleanliness (free of dirt and other non-metallic contaminants) and the low levels of residual or “tramp” elements like copper and tin are the critical factors. These are more common and variable in obsolete scrap and can take away properties like formability that sheet steel users require. That has made busheling more desirable. But the cheaper-than-shredded price which persisted for much of the past year also made industrial scrap attractive to other mills.

Indeed, busheling and bundles have become a staple in the diet of some rebar and structural mills. These mills rarely used this scrap in the past, yet its cheap price and higher metallic yield versus shredded scrap made it worthwhile. Indeed, some melt shop managers bemoaned having to use busheling because it’s not as dense as shredded and it lowered their raw steel output. Nonetheless, they were told to use it and to consume less shredded. Price was one reason; availability was the other.

In addition to chasing long products steelmakers from the ferrous market’s industrial scrap aisle, some EAF-based sheet mills are being forced to raid each other’s suppliers and to use more alternative and higher-priced raw materials like imported pig iron. The last purchase of imported pig iron brought a price of $300 per tonne delivered to the port of New Orleans. Add an extra $20 or $30 per ton to carry that metal upriver by barge. As a consequence, offshore suppliers are now seeking $310 to $320 per tonne for the next deal, said one U.S. iron trader. One U.S. mill has bought more scrap from Europe, both industrial grades and shredded scrap, but even that supply is limited by the strength of demand elsewhere.

With no excess supplies, one mill did run out of scrap.

Flat-rolled steel sales are in the driver’s seat, while demand in other segments of the domestic market like the oil and gas drilling industries, is still weak. Even so, the sheet mills have not been able to take advantage of the dearth of scrap demand from these slowing sectors. The price erosion for scrap over the past 16 months did serious damage to the scrap supply chain, and with inventories eroded to near zero, supply is struggling to meet demand. Indeed, one mill in the South ran out of some scrap grades last month and had to raise its prices by as much as $70 per ton at mid-month to get what it needed. Others elsewhere were running with little or no inventory on hand.

Meanwhile, the tube makers and other non-flat steelmakers are dealing with the pain of paying higher scrap prices while facing lower demand for their finished products. If they balk at paying higher prices for their scrap, they run the risk of losing their current supply base.

Several brokers said there were no calls from mill buyers last week asking them to speed up shipments. Most buyers realized that such requests would be seen as panic calls and encourage dealers to ask for higher prices this week. Some, however, were polling dealers to determine how much scrap would be available this month. Again, the critical issue, particularly for the EAF-based flat-rolled mills, is the tonnage of busheling and bundles they can get now

Even taking into account the strong offshore demand and higher buying prices at the docks for heavy melt and shredded scrap, industrial scrap price gains should outpace the increases for the obsolete grades. One Eastern long products mill has already raised its offers this month for heavy melt, shredded and five-foot plate and structural scrap by $45 per ton to keep more of that scrap from going overseas. But that mill and other mills along the coast face a more formidable challenge in competing with the exporters.

Industrial scrap may be tight, but obsolete flows into dealers yards are rising.

Dealers are seeing a mixed performance in the flows of obsolete scrap. Auto wreckers are selling more to shredders, but the intake from both the peddlers and demolition contractors is still weak. One Chicago-based trader said the peddlers still don’t think it’s worth their time to collect much alley scrap based on the offers they are getting from the shredders. He added, however, that he expects that to change in the next month as the April and May rise in shredded prices should translate to higher offers for scrap at his level.

There is also rising competition among shredders for light iron –a thinner material that can be shredded, and yet provides a higher rate of ferrous recovery than autos. The shredders may be trying to offset the higher prices they are paying for cars. Junked and wrecked cars typically provide about 80% of their weight in iron and steel so long as the engine and drive train are still in the car when it is fed into the shredder.

Another problem for the domestic mills is the steep increase in the export prices. One East Coast exporter sold a cargo to a Turkish mill at $312.50 per tonne for the heavy melt portion of that shipment. An Eastern trader said that deal turned the domestic ferrous market on its head. Many of the U.S. mills can’t tap into cheaper supplies on the coast to offset higher prices sought by local scrap suppliers, he said. The Turkish mills are still looking for more scrap, said another East Coast trader, but are balking at U.S. exporter’s new offers of heavy melt at $320 per tonne.

If prices rise by as much as $50 per ton this month, matching the gain seen in April, one Midwest trader said the mills won’t have trouble finding all of the scrap they need. He believes such an increase will create a ferrous scrap “price bubble” that could burst if dealers have been holding back scrap. Back-to-back increases of $50 per ton will persuade them a price drop will follow in June and that they should sell all they have this month. He is already seeing that, he said. Dealers who had nothing to sell in April, now are offering him several truckloads and want to know how soon it will be picked up.

They want to liquidate inventory, he said, but like many other scrap dealers they don’t have enough workers to prepare the scrap to meet mills’ specs and deliver it. Many yards, both large and small, laid off both yard workers and truckers in the second half of last year when prices were collapsing, he said.

U.S. Shredded Scrap Thermometer: A spring shredded flood?

Shredded might not enjoy the same dollar-for-dollar gains as the industrial scrap grades are expected to see this month. Nor are the same per ton increases likely to be seen in all regions. Shredders in the coastal areas could see hefty price increases if the domestic mills nearby are battling with offshore mills for the shredded this month. Others in some inland markets could get by with modest increases of as little as $10 per ton or sideways offers. The reasons for the disparities include:

• Shredded is more abundant because more cars are being bought by shredders and imports of shredded scrap from Europe have risen. Yet, mill-delivered prices in the South and Southeast are as much as $30 per ton higher than what is being reported in northern cities like Chicago and Detroit. Remote sales from Midwest shredders to mills in the South could ease upward price pressure there.
  
• Shredder operators said they increased the prices paid for cars because the auto wreckers were the only suppliers with much feedstock to offer. Now that they are offering more money and warmer weather has arrived, the peddler trade could be reinvigorated.
  
• Mill-owned shredders are captive suppliers and operate as cost centers. With intake on the rise, they may be able to fill more of their mills’ needs this month and force some independent shredders to look for homes elsewhere for their output.
  
  Shredded remains as the most widely used grade of ferrous scrap, and perhaps the most abundant because of the excess number of shredders–more than 300 according to some sources. That’s the reason why shredded can often serve as the wild card in the scrap supply game.
  
• When prices of industrial scrap rise or supplies are unavailable, long products mills, foundries and integrated mills can shift the melt mix and use shredded to fill their raw materials needs. Even the EAF-based flat-rolled mills can use more shredded at times, but this usually requires adding more pig iron as well to dilute the tramp non-ferrous metal found in some grades of obsolete scrap.
  
• Unlike industrial scrap supplies, which are fixed by the output of finished goods like cars and appliances, shredded scrap availability is determined by the price. Throw more money at scrap dealers, one veteran trader said, and they will find more material to shred and ship to the mills, even if they have to dig it up at a landfill.
  
  

NASDAQ OMX Commodities (Stockholm) has rescheduled the start of trading in the Midwest US shredded scrap index futures to the end of the second quarter 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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