Mike Marley’s Shredded Power #54

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #54

Has the scrap market found a price floor?

July 19, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

The summer doldrums have not yet arrived, as they have been held in check by a rising undercurrent of activity in the ferrous scrap market. Some dealers report problems obtaining enough scrap, partly due to the summer heat wave, and partly due to their suppliers’ displeasure with the lower prices. If supply is tightening up, expectations are growing that prices will be unchanged or up slightly in August. Several mill buyers and brokers, on the other hand, see supply rising and worry that sheet steel sales may be slowing. They expect a “soft sideways” market next month, with some prices off by as much as $10 per gross ton.

Scrap industry sources point to several factors driving the potential supply pinch. First, an uptick in demand and higher prices in the export market is taking more obsolete scrap away from the domestic market. Second, several mills in the Midwest had problems buying shredded scrap and cut grades like heavy melt from local suppliers. They had to shop elsewhere for what they needed. Last, the summer heat wave and lower scale prices have reduced the flows of obsolete scrap into dealers’ yards.

But a Midwest mill buyer said hot weather also has limited steel output and thus scrap consumption. Several mills could start the next month with extra scrap on the ground and fewer worries about slow or missed deliveries. More troubling, he said, is the fear that steel orders may be weakening. Sheet prices are stable and order lead times for cold-rolled and galvanized sheet are unchanged, but hot-rolled band lead times now are between two to four weeks, down from four to six weeks a month ago. The sheet market has been the strongest segment of the domestic steel industry. Weaker sales now could signal an even slower pace in the coming months, he said.

Export rebounds, but the price gains are slim and the tonnage bought modest.

Offshore, Turkish steelmakers bought four cargoes in the past week including one from a U.S. exporter. Prices inched up. New offers for the 80/20 heavy melt are now above $220 per tonne delivered to a Turkish port, an increase of about $4 per tonne from the sales a week earlier. Though the prices are higher, this reflects only a modest price increase and not a significant gain in the tonnage bought from the U.S.

Also, the scrap price gain may be tied to a rise in iron ore prices and a spike in the prices sought for steel billet and not solely a need for scrap. Steelmakers in Eastern Europe are asking for $335-$340 per tonne for their billet delivered to Turkey, and offers from China have risen to $345 per tonne. Both are up by about $10 per tonne. Turkish steelmakers have few problems with the Black Sea suppliers, said one Eastern trader, but are leery of the Chinese after the billet supply problems earlier this year. Some Chinese traders reneged on deals in April after billet prices rose in the Far East. Turkish mills had to make several near emergency scrap buys in May and paid higher prices for that scrap.

Any new offers of 80/20 heavy melt from this side of the Atlantic probably will be at $220 per tonne or as high as $225 per tonne. Shredded offers also could rise to $225 or $230 per tonne since the Turkish mills usually pay a $5 per tonne premium over heavy melt for it. But the Turkish mills are likely to rely more on their European suppliers if U.S. exporters push too hard for higher prices. Scrap demand in several European countries is weak.

The biggest hurdle facing U.S. exporters may be obtaining enough scrap to fill a ship. Faced with lower offshore prices and demand, exporters trimmed their buying prices for heavy melt to $150 per ton. Their intake from local yards has slowed to a trickle. Some large coastal dealers reacted by selling more to the inland mills where they got better prices. Even with rail freight costs of $40 per ton, many still netted more than they were likely to get at the docks.

The exporters are also lacking shredded scrap. They typically sell some shredded scrap to U.S. mills each month, but boosted their tonnages this month. They got better prices at home than they could expect either from Turkish mills or steelmakers in India and Pakistan. The mills in southern Asia typically buy shredded scrap in containers. That allows them to reach a wider array of U.S. shredded producers. But that demand has all but disappeared and prices have fallen along the U.S. East and Gulf Coasts.

Lower offers spawned dealer resistance in the Midwest.

Eastern yards filled unanticipated shortfalls at some EAF flat-rolled mills in the Midwest. The flat-rolled steelmakers there are running well, yet they tried to cut obsolete scrap prices by $20 per gross ton. Several local dealers balked at those offers and one major mill countered with a better proposal. It offered–down only $10 per ton–and got much of the available tonnage. By the time other mills got wise and followed with their own down-$10 offers, local dealers said the cupboards were nearly empty. The mills could expect to receive a fraction of what they needed and thus turned to the distant suppliers. They maintained the $10-per ton lower prices for local scrap but paid More for the remote supplies. Those springboard prices reflected higher rail freight costs from the East Coast and other distant regions.

But a Midwest trader said it was not simply price resistance that prompted him to offer less scrap to the mills. The flow of feedstock to his and other shredders has declined. Auto wreckers disposed of their excess inventory in May and June when scrap prices were rising. Now, he said, some are again holding back cars because they are unhappy with the price cuts in the past month.

The consequence is that some shredders are starving and have raised their buying prices in an effort to draw out more material. In Ohio and Indiana, some are now paying between $150 and $155 per net ton for shreddables with one Ohio shredder offering as much as $160 per net ton.

With mill-delivered shredded prices lower this month, now down to an average $240 per ton, he said those higher feedstock prices provided him with little or no margin on the ferrous metal. It is also eating up what profits they are getting from recovered nonferrous metals. Some hungrier shredders in northwestern Ohio are falling behind on shipments. They are reaching out to scrap dealers and auto junkyards in the Detroit area with offers of $150 per net ton for feedstock. That is about $15 per net ton higher than the shredders there are currently paying and could set off a price war.

Another segment of the domestic steel industry displayed a bigger appetite for shredded scrap this month. Because of the $50 per gross ton price spread between bundles and shredded, integrated mills shifted their melt mix to use more shredded. That sopped up some excess supply, minimized downward pressure on obsolete prices and left more industrial scrap available to the EAF-based flat-rolled mills. That enabled their EAF rivals to limit their springboard buying of busheling and bundles and lowered the prices paid for that remote scrap to about $305 per gross ton from $320 per gross ton last month.

Shredders are not the only scrap suppliers feeling a squeeze. Dealers are seeing no improvement in the flows from demolition contractors. This is normally their busiest season, yet an Ohio trader said the volume of demolition scrap and thus the available tons converted into heavy melt, and plate & structural scrap has declined. Most of the demolition contractors are doing only “sticks and bricks” projects, he said. In other words, they are tearing down older homes and not commercial and industrial buildings which typically yield more iron and steel scrap. There is little non-residential construction work to drive that business, he said, and building owners aren’t awarding many new contracts.

In contrast to the supply woes in the Midwest, it was a buyers’ market” for the mills in the South. They cut the prices by as much as $25 per gross ton. A lack of export demand, more shredded from East Coast suppliers and several cargoes of scrap from Western Europe met their needs. Because prices in the South and Southeast have been above the levels in the Midwest, the larger decreases there this month only served to bring the two regions closer to pricing parity.

No mills are looking for more scrap and some may have too much at month’s end.

At present, said one trader, none of the mills are looking for more scrap and he’s not aware of anyone offering them more. Indeed, some dealers have said they may end the month still owing tons to some mills. He expects prices to be unchanged in August, he said, but is content to wait and see what the mills intend to pay for it. “Right now,” he added, “we don’t see prices dropping like they did at this time last year.”

Ferrous scrap prices began a downward spiral last July that lasted for five months. Mill-delivered prices for some grades plummeted by more than $150 per gross ton by year’s end. But dealers may be misjudging how much scrap mills will be needed in August. Many of the long products mills and the pipe mills are still running at only 50% of their capacity or less. And, there could be excess inventory at some mills by month’s end. The 90-degree plus temperatures have plagued the Midwest and Eastern Seaboard in recent weeks and reduced melt shop operations. Because EAF mills are huge consumers of electricity, some utilities restrict usage during peak hours or raise the costs if the mills run the furnaces at those times. One mill, for example, is limiting its melting operations to between 4 a.m. and noon each weekday.

Shredded Scrap Thermometer: Shredded’s inconsistencies.

Shredded scrap responds to price changes unlike industrial scrap grades like busheling which continue to flow into dealers’ yard regardless of the price. Mills cut their prices if steel demand is weaker and scrap is plentiful. Shredder operators, in turn, cut their buying prices to reduce intake. After that, however, the price moves provoke different responses in the shredded supply stream. Auto wreckers, demolition contractors and smaller dealers don’t just lower their buying prices. They pay less, but they all pull back supplies when prices spiral downward. To borrow a phrase from the scrap industry’s lexicon, they “sit on their scrap.” The consequences include:

• Shredders in many major cities saw their intake slow when prices declined for five months last year. Nevertheless, they still had some material coming across the scales most days. In rural regions, however, the flows dried up. So severe was the problem that some shredders only operated one day a week, usually after they had amassed enough feedstock to keep a shredder crew busy for a day.
• The success of the early shredder operators spawned copy cats. There are now more than 350 shredders in the U.S., many of them three or four times more productive than the earlier machines.

The country’s economic growth hasn’t matched that expansion and as a consequence there is a limited amount of junked cars, discarded home appliances and other unwanted durable goods that can be shredded.

• Owning and operating a multi-million dollar mega-shredder requires that the machine runs at an optimal pace to produce enough revenue. That pays for feedstock, workers’ salaries and the bank debt incurred to buy that machine. Because there is a limit to feedstock, shredders often pay high prices for it. Price wars with rivals are common and profitability is usually the first casualty.

Pricing and technology can produce unanticipated results and have done this in the case of shredded scrap. Two wild cards that reflects such outcomes include:

• Busheling and bundles are regarded as higher-value ferrous scrap, but the excess supplies last year drove down their prices and made shredded more valuable. Rebar makers and other mills making lower value steel products were able to use more busheling instead of then higher-priced shredded scrap. They, as one scrap trader said, enjoyed a filet mignon diet on a hamburger budget.
  
  ·The quest for profitability persuaded many shredder operators to adopt sophisticated systems that recover more valuable nonferrous metals. That improved the bottom line, but it also produced a cleaner shredded scrap. Integrated steel mills that never used shredded in the past because it was “dirty and full of contaminants” have become one of its main consumers.

The Nasdaq Futures Exchange expects to start trading in the Midwest US shredded scrap index futures to the third quarter 2016. The contract will trade in 20-gross ton units with the prices settled on the 11^thday 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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