Mike Marley’s Shredded Power #55

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #55

Mills want to slash industrial scrap prices.

July 26, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Thanks to two months of price cuts and hotter summer weather, obsolete scrap supplies are shrinking; and along with that, any hope for lower prices on this scrap. Some mill buyers and brokers are expected to shift their focus on the price negotiations for next month’s scrap purchases. Now, they will be looking to narrow the growing price spread between the industrial grades and shredded scrap.

Shredded scrap slipped to $240 per gross ton on a delivered-to-the-mill basis in both the Midwest and the South this month. But busheling and bundles prices were unchanged in the $280-290 per ton range, with a few mills still paying as much as $310 per ton to distant suppliers. That’s a $70 premium over shredded scrap and consequently some want to shrink it by as much as $30 per ton.

Busheling and bundles traditionally command a premium of about $20 per ton over shredded because they are cleaner and yield more metal when melted. But busheling prices can have huge swings. In the

2008 scrap buying boom, busheling sold for more than $800 per ton for some months, $300 higher than shredded scrap. Last year, on the other hand, domestic flat-rolled mills were running poorly and busheling was in oversupply. It sold at a discount to shredded scrap for much of the year.

Temperatures aren’t too high to melt scrap, but they’ve reduced flows and processing.

There is no longer much talk about cutting obsolete scrap prices. The price cuts obtained earlier this month, the second in as many months, and the prolonged heat wave have reduced scrap flows into their yards, several dealers said. That has tightened up the supply of both shredded scrap and cut grades like plate and structural scrap.

The 90-degree plus temperatures are also limiting productivity and output at scrap yards. Shredders face power usage restrictions during the days and those in urban areas can’t make up for lost time by operating at night. Doing so is likely to incur wrath from their neighbors. Torchcutting, which produces much of the usable structural scrap, is now limited to the cooler, early morning hours. Some yards are bringing in their cutters at 5 a.m. and sending them home before noon.

Steel mill output is likewise affected by power restrictions. But some mills that are running at a slower pace because of weak sales of their steel products are able to make up lost production by shifting operating schedules to late night or early morning. A few have switched and are running five or six days a week at off-hours instead of the two-weeks-on and two-weeks-off melt schedules they had been using.

EAF-based steelmakers weren’t picking many fights about industrial scrap prices this month, though some operate both sheet and long products mills. Indeed, busheling and bundles prices haven’t changed for the past three months because industrial scrap has been tight and the flat-rolled mills are busy. Summer vacation closures at auto stamping plants have limited scrap output and the flat-rolled mills need just about every ton of that scrap they can put their hands on. Busheling and bundles normally make up about 60% of the scrap they use to make sheet steels.

Offshore demand may be anemic, but scrap imports have a strong pulse.

An East Coast export trader said he is not seeing much interest from offshore buyers. That includes both those that buy bulk cargoes and smaller traders who purchase containers loaded with shredded scrap. The containerized offers are higher than a few weeks ago, he said, but are still about $10 per ton below domestic mills’ prices.

Scrap imports are a different story, however. The U.S. mills, benefitting from problems in Europe because of Brexit and the unrest in Turkey, are buying cargoes of shredded scrap and No. 1 bundles from Europe. Bargains are available because of the strength of the U.S. dollar versus the Euro, the British pound and the Turkish lira. Even if they are paying about the same prices or slightly higher when all of the costs are totaled, said a trader in the Southeast, they still need industrial scrap and can use the imported metal as leverage in their negotiations with local scrap dealers next week.

But some U.S. scrap exporters and their European counterparts have not given up hope for near-term revival in export activity. An East Coast exporter said the Turkish mills must buy about a dozen cargoes to meet their needs for late August and September. Despite the current political unrest, a Turkish mill bought a cargo from a European exporter and paid $224 per tonne delivered to a port in Turkey for the 80/20 heavy melt portion of that package. That’s an increase of about $4 per tonne over the previous sale from that region.

U.S. exporters are looking for $230 per tonne for their heavy melt, said one trader, and they view that offer as reasonable because of the recent increases in the prices of steel billet from the CIS countries and China. Turkish mills have had to pay as much as $350 per tonne for steel billet and are still wary of deals with the Chinese suppliers because of their unanticipated demands for higher prices in April when steel prices rose in the Far East.

The U.S. exporters are facing resistance from the Turkish mills who have countered with offers of $220 per tonne. Some have bought smaller short-sea cargoes from Black Sea exporters at lower prices. These are usually barge loads of 4,000 tonnes of heavy melt and other cut grades. But there are limits to how much scrap they can obtain from these suppliers, he said.

East Coast dealers found new homes for their scrap in the Midwest.

Weak overseas demand for US scrap can drive down obsolete scrap prices in the US market, but several of the largest coastal dealers balked at the lower offers from the docks this month. One said the best he could get was $155 per gross ton for his heavy melt. Also, the lower mill offers for obsolete scrap this month produced mixed results in various regions of the country. Most mills in the South and along the East and Gulf Coasts were able to slash these prices by as much as $30 per ton. But in the Midwest, the mills retreated from their initial down $20-per-ton offers and only managed to take back $10 per ton.

Shortages and stronger demand in the Midwest also lured several major dealers in the East Coast to abandon the offshore market and sell much of their scrap to mills in Ohio and Indiana. This included dealers whose yards are equipped with rail sidings. The smaller dealers without access to rail or barge shipping had little choice other than selling their scrap to the docks. Yet even with those suppliers and their own feeder yards, the exporters are having a tough time gathering enough material to fill a ship, said a northern New Jersey dealer.

And Eastern scrap dealers found plenty of hungry mills to feed in the Midwest. Flows into the yards in the Midwest are declining because demolition contractors and auto wreckers, the major suppliers of obsolete scrap to dealers and shredders, are discouraged by the price cuts in June and July. Intake at dealers’ yards is off by as much as 20% and could continue to decline, said a Cleveland-based dealer. He fears a repeat of the scrap drought that followed the five consecutive months of price cuts late last year. By year’s end, he said some shredders in smaller towns were running one-day a week because they had so little material to shred.

Another northern Ohio trader said these feedstock suppliers have learned from the scrap industry. They know that unlike the past, few dealers have the financial wherewithal to hold much scrap. “They get three or four phone calls from several dealers when the market is strong,” he said. “They know the dealers need their scrap and will come back to them.”

Intake is so poor that some dealers said they expect to end the month owing scrap to mills. As this final week of July began, one dealer in the Midwest said he wasn’t worried if the mills cancelled his unshipped orders. He had only shipped about two-thirds of what he had sold and isn’t seeing enough scrap coming through the gates to fill those orders.

Several mills had problems finding enough plate and structural scrap this month and substituted heavy melt and shredded scrap. Much of the increase in non-residential construction has involved roads, and not new shopping malls and office buildings. Older buildings usually yield the heavy I-beams, but many building owners won’t tear down a structure unless they are replacing it with a building that will generate revenue. Also, some are sure scrap prices will rebound and they may wait until they see that.

Making these short supply situations worse, some of the mills that are running poorly have been keeping scrap inventories to a minimum to conserve cash; and at times, several have come close to running out. One mini-mill with a limited amount of storage space on its property had to keep the gates open at nights and on the weekends to allow deliveries at those times because its scrap inventory was so low.

Shredded Scrap Thermometer: A shredded slowdown.

That bumper crop of shredded scrap said to be overflowing scrap yards throughout the country because of the weaker export market has evaporated in the summer heat wave. True, the stronger dollar has limited U.S. exporters’ overseas sales and brought more European scrap to the U.S., but some mills found domestic shredded scrap a more attractive buy which has helped to firm up its price despite pressure from other mills to reduce it by as much as $30 or more per ton this month. Here’s what helped shredded regain its strength:

• The widening price spread between shredded scrap and prime industrial grades like bundles and busheling prompted several integrated mills to scrap plans to use more industrial steel scrap and favor the now cheaper and more abundant shredded as the main component of their scrap charge.

• Lower prices reduced the feedstock flows into dealers’ yards and higher temperatures forced many shredders to pull the plug on their machines during the daylight hours, thus producing the double whammy of limiting intake and processing less of the diminished supply.

• Tighter supplies of other obsolete grades like plate and structural scrap forced some mills to turn to shredded scrap as the readily available substitute.
  
  Shredded scrap prices may be bottoming now after two months of declines, but there is still the likelihood of more downward pressure on its price in the near term. Two “wild cards” which could emerge from the deck in the coming months include:

• Weather-induced scrap supply shortages, like 90-degree plus temperatures in summer (or snowstorms in winter), are short-term phenomena and their impact on prices and supply are often mitigated within a week or two.

• Long products mills are still the biggest users of shredded scrap and many of these mills, which make products like rebar and pipe, are still not enjoying booming sales like the domestic sheet mills. Thus, their demand for shredded has been minimized for much of this year and is expected to remain weak.

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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