Mike Marley’s Shredded Power #59

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #59

Some mills prepare to make across-the-board price cuts.

August 24, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

If Yogi Berra had been a scrap dealer and was still in the metals game today, he might be telling us that it’s déjà vu all over again for the domestic ferrous scrap market.  The major EAF-based mills are pitching plans for another inning of price reductions.  Indeed, they expect to match the $20 per gross ton cuts obtained this month for busheling and bundles and extend that price-cutting streak to include heavy melt and shredded scrap.  They failed to achieve those cuts for the obsolete grades in their negotiations earlier this month.

On the other hand, most dealers are anticipating – switching now from Yogi-isms to scrap-speak – a “soft sideways” market in September.  That usually means a drop of about $5 per ton on most grades.  But some steelmakers are looking for a bigger takeback on the industrial grades and a $10 slice off shredded scrap prices.  Cut grades may be unchanged.  Others are looking for industrial prices to be off by between $5 and $10 per ton while obsolete grades will be unchanged for the second month in a row.
 
Timing could play a larger role next month.  The Labor Day holiday is September 5.  Since some EAF-based mills are hoping to push through steeper price cuts, dealers don’t expect much activity in the two weekdays ahead of the holiday.  Mills and brokers may try to place price-to-be-determined purchase orders with selected dealers, but the usual bargaining probably won’t start until after the holiday.  If it isn’t resolved until week’s end (Friday, September 9), some steelmakers could face a supply squeeze. This month’s purchases won’t begin to arrive at the mills until the middle of the following week.

More important is the clouded picture of both supply and demand. Steel mills in some regions like the Eastern Seaboard are running slower.  A few have pushed forward maintenance outages and will be buying less scrap next month.  Some grades will be in oversupply and dealers there will be scrambling to sell that scrap elsewhere.  At the same time, however, there are still shortages of key grades like heavy melt, and five-foot plate and structural scrap in several other regions.  Mills there probably will pay distant scrap suppliers higher prices to get what they need.

Oddly, the outlook for scrap in the East offers a distinct contrast.  Three smaller EAFbased mills in the East will have minimal scrap needs this month either because of outages or thinner order books.   Some mills in the Pittsburgh area and eastern Ohio have bigger appetites, though.  These mills were starving for business earlier this year because of the decline in oil and gas drilling.  Boom times have not returned, said one trader, but he sees the restocking their scrap larders next month as a positive sign.  “Nobody is holding scrap in this region,” he said.  “If prices are sideways, we’ll sell because we can make some money at these levels—not a lot, but enough.”

Some Midwest dealers, on the other hand, are worried that flat-rolled steelmakers will buy less and that inventories of industrial scrap will start to pile up.  This stems from the modest buying programs that these mills had this month.  Sheet mills in the South cut their busheling and bundles prices by $30 per ton, largely by limiting or eliminating tonnage bought from suppliers in Detroit and Chicago.  They used more imported bundles from western and northern Europe instead.

Now, prices of hot-rolled coil are slipping and some are worried that it may augur a slowdown in domestic sheet sales and production.  These prices have dropped to $580 per net ton and order lead times are less than two weeks at some mills.  U.S. prices are stronger than hot-rolled coil prices elsewhere in the world, but are down from the $640 per ton that the U.S. mills were getting two months ago.  Some dealers worry that it reflects weaker demand from the auto industry.  Or, domestic steel users and warehouses may be finding other foreign mills offering steel at cheaper prices.

Some mills also have excess scrap.  One EAF-based flat-rolled mill in the Midwest has told suppliers that it has at least two months’ supply on the ground or in its delivery pipeline.  It will still buy scrap next month, but will cancel all unshipped orders at month’s end.  It could drastically slash its offers for both industrial and obsolete grades.

There are gloomy forecasts of excess obsolete scrap as well.   A trader in the upper Midwest said he will complete shipping all of his orders of shredded scrap by the end of this week.  That means five more days of scrap coming across the scale in his yard, he said, and no certainty he will find another home for it soon.  He cut his feedstock prices earlier this month and thought intake would match what he sold.  It didn’t decline as much as he anticipated.  He plans to lower his buying prices later this week.

While some worry that scrap will pile up, others are still filling old orders.

But another trader in the region said some dealers just finished shipping their July orders, particularly for plate and structural scrap.  There aren’t many major demolition projects underway in his area, he said, and some dealers have complained that contractors are holding back scrap because the prices are too low.

Prices for bundles and busheling could drop, he said, but noted that if the decline is too steep, long products mills may substitute busheling for the scarce supplies of obsolete scrap.  “That’s what they did last year when busheling was so cheap,” he said, then added: “Why wouldn’t they do it again this year?”

Other dealers said the flows of scrap into their yards continue to decline because of low prices, and hot and humid weather.  Scrap processing is likewise affected by the high temperatures.   The heat and humidity also limit power consumption at EAF mills, but that usually applies only in daytime hours.  Those mills running at a slower pace usually move melt shop work to the night and early morning hours.

The outlook in the Southeast is mixed as well, after seeing the steepest price cuts in the country this month.  Despite those declines, one trader in the region said there is no overabundance of scrap in dealers’ yards.

Yet, one mill in the region had to tell dealers to delay their shipments for several days, said a trader.  That mill was buried with excess supplies of offshore scrap.  Unlike the materials bought from domestic yards, mills and their brokers have little control over the cargoes from overseas. Telling a ship owner to anchor his vessel in the Gulf of Mexico for several days and postpone transport by a barge company can incur substantial demurrage costs whereas telling a local dealer to delay shipping several railcars may require only a phone call or fax.

A Birmingham-based trader said the imports created a mixed picture of scrap supply in the region.  Bundles and shredded scrap were abundant at some mills while cut grades were scarce throughout the region.  Like several other regions, he said demolition work was spotty and as a consequence plate and structural scrap were in short supply.  Competition for that scrap could be more intense in September and put a price floor under the market.  That could limit the downward pressure on the other obsolete grades, he added.

Turkish mills aren’t buying much, but demand in Asia is reviving.

Adding to the chaos is the lack of clarity in the offshore market.  Turkish steelmakers bought two cargoes from separate US exporters. They paid $227 per tonne for 80/20 HMS delivered to a Turkish port from one, and they paid $228 from another.  Sellers on this side of the Atlantic were asking for $230 per tonne and point to problems of getting much material from local scrap dealers.  They contend that higher prices are needed to draw out more scrap or to take it away from domestic mills.

Turkish traders were reluctant to move above the $229 per tonne paid in deals for bulk cargoes from their suppliers in Europe and from one U.S. exporter a week earlier.  Softer offshore demand for rebar and the weakness of the Turkish lira in the aftermath of the failed military coup are clouding the market.

One broker said the East Coast export yards are not building much inventory.  They have scrap coming from their own feeder yards and aren’t boosting their local prices.  They are offering small and mid-size coastal dealers between $160-170 per ton for export heavy melt.  These are the yards that lack rail siding or access to barge transport on the coastal waterways and thus have few outlets other than the docks, the local steel mills will take truck shipments or larger scrap yards in the area.  Distant suppliers in western Pennsylvania and Ohio have gotten as much as $185-190 per ton from New England area exporters, but those offers also carry extra freight costs.

Demand and prices in Asia, on the other hand, continue to move upward at a steady pace.  One West Coast trader said prices are stronger in Taiwan and Southeast Asia.  Chinese steel billet prices have inched upward and as long as Chinese exporters don’t start dumping billet and rebar into the Asian market again, he believes scrap demand and supply will be in balance there.  Demand for shredded scrap in containers is stronger on the West Coast as well as the East and Gulf Coasts, said another exporter.  Offers from Indian scrap traders are now as high as $218 per tonne at some Eastern ports.

Shredded Scrap Thermometer:  A Return to 2015?  

Short-term outlooks and short memories are chronic problems for ferrous scrap buyers and sellers.  If dealers and steel mills spent more time planning for scrap purchases six months or further ahead, shredded futures trading probably would already be a well-established buying and sales tool.  Likewise, lessons from the past misjudgments might not be repeated so often.  Consider last year’s pricing death spiral for shredded scrap and the impact it had on supply and prices this year:

• Five consecutive months of price cuts in the second half of last year shut down the flows of shredder feedstock from peddlers, auto wreckers and demolition contractors.  Some dealers said intake is still declining from the reductions sought by the mills two months ago.  Prices have been stable, but intake has not recovered.  Flows are off by as much as 30% at some shredders.

• When shredded prices bounced back in the first quarter, supplies from auto wreckers and smaller scrap yards were the first to resume.  It took longer to refill the supply lines from peddlers and demolition contractors.

• Busheling prices dropped below shredded for several months last year and long products steelmakers scooped up the then-cheaper industrial scrap.  Domestic flatrolled mills were losing market shares to steel imports and weren’t using as much busheling and bundles.  They are a lot busier this year and may be less willing to allow the price to drop to even or below shredded and invite competition for the material.

Shredded scrap supply may be tight at times, but the U.S. probably won’t ever run out of it.  As a developed economy, this nation uses and discards millions of old cars and appliances each year.  Shredding enables the steel mills to reclaim ferrous metals from these goods and uses them to make new steel products.  Two other factors serve as “wild cards” in the supply of the fragmented scrap.  These include:

• All of the largest EAF-based steelmakers have captive shredders that serve as a key part of scrap supply chains for these mills.  Some are captive to an individual mill and other mill-owned shedders may serve a dual role as a captive supplier and a profit center for their corporate parent by producing and selling shredded scrap to rival steelmakers.

• The excess number of shredders operating in this country ensures that there will surely be enough shredders outbidding each other for that feedstock.

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


This report includes “forward-looking” statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, international currency movements, technological developments, governmental actions and/or other factors.  The information contained in this report is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any action is neither authorized nor warranted.  WSD does not solicit, and avoids receiving, non-public material information from its clients and contacts in the course of its business.  The information that we publish in our reports and communicate to our clients is not based on material non-public information.  
The officers, directors, employees or stockholders of World Steel Dynamics Inc. do not directly or indirectly hold securities of, or that are related to, one or more of the companies that are referred to herein.  World Steel Dynamics Inc. may act as a consultant to one or more of the companies mentioned in this report.  
Copyright © 2016 by World Steel Dynamics Inc. all rights reserved.