Mike Marley’s Shredded Power #60

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #60

With obsolete scrap tight, ‘sideways’ prices are likely.

August 30, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Ferrous scrap traders and brokers don’t expect to see much buying this week.  Most believe the mills will wait until after the Labor Day holiday to begin purchasing scrap for the month.  Several have told suppliers they have enough scrap on hand or en route to their mills.  Whether those supply pipelines are as filled as they say is uncertain.

Several Midwest dealers said they started this final week of the month still owing hundreds of tons of scrap to mills and probably won’t finish those shipments until late next week.  That assumes most mills won’t cancel their unshipped orders from August, much as they did this month because of late July shipments.  Some dealers were still shipping scrap bought in July as late as the third week of August.  Instead, the mills will monitor deliveries and try to avoid making any huge buys ahead of the holiday.  Such early purchases might be regarded as desperate measures and encourage dealers to expect higher offers.

Some dealers said that they are desperate as well, not only because they can’t fill existing orders, but because they also are unsure of how much to offer the mills in September.  One Ohio dealer said flows of obsolete scrap into his yard are far below what he expected, and he has had to turn down requests from some mills to buy more scrap at prevailing prices last week.  He also hopes that some mills will cancel his delayed shipments, otherwise he could still be shipping August orders by mid-September, he said.

Shredded and No. 1 heavy melt are in tight supply in many areas.  Shredder operators blame the combination of stagnant prices and high heat and humidity.  Even worse, said a trader in the South, is the scarcity of five-foot plate and structural scrap, either because there are so few big demolition jobs or contractors are holding that scrap off the market.  Some mills are trying to overcome this by using more shredded, but they may find the shredded reservoir low next month.

Another Midwest trader said he oversold much of his shredded output this month, not by design, but simply because intake from key suppliers—auto wreckers and smaller dealers—was so low.  Most of the shredders in the cities have adequate supplies, but those in rural areas are starving for feedstock, he said.   He expects one or two mills to cancel their unshipped orders and try to buy at lower prices.  Others will realize how tough it is to get enough obsolete scrap and won’t cancel. As a result, shredded and heavy melt prices probably will be unchanged, he said, even if the industrial steel scrap prices fall.  EAF-based flat-rolled mills will be less aggressive in buying scrap next month, he said because there’s a lot of industrial scrap piled up at those mills.

Shredded scrap and heavy melt may be tight; busheling and bundles are loose.    

Busheling and bundles are plentiful and many dealers acknowledge that they expect these prices to slip when the buying gets underway next week.  They plunged by as much as $30 per gross ton in some regions of the South this month as the mills there slashed their offers to distant suppliers in the North.  It was the second time in as many months that industrial scrap prices have declined and several dealers said they expect to see a third round of price cuts next week.

Most believe these prices will be off by about $10 per gross ton, but their guesstimates often understate what the biggest EAF-based mills will seek.  Buyers and brokers for some flat-rolled mills have indicated that they may push for reductions of $20 per gross ton or more.  They aren’t worried that steeper price cuts will choke off supply.  Industrial scrap is not as price-sensitive as obsolete scrap.  It will continue to roll into dealers’ yards regardless of the price.  Only dealers can limit supply by choosing not to sell much tonnage.

A $20-per ton price cut, if successful, would lower busheling and bundles prices to the same level as shredded scrap in many regions—$240 per ton on a delivered to the mill basis.  That could lure long products steelmakers who may be having problems getting enough shredded scrap back to the prompt industrial scrap market.  They were active buyers there last year.

EAF-based flat-rolled mills may not be troubled by that surplus at this time.  Some are overstocked with prime industrial scrap, possibly from their own scrap yards and imports.  Also, order lead times for hot-rolled coil continue to shrink.  These are now down to between one to two weeks at some mills.  The price for hot-rolled coil, the bellwether price for sheet steel products, has been slipping.  Some traders said they are now hearing offers as low as $560 per net ton, down about $80 per ton from the high seen earlier this year.

And despite the anti-dumping and countervailing duties of foreign sheet steel products, imports of hot-rolled coil and steel slab are on the rise, according to the latest figures from the American Iron and Steel Institute.  Imports of hot-rolled coil rose to 333,231 net tons in July, up 48.1% from the 224,934 tons brought ashore in June.  Imports of semifinished slab climbed by 36.5% to 752,561 tons in July from 551,256 tons from the prior month.  The Commerce rulings limited intake of unfairly priced foreign steel, but they also spurred the domestic mills to raise their sheet prices sharply. That may have encouraged steel users and warehouses in the U.S. to shop elsewhere.

Those import figures also suggest that integrated mills aren’t buying as many hot-rolled coils from the EAF-based mills as they had been getting.  They filled a supply shortfall at the integrated mills which have shut down about 5 million tons of their raw steelmaking capacity in the past two years.  Instead of restarting their blast furnaces, coke ovens and BOFs, they instead bought hot-rolled coils from their EAF rivals and turned them into cold-rolled and galvanized sheets. These so-called “substrate sales” had been a bonus for domestic EAF mills.

Dealers are not the only suppliers short scrap; the export yards have no excess.

One Eastern trader said several mills in the South and the Midwest were active in his region last week looking for shredded and cut grades.  This seemed to belie the claims that they had adequate supplies and would not buy much in September.  It is unclear whether they were short these grades of obsolete scrap – trying to get ahead of the September buying by other mills – or trying to tap into the apparent supply excess in that region.  Two EAF-based Eastern mills have planned outages in September and a third mill is running poorly.  Mills in the South and Midwest may believe that they can pick up cheaper scrap there.  Again, whether they’ve had much success is unknown.

In most instances, he said they were trying to tap larger dealers with rail sidings because they are the suppliers that can ship scrap long distances.  They also tried to buy more from the export yards, he said, but weren’t having much luck there.  Like the larger dealer yards in the area, the exporters can ship scrap not only in rail cars but also by barge to coastal mills in the Southeast.  Normally, when domestic mills turn to the docks for scrap, they are buying shredded.  The 80/20 export heavy melt does not meet their requirements.

But the exporters may have little shredded or other grades they can offer into the domestic market, and they have other customers to serve.   Turkish steelmakers bought three cargoes from U.S. East Coast exporters last week and double that number from European suppliers.  The prices paid to European exporters were lower, but the U.S. shippers got the same price they obtained in previous deals, possibly because they could not provide more within the time specified by the Turkish mills.

Offers for shredded in containers have leveled off at $225 per tonne at the major East Coast ports and as low as $215 per tonne at the smaller.  Some coastal shredders have not sold much to these offshore buyers because they are waiting to see what the domestic mills will offer next week.  Some mills in the South paid them as much as $220 per gross ton F.O.B. a dealer’s yards for shredded scrap earlier this month.  Some believe they could see better offers this month because of the shortages of some obsolete grades.

Others, and this includes some suppliers on the U.S. West Coast, are anticipating a spike in offshore demand by Asian steelmakers.  Chinese steel billet prices have risen to as high as $360 per tonne delivered in the Far East, but some Chinese billet suppliers have reneged on earlier agreements to sell billet to mills in neighboring Asian countries at $320 per tonne, said one West Coast trader.

Steelmakers in Southeast and southern Asia may be forced to boost their steel output and buy more imported scrap.  That could bolster overall demand on the U.S. West Coast and buying of containers of shredded scrap on the East and Gulf Coasts.  Traders can make a few phone calls and have containers filled with shredded dropped off at the docks within a few days whereas it can sometimes take as long as a month or more to gather enough scrap for a bulk cargo and fill a vessel.

Shredded Scrap Thermometer:  Shredded uncertainty.

Dealers and brokers are equivocating in their forecasts for shredded scrap prices in September.  Domestic flat-rolled demand may be slipping and EAF-based sheet makers have excess supplies of industrial scrap at their mills.  Thus, most have no doubt that busheling and bundles prices will fall by at least $10 per ton.  They see no change for No. 1 heavy melt and fivefoot plate and structural scrap prices because of slow deliveries and apparent shortages in many regions.  Yet, they are unsure about shredded.  It could be sideways or could drop as much as busheling, some said.  But there may be reasons to worry about its availability as well.  These include:

• Shredders depend on a mixed group of feedstock suppliers even those with their own feeder yards.  But the flow of shreddable materials—cars, appliances and demolition scrap—has been slow in the past two months.  Low prices are one reason; hot temperature and humidity is the other. Whether intake will improve with moderate Indian summer weather is still a guess, but no one expects prices to get any higher.

• When supply of higher-quality obsolete materials like plate and structural scrap tighten up, long products mills and foundries often shift the melt mix to use more shredded scrap.  It’s comparably priced and provides better density in the charge bucket than the usually higher-priced busheling.

• If shredded feedstock has dwindled as much as some report, it will take not only higher prices but a few weeks to draw out more feedstock.  Auto wreckers were the first to respond earlier this year when prices rose, but many had been holding back inventories for six months or more.  They may not respond as quickly now.  Demolition contractors, smaller scrap yards and even peddlers hold back when prices rise.  They often wait till next month to see if another price increase will follow.

Scrap demand is rarely uniform throughout the country.  There are pockets where supplies of shredded may be more are abundant and enough brokers with railcar to move that scrap.  That is one of the “wild cards” which could ease any potential pressure on shredded supplies next month.  Others include:

• Direct-reduced iron (DRI) normally is used as a substitute for higher-priced busheling, but there’s no reason it could serve the same role for shredded and cut scrap at some mills.  The one key drawback is the uncertainty over deliveries from some key offshore suppliers.   
 
• Shredded scrap travels well in railcars and trucks.  It also easily fills the holds on bulk cargo ships. Several European exporters, disappointed with the modest $5 per tonne premium they get from the Turkish mills may be happier shipping more of their fragmented scrap to U.S. mills if the prices and ocean freight charges are more attractive.


The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures in the forth quarter of 2016.  The contract will trade in 20-gross 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.      


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