Mike Marley’s Shredded Power #61

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #61

Weaker flat-rolled demand will lower all ferrous prices.

September 8, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Ferrous scrap demand this month is weaker than dealers expected.  Several Detroit area steel producers are buying fewer tons this month and have slashed their busheling and bundles prices by $30 per gross ton.  They also obtained “sympathetic” downward price moves of $20 per ton on shredded scrap despite stiffer resistance to those efforts.  Dealers had hoped that reduced intake of shredder feedstock and stronger buying by long products mills elsewhere would create regional demand spikes and firm up prices shredded scrap and other obsolete grades.

The busheling price in the Detroit area is now at about $230 per ton on a delivered-to-themill basis, its lowest level in more than six months.  Shredded has slipped to $220 per ton.  The price spread between these bellwether grades has narrowed and some traders believe these decreases will serve as the pattern for price reductions elsewhere in the U.S. this month.

Several forces are driving the price declines, but most prominent perhaps, is the weaker demand and prices in the hot-rolled steel coil market.  Domestic mills aren’t just battling each other, though.  They are facing imports from foreign mills that escaped the heftier anti-dumping and countervailing duties imposed by the U.S. Commerce Department.  They have been underselling the domestic mills, traders said.  As a result, hot-rolled coil prices are sinking, with offers now as low as $520 per net ton and delivery promised in two-weeks or less.  Two months ago, these prices were $100 per ton higher and order lead times were four to six weeks.

Detroit area mills have smaller appetites for scrap.

An integrated mill in the Detroit area is buying only 20,000 tons of scrap this month versus the 30,000 tons it bought in August.  An EAF-based mill there likewise will buy only two-thirds of the tonnage it bought last month.

That these mills will be taking less scrap is troubling.  Some scrap dealers are worried that the reduced buys signify a potential downturn in auto output and, as a consequence, reduced steel and scrap demand.  Automotive demand has been the strongest market for domestic steelmakers for the past five years and has offset the weakness in other steel markets like oil and gas drilling and construction.

The scrap shopping lists are likely to be shorter at several Chicago area mills as well, industry sources said.  And a trader in the Southeast said several mills there are reducing output in September because of weaker steel sales and probably will trim this scrap purchases.  Yet, he said many were still being offered more scrap last week by dealers who were anxious to sell before the next round of buying begins.  He doesn’t expect any quick buying decisions.  Most mills have been offered industrial scrap at prices that are down by as much as $20 per ton, he said, but added that they probably will wait to see if lower offers will be forthcoming later this week.

On the other hand, in the Eastern Ohio and Western Pennsylvania region, dealers expect to see a modest uptick in scrap purchases in September.  Some are expected to have bigger buying programs than they’ve had for much of the past year.  One scrap trader cautioned that any increase in demand does not signal boom times for these mills.  Most had run their scrap inventories down to the ground and now they are seeing an increase in the number of drilling rigs.  That activity and not oil and natural gas prices is a better predictor of more demand for steel products, he said.

Sheet producers will be leading the price-cutting parade.

Sheet producers, both the integrated mills and EAF-based producers, are leading the downturn in scrap demand, a Midwest trader said.  Some are overstocked with both busheling and bundles and even shredded scrap in some regions.  He attributed this to the weaker order books, particularly at some EAF-based flat-rolled mills.

Excess inventories of industrial scrap could reflect the new direct deals that some mills made with independent stampers and late-arriving scrap imports from the European exporters.  In both cases, he said the mills are unable to cancel those shipments as they often do with domestic scrap dealers.  With industrial scrap generators like stamping plants, they have long-term contracts requiring them to take all of the tons generated each month.  Import deals often are made two or three months in advance.  It may take a month or longer until that scrap arrives at the U.S. mill.  As a result, he believes the flatrolled mills will minimize purchases from domestic dealers, especially from major Midwest yards that have been key suppliers to mills there and in the South.

Cancellations of unshipped scrap orders were widespread at the end of August, but some mills were selective about which scrap they would leave homeless.  Unshipped orders for busheling and bundles were killed in most regions, but some mills in the Midwest and the South did not rescind all of their purchases of cut grades like plate and structural scrap.  A few mills in the South and Midwest also hung on to their purchase orders for shredded scrap or postponed the cancellation dates until Sept 2 or 3 instead of Aug. 31.  
Many mills cancel undelivered orders on the final day of each month if they expect prices to decline in the next month.  But these cancellations don’t include scrap that is already loaded on a railcar and scheduled to be collected by the railroad’s switching crews or scrap that is already on its way to the mills.  Canceling those en route shipments would create logistics nightmares for the railroads.  Either they would have to return the loaded railcars to the various scrap yards where they originated or park them on a siding until dealers or brokers arranged new sales.

Another trader in the Southeast said most dealers last week anticipated cancellations on higher-priced industrial scrap.  They recognize these actions as part of the psychological warfare that the mills wage against scrap dealers, he said.  Many, however, did not receive any cancellation orders for obsolete grades.  Consequently, he said he doesn’t anticipate much downside for obsolete scrap prices this month.

If the obsolete scrap price cuts are as steep as those sought for the industrial grades, it could cut the flows into dealers’ yards by another 10 to 20%.  Intake at most yards is already off from the levels seen in the late spring/early summer period.  The consequence could be a repetition of the obsolete scrap drought that afflicted the domestic market late last year and earlier this year.  Mill-delivered shredded scrap prices then plummeted to less than $200 per ton and feedstock dried up.  Shredders in some cities were running only three days a week, but some in rural areas operated only one day a week.

Containerized scrap demand is steady, but bulk cargo sales are in a dead calm.

There were no reports of new purchases by Turkish steelmakers or the major scrap importers in Asia, but demand for containerized shipments of shredded scrap continues at a steady pace.  Shredded scrap is being shipped overseas from ports on the U.S. East and Gulf Coasts and both heavy melt and shredded scrap are being bought in containers from West Coast dealers and exporters, industry sources said.

One East Coast trader said foreign offers for shredded scrap were at between $215 and $225 per tonne loaded in a container and delivered to the docks.  Whether they will remain at those levels is uncertain at this time and could hinge on what happens in the domestic scrap market this week.  Some coastal shredders used those offers as leverage with domestic mills last month, and were able to get $220 per gross ton for shredded scrap in a railcar at their (the dealer’s) yard.  That could put a floor on scrap prices, at least along the coast, he said, but could also deny inland mills any opportunity to limit their purchases from local dealers and buy more from coastal shredders as a means of driving their local prices lower.

Steep reduction in the prices of busheling and bundles could have other unexpected consequences.  If the busheling prices drops to the same level or below shredded prices, it could encourage long products mills to change their melt mixes and use more industrial scrap, much as they did last year.  The cheaper price was not the only appealing factor.  Busheling also provides a higher metal recovery rate than shredded scrap.

The price cuts could also persuade dealers to hold some industrial scrap off the market this month with the hope that prices may bounce back sooner than expected. Some flatrolled mills are forecasting a light buy this month based on their steel orders, but if steel prices continue to drop as sharply as they have in the past two weeks and the auto sales aren’t collapsing as some fear, that may spur steel users and service centers to buy more. Some mills could be short scrap by mid-month and be forced to scurry around looking for more tons.

Inventories throughout the entire recycling chain are lean.  Dealers attribute that to the combination of low scrap prices and unusually high temperatures this summer.  Some mills and brokers may be betting that intake will rise this month as temperatures moderate, yet no one is sure that will be enough to motivate peddlers.  Even with cooler temperatures, the best price they can expect from a shredder is $60 or $65 for the half-ton of material crammed into a pickup truck and even less from smaller dealers without shredders.  They hope to make a few bucks when they put together all of those pieces bought from the small army of dumpster-divers.

Shredded Scrap Thermometer:  Finding a price floor.

Busheling and bundles are byproducts of industrial output and have little or no price sensitivity.  Supply of shredded scrap, on the other hand, can be limited by lowering the price for feedstock like old cars and appliances and peddler scrap.  Cutting the industrial scrap prices as deeply as they did last year created an upside-down price spread that had some unintended consequences that could reoccur if industrial scrap prices spiral down at a faster pace.  These include:

• When busheling and bundles prices dropped as much as $20 per ton below the shredded scrap prices, long products mills developed an appetite for it.  Price was the main driver, but better metals recovery was another benefit.  When demand revived at domestic sheet mills, they were forced to raise prices sharply to regain control of busheling supplies.  Fortunately, sheet prices rose even more and they were able to offset the then-higher prices they had to pay for busheling and bundles.

• Steelmakers usually trim their shredded scrap prices in the spring when milder weather brings more feedstock from peddlers and demolition contractors into the scrap stream.  Cutting those prices in the fall could be counterproductive, especially if winter snowstorms arrive earlier in some regions.  That can have greater impact on both the flows and the processing of scrap even more severely than the 90 degree-plus temperatures that have prevailed through much of this summer.

• Dealers frequently complain that the price cuts can lower intake into their yards quickly, but that price increases don’t refill the feedstock pipeline as rapidly as some expect.  Some suppliers will continue to hold onto junked cars and other shreddables if they believe prices will rise higher in subsequent months.

Because of the steady rise in EAF-based steelmaking and its expansion into markets like sheet products, mills have learned to use alternative materials and take an active role in the scrap processing and trading business.  Such steps are the “wild cards” that often ensure a steady supply of metallics when scrap is tight.

• All four of the largest EAF-based steelmaker in the U.S. have substantial roles in the scrap industry.  These range from Nucor Corp.’s acquisition of David J. Joseph Co. and its extensive network of scrap yards and brokerage offices to the numerous small feeder yards that make up the swath of scrap yards spanning the Sunbelt states and functioning both as suppliers to Commercials Metals Corp’s mills and to other steel producers in the region.

• The U.S. is the world’s largest scrap exporter, but some domestic mills have tapped into the European supply pipelines for key grades like shredded scrap and bundles for additional supplies and to use as leverage when bargaining with domestic scrap dealers.

• Last is the use of alternate materials like direct-reduced iron and imported pig iron which has also enabled mills to use cheaper and more abundant scrap supplies to make their steel products


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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