Mike Marley’s Shredded Power #63

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #63

Prices likely will weaken, despite tighter scrap supplies.

September 20, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Those steep drops in both obsolete and industrial steel scrap prices this month may be more far reaching than anticipated.  Many dealers now believe that scrap prices will continue to decline in October and possibly in November as well.  Weaker overall demand for scrap and softer sales of domestic steel products are driving this decline.

Their pessimism stems as much from the fewer tons sold to many steelmakers as much as the lower prices mills were able to obtain this month.  Busheling and bundles prices dropped by about $30 per ton while shredded scrap and other obsolete grades were off by $20 per ton.  More importantly, several major mills bought less scrap from their local suppliers and were no-shows in the distant scrap surplus regions where they have been active buyers for much of this year.

As an example, an Eastern trader said several yards in western New York and on the Eastern Seaboard expected to sell five-foot plate and structural scrap at sideways prices to mills in the Midwest and South.  They found fewer takers, however, and those who were buying didn’t want much.  That created a mini-surplus and helped mills in northern Ohio and western Pennsylvania buy this scrap at lower prices.

A Chicago-based broker characterized the buying by the steel mills in that area as “nonevents.”  Some mills have scheduled outages this month or in October and have reduced their purchases this month.  Others simply told dealers that they didn’t need as much scrap because sales of their steel products have declined and they either have too much scrap at their mills or too much in their supply pipeline.

Domestic sheet steel output and prices are declining.

Troubling many dealers is the ongoing slide in prices of hot-rolled coil and the decline in the domestic steel industry’s operating rate.  The American Iron and Steel Institute (AISI) said the industry’s capability utilization rate dropped below the 70% mark for the past two weeks – 69.8% last week and 69.5% one week earlier.

The institute reports output on a geographic basis and not by product lines, yet many believe the slide reflects a slowdown in sheet steel production by U.S. steelmakers.  Several EAF-based sheet mills now have “holes” in their production schedules, said a trader in the South.  Hot-rolled coil prices have slipped to $520 per net ton and lower, especially in U.S. Gulf Coast port cities.  Sheet steel imports are on the rise from foreign steelmakers that were not slapped with hefty unfair trade penalties earlier this year.

Another trader in the Southeast said dealers have underestimated the scope of the pullback in steel demand this month.  Flat-rolled bookings at U.S. mills are down sharply, he said and added that mills and steel users are having trouble finding a price floor.   With U.S. mills struggling to obtain orders, hot-rolled coil prices could slip below $500 per ton.

Also, lead times have shrunk.  A steel purchaser accessed one mill’s new order tracking system but failed to find his orders for steel coil.  He called the mill’s salesman to find out what he was doing wrong.  Nothing, he was told.  The steel had already been delivered to his plant—five days after he had placed the order!

Steel service centers and distributors have not been buying as much from domestic mills which may account for a large part of the slowdown in sheet orders.  Some scrap traders believe the warehouses are keeping a tight grip on spending until they see steel price reductions that match what the mills have trimmed from their scrap costs.

In addition, according to one Midwest dealer, the EAF sheet producers are not selling as much hot-rolled coil to the integrated steelmakers.  The integrated mills shut down or mothballed 5 million tons of raw steelmaking capacity and were buying hot-rolled coils from EAF sheet producers to make their cold-rolled and galvanized sheet.  They are no longer buying as much, either because they are selling less sheet, relying more on their own melt shops or may have found other cheaper suppliers of hot-rolled coils or steel slabs.

Others are worried that automotive steel demand may be weakening.  A scrap buyer at one Midwest mill said that steel orders from the auto companies and their component makers have been thinning in the past month.  Likewise, a scrap trader said the sales of scrap to iron foundries have dropped as well.  He regards the foundry business as a “canary in the coal mine” indicator for the auto industry.  Scrap purchases from both the automaker-owned foundries and their outside suppliers of castings usually decline before the auto companies reduce their sheet steel purchases, he said.

Obsolete supplies are declining, but demand may be dropping faster.

Whether the weaker demand will be matched by a weaker supply of obsolete grades like heavy melt and shredded scrap is uncertain at this time.  Flows into their yards have declined and may drop even further in coming weeks, much as they did during the price slide in the second half of last year.  But industrial scrap output, barring a sudden and drastic drop in automaking, continues at a steady pace and may offset some regional shortfalls.   Plus, the price of busheling in many regions is now only $10 per gross ton above shredded scrap prices.  That may be low enough to attract rebar makers and other long products mills that can’t obtain adequate supplies of shredded scrap and heavy melt.

Or, they may be able to tap into the supplies from dealers in the coastal and seaboard regions who don’t have a stronger alternate outlet for their scrap.  Offshore demand is weak and the import prices in Turkey, the leading overseas market for U.S. East and Gulf Coast shippers, continues to decline.  Only one U.S. exporter sold a cargo to a Turkish mill last week and the price paid for the 80/20 heavy melt portion slipped to $218 per tonne delivered to a Turkish port, down $2 per tonne from the previous sales. Those prices were off by about $8 per tonne from the week-earlier deals.  The export yards aren’t displaying much confidence in the overseas market, said a Philadelphia area dealer.  They’ve lowered their heavy melt buying prices to an average of $160 per ton.

Nor is demand any brighter on the U.S. West Coast.  One export trader said the competition is heating up between Chinese steelmakers and other mills in the Far East.  Taiwanese steelmakers are planning to cut their rebar price and expect scrap suppliers in the U.S. to support them by lowering scrap prices.  At the same time, the shipping companies have announced plans to raise container freight rates.  But he and others believe the increase may not stick.  One or more of the major shippers will break ranks and stick with the current rates because the Pacific shipping activity now is so weak.

Will the mills get all of the scrap they bought this month?

Dealers have cut their scale prices to match the lower offers from the mills and already are seeing their intakes drop.  That could test the supply side dynamics for the obsolete scrap market, said one broker.  Dealers tend to sell all they expect to see coming through the gates this month.  If intake drops more than they anticipate, some will have no scrap to ship to the mills in the final week of this month.

Indeed, a Midwest broker said obsolete scrap flows now are off by as much as 30% in the wake of this month’s price cuts.  Supplies are likely to get even tighter, he warned.  Some mills, though they lowered their obsolete scrap prices by $20 per ton, did not cancel higher-priced orders from August.  Dealers were still delivering those older orders last week and said they are unsure if they can provide all the tonnage they sold this month.  Next week’s pace of deliveries will determine that.

Some mills that are running with minimal inventories on hand and relying more heavily on outside scrap suppliers may be short on supplies.  If the steel mill operating rates are steady and not declining, these mills could be lacking some key grades of scrap as they head into October.  With obsolete scrap flows shrinking in other regions as well, and few or no offers from the docks and coastal scrap yards, they may have no alternative other than to wait for those delayed shipments.

But a trader in the South said the supply issue may no longer be as critical for the largest EAF mills that now have their own scrap processing subsidiaries.  That includes the four major EAF-based mills—Nucor Corp., Steel Dynamics Inc., Gerdau Ameristeel and Commercial Metals Co.   In this weaker steel demand environment, he said mills are comfortable cutting back purchases from outside suppliers and relying on their own yards to fill their incremental scrap needs.   In some instances, mills can take their in-house
inventories of scrap down to as little as ten days’ supply and not be worried.  This has shifted the risk of owning scrap back onto the dealers, he said.

Shredded Scrap Thermometer:  Finding enough feedstock.

When obsolete scrap prices drop even by what some now regard as a modest $20 per ton as was the case this month, dealers are quick to warn that flows into their yards will decline and supply will shrink.  That’s true.  Yet it is hard to see some of the larger scrap yards shutting off their shredders for several days or even weeks.  Many will pay higher prices for shreddable materials and reduce the likelihood of an adequate profit margin.  Their reasons for playing this zero-sum game include:

• Some believe there is constant demand for shredded scrap, regardless whether it’s the  EAF-based mills, integrated mills, or the foundries.  Indeed, the market for shredded scrap has grown.  It has been a staple raw material for the EAF melt shops and foundries   Even the integrated mills, which once regarded shredded scrap as poison because of so-called tramp elements like copper and nickel-based stainless steels, are significant shredded users after the introduction of nonferrous metals recovery systems that have eliminated that problem.

• Shredded scrap is one of the three obsolete grades that are part of most bulk cargo sales to overseas steelmakers, although there are a few offshore mills in South America and Asia that buy all-shredded cargoes.  Shredded also plays a more prominent role in containerized exports, especially from U.S. East and Gulf Coast ports, largely because its density minimizes freight costs.

• Operating and capital costs for a shredder are much higher than other pieces of equipment in scrap yards.  Thus, it’s difficult to let the machine sit idle for more than a few days.  Even machines intentionally idled by major scrap processors and steelmakers will be switched on after they have accumulated enough material to shred for a day or two.  In some instances, it may be running simply to generate revenue to pay the bank loans that were used to buy and install the machine.

Even when the supplies of shredded scrap shrink as they sometimes do because of lower feedstock prices and seasonal factors like snowstorms, steelmakers and foundries have alternative materials they can use to fill supply shortfalls.  These are the wild cards to be played when much of the shredded has been dealt away.  
• Busheling and bundles were abundant in many regions last year and priced dropped as much as $20 per ton under shredded scrap.  This upside-down pricing as many characterized it made the industrial scrap more attractive to some steelmakers that normally would not use much.   Now, it isn’t as attractive price-wise as it was in 2015, but its availability could again make busheling a viable alternative to shredded if supplies tighten up as much as some anticipate.  

• Despite their complaints about unfairly priced finished steel imports, some U.S. EAFbased sheet mills have been major importers of scrap.  This year, bundles from several western European countries were a favorite.   Shredded scrap was the favorite in the past and could be again, assuming the price, the strength of the U.S. dollar,  and better availability versus other scrap grades are the basis for purchasing decisions.


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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