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Steel News September 28, 2016 09:32:52 AM

Mike Marley’s Shredded Power #64

Michael Marley
ScrapMonster Author
Steel orders and prices continue to spiral down, lowering expectations for ferrous scrap prices next month. Several dealers said they are focused on shipping what they have sold to the mills by the end of this week. They believe many of the mills and their brokers will cancel all unshipped orders by Friday.

Mike Marley’s Shredded Power #64

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #64

Steelmakers expected to seek scrap price cuts in October.

September 27, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Steel orders and prices continue to spiral down, lowering expectations for ferrous scrap prices next month.  Several dealers said they are focused on shipping what they have sold to the mills by the end of this week. They believe many of the mills and their brokers will cancel all unshipped orders by Friday.

Indeed, some Midwest traders expect EAF-based steelmakers to cut prices in October by the same amounts as they did this month. If successful, that could mean another $30 reduction for busheling and bundles, down to $210 per gross ton on the average, and a $20 decrease in shredded scrap to about $200 per ton in most of the major steelmaking regions.

Mills bought fewer tons this month, but dealers also pulled back, particularly their offers of heavy melt and plate and structural scrap.  Though their intake has been dropping, many shredders are unloading all of their tons to avoid being stuck with expensive scrap in a declining market.  Few, if any, dealers have cut their scale prices yet.  Their inventories were low already and they want to have enough tons to fill existing orders.

Not all dealers are convinced that the mills will be able to slash prices severely.  Some mills boasted last month that they had adequate supplies of scrap from their own yards as well as scrap imports, direct reduced iron and imported pig iron.  But one Midwest trader said he’s not certain that they still have those surpluses.  There is enough industrial scrap, he said, but the supply of shredded and other obsolete scrap has tightened.  Also, he said, there has been little or no offshore buying of scrap or other raw materials.  Imported pig iron, for example, now costs as much as $290 per ton delivered to mills in the upper Midwest.  That is $60 per ton higher than the price of busheling at these mills.

Obsolete scrap flows have dropped steadily and show no signs of rebounding.

Obsolete flows into dealers’ yards have declined since June when the mills reduced their prices for shredded scrap and other obsolete scrap, but left prices for busheling and bundles unchanged.  The industrial scrap prices stayed at those levels because EAF-based sheet mills were running at capacity and didn’t want to risk losing limited industrial scrap supplies to rival producers.  Output of bundles and busheling typically declines in the summer because of auto stamping plant closures for vacations and retooling of the presses for model year changes.

June’s price cuts for obsolete scrap were followed by steady prices in July and August.   Prices fell again this month despite diminishing feedstock flows to shredders and other scrap processors. The mills cut those prices by about $20 per ton this month and dealers in several regions said intake has declined again.  Flows are now off by as much as 30% from the levels seen at mid-year and could drop even further, they said.  If the mills cut prices as much as some expect and dealers lower their scale prices, intake could fall to anemic levels, said a northern Ohio trader.  “If we see another steep price drop next month, it will have a serious effect on our inbounds and our revenues,” he said.

Feedstock prices at several Midwest shredders are down to a range of $100 to $110 per net ton and the prices that smaller feeder yards are now offering to peddlers have dropped to between $70 and $80 per ton.  Though profit margins per ton may be healthier, volume is lower and shredder operators may not be making enough to cover all of their costs.  They aren’t drawing much tonnage from the auto wreckers, smaller scrap dealers and demolition contractors.  Scale prices for peddlers match the lows they were getting in the end of last year.  That shut off the flow from this branch of the obsolete scrap stream.

By contrast, some mill-owned shredders there and elsewhere are paying as much as $130 per net ton for shreddables, and even that may not be providing them with enough material.  A Midwest trader drove past a mill-owned shredder last week and estimated that it had about 500 tons of shredded on the ground and another 100 tons of feedstock to shred.  No trucks were at its gate with additional material, he said.  In busier times, that shredder produces about 1,000 tons per day.

Ferrous export sales have slowed and scrap imports may be receding also.

Ferrous scrap export prices and demand continue to slide as well.  A U.S. Gulf Coast exporter sold a cargo to a Turkish mill this week.  The 90/10 heavy melt portion of that cargo was priced at $210 per tonne delivered to a Turkish port and $213 per tonne for shredded scrap.  That equals $208 per tonne for the bellwether 80/20 heavy melt.  Export demand has been steadily weakening for the past two months, both on the East and Gulf Coasts as well as on the U.S. West Coast.

Further, U.S. East Coast exporters have again cut their buying prices. They are paying smaller dealers on the coast $140 per ton for export heavy melt and $150 per ton to the larger dealers.  That, according to one East Coast trader, may be an indication that they don’t expect to see a price increase from their offshore customers in the near term and have little or no incentive to sell much scrap in the domestic market.

U.S. mills have shown less interest in offshore scrap as well.  UK and Swedish exporters have sold plenty of scrap to U.S. EAF-based steelmakers in recent months, but one U.S. trader said they failed to make any new deals this month.  Buyers for one U.S. mill rejected the prices sought by European exporters and countered with an offer of $200 per tonne for the shredded scrap that would be delivered to New Orleans.  Moreover, he said the counteroffer was a “take it or leave it” offer and that the U.S. buyers said their mills did not need that scrap.  The Europeans have since sold it to steelmakers in southern Asia at higher prices, he said.

A price standoff between mills and steel users may be crimping sheet orders.

Flat-rolled steelmakers and their customers are trapped in a self-driven pricing death spiral.  The mills are trying to keep their steel prices from declining at the same pace or faster than scrap prices, seemingly because they have protection from unfairly priced imports and hope to preserve the now healthier $100-per ton-plus profit margins on their sheet sales.

But service centers and other major steel users aren’t restocking their inventories.  Many are minimizing their purchases and probably will continue to do that if scrap prices are declining.  The slower pace of mill sales is reflected in the steel industry’s output.  Domestic raw steel production was 1,605,000 net tons last week and the capability utilization rate was 68.6%, the American Iron and Steel Institute said.  That is down 1.7% from the previous week when production was 1,632,000 net tons and the utilization rate was 69.8%.

The softer sales may reflect an unwillingness by some steel users and service centers to restock until they see a bottoming of scrap prices, said one dealer.  Instead, most steel buyers are only replenishing what they have consumed or sold.  The mills are aware of this, he added, but are trying to keep ahead of the potential decline in the steel prices.  By lowering scrap prices, he said they may be encouraging the steel users to delay buying until they see lower steel prices.

Hot-rolled coil prices are now down to an average of $520 per net ton with a few mills willing to sell at as low as $500 per ton for larger orders.  Some reports have indicated that a few flat-rolled producers may announce price increases in the next week or two in an effort to keep hot-rolled coil prices from slipping below $500 per ton.

Whether all the domestic sheet mills will join in an industry-wide price hike is uncertain.  With the order books thinning, some may choose to sell at lower prices and pick up more orders.  Others may be worried that an increase could open the doors to imports from other countries not limited by the trade penalties.  Or, steel price hikes in a weakening scrap price environment may be rejected by the largest steel users and warehouses who will continue to minimize buying and push to lower steel prices.

Hot-rolled coil may not be the only steel product under pressure.  Some traders said demand and prices for cold-rolled and galvanized sheet are slipping.  Several domestic mills have filed new trade complaints alleging dumping of Chinese sheet steel products.  They contend that Chinese steelmakers are circumventing U.S. trade restrictions by selling sheet to mills in Vietnam where it is galvanized and later exported to the U.S.

Such trading is a sham, they contend, an effort by Chinese mills to avoid the antidumping and countervailing duties imposed by the U.S. Commerce Department earlier this year.  Whether the U.S. government will agree is uncertain since the law only prohibits imports of products that involved only minor changes.  Some industry analysts said galvanizing may be deemed a major change to those steel products and not subject to the circumvention rules.

More troubling according to some scrap traders is the potentially weaker demand from the automakers in the fourth quarter.  Automotive foundries and some steelmakers that supply bars and wire rod to the industry’s component makers said their order books have gotten thinner in the past month.  That’s carrying over to the scrap market as well.  One Midwest dealer who is a key supplier to foundries in that region said his sales to several automotive foundries have contracted.

Shredded Scrap Thermometer:  Feast or famine?

The likelihood of another round of price cuts for obsolete grades like shredded scrap, the second in as many months, and no price increases since June has some dealers wondering whether a new pricing pattern is taking shape in the ferrous scrap market.  Prices rise in the first half when supplies are tight following a decline in obsolete scrap flow in the previous year’s second half.  They level off at midyear, then start the next decline.  More importantly, said a veteran trader, is whether some of the smaller shredder operators can survive and deal with such challenges. These include:

• Last year, some operated only one or two days a week because the feedstock flows were so poor.  Low prices were one reason; colder weather also played a role.  Smaller scrap processors that lack adequate working capital may have a tough time surviving a combined sales and feedstock drought?  Even if they cut scale prices to a minimum, they still have fixed expenses like taxes and servicing the bank debt on the loans they obtained to buy these multi-million dollar machines.

• Many mill-owned shredders have an advantage of operating as a cost center and as such often can pay more for feedstock than independent shredders.  Their main goal may be to maintain a steady supply of scrap for the melt shop and not turn a profit.

• Some shredders have their own feeder yards and can rely on those to provide shreddable materials.  Most, however, require additional supplies of feedstock.  Smaller shredders may be hard-pressed to pay the higher prices offered to auto wreckers, demolition contractors, other scrap dealers by the bigger and better-funded shredders.

Several industry members and observers have talked about a potential shakeout that would shut down aged or undercapitalized shredders.  That may not be as bad an outcome as some imagine, at least for those not losing this jobs because of such closures.  Without the marginal operators, the survivors might be more profitable and able to survive economic downturns in the steel and scrap industries.  Identifying who these likely survivors are the “wild cards.”  

• One group will include shredders in major cities with a large enough population to produce enough shreddables like old appliances and other materials gleaned from the household trash that is fed into municipal waste-to-energy plants.  Demand for this feedstock is not as intense as the competition for junk cars and scrap from demolition projects.  Shredders with a network of their own retail scrap yards will buy this urban offal at minimal prices.

Major coastal yards with shredders also are likely to weather a shakeout.  One reason is there are so few of them and most have new, more efficient megashredders.  Another is that they are positioned to sell shredded to overseas steel mills and foundries either as bulk cargoes or in containers as well as the mills at home in the U.S.



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.      


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.

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