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Steel News October 05, 2016 09:48:42 AM

Mike Marley's Shredded Power #65

Michael Marley
ScrapMonster Author
Scrap dealers may be ready to shelter in place this month as they face another assault on ferrous scrap prices from the domestic steelmakers. Prices for busheling and bundles are expected to plummet by $30 per gross ton or more this week when the mills begin to make their October buys.

Mike Marley's Shredded Power #65

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #65

Prices fall because of poor demand and excess supply.

October 4, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Scrap dealers may be ready to shelter in place this month as they face another assault on ferrous scrap prices from the domestic steelmakers.  Prices for busheling and bundles are expected to plummet by $30 per gross ton or more this week when the mills begin to make their October buys.  Offers for shredded scrap and other obsolete grades are likely to drop by between $10 to $20 per ton, several dealers said.  This would match many of the price cuts the mills obtained last month.

Most dealers believe the mills will delay making purchases until later this week.  Because they expect prices to drop, some mill buyers and brokers won’t answer or return phone calls from dealers early in the “buy week”.  The longer he can keep some dealers waiting, one Midwest mill buyer explained, the more likely they are to lower their offering prices later.

Several mills canceled their unshipped orders Friday in anticipation of being able to buy at lower prices this week.  But traders said these notices were non-events since most dealers already had shipped all the tons they sold last month.  Such cancellations typically affect only shipments that have not yet been loaded on a railcar or barge.  Once loaded, the scrap is deemed to be “in transit”.  Orders for scrap in transit before month’s end – whether it’s delivered within a day or even a week after – can’t be cancelled.

Weaker sheet prices and demand puts pressure on the industrial scrap prices.

The current driving factor behind lower scrap prices is sagging demand for domestic sheet steel and the subsequent downward spiral of the hot-rolled band prices in recent weeks.  In such a falling market, dealers are desperate to sell all of the busheling and bundles they have and what they expect to see coming into their yards this month.

Price drops in busheling and bundles, whether they are $5 or $50 per ton, have little impact on the volume of industrial scrap supply.  This scrap will continue to flow into dealers’ yards until auto, appliance and other durable goods manufacturers produce fewer products and generate less scrap.  In a weakening market, dealers react by disposing of industrial scrap quickly in order to avoid selling it at even lower prices next month.  Many want to be "looking at dirt" in their yards by month’s end and not piles of expensive steel scrap.

Interestingly enough, a steel mill-owned scrap company offered both busheling and shredded scrap to rival EAF mills last week at prices that were down by as much as $30 per gross ton.  There were no confirmations that these mills had bought any scrap from their rival, a Chicago area trader said.  Most pre-market deals are settled on a price to be determined basis.   It’s rare that a mill will buy on a fixed price basis so early, he said, because in the current environment mill buyers expect the later in the buy week offers to be lower than the initial offers.  They could look foolish buying at down $30 per ton if prices settle-out at down $40 or $50 per ton.

Why brokers for one major mill would offer scrap to rival mills had several scrap dealers scratching their heads.  One explanation may be that the steelmaker’s scrap unit has too much industrial scrap and is trying to drain that pool before this month’s flood of busheling and bundles comes through the gates.  Or, it may be trying to take the de facto power on price changes away from a key EAF-based steelmaker in the Detroit area.  Because that mill is such a huge consumer of shredded and busheling, its buys often set the pace for price changes at other mills in the Detroit area and elsewhere.

Steep price cuts in busheling could make it more attractive to long products mills.

Some traders believe a few mills may push for cuts of as much as $40 per ton on busheling and bundles this month.  If successful, that could drop the industrial scrap prices to as low as $190 and put them at the same level or lower than shredded scrap prices, which many believe will settle at an average of $200 per ton on a delivered to the mill basis.  That might persuade rebar makers and other long products mills to use more busheling instead of shredded scrap.  Two factors drive such decisions: a) the metal recovery rate is higher for busheling than it is for shredded; and b) there is less need to compete for material with the containerized scrap exporters who buy shredded in East and Gulf Coast regions (prime scrap is rarely exported).

Price spreads between the key steelmaking grades are expected to narrow to a range of $160 to perhaps no higher than $210 per ton delivered to the mills.  That’s a spread of about $50.  No. 1 heavy melt will be at the low end particularly along the U.S. East Coast.  Busheling probably will be at the top in the industrial scrap poor areas like the South and Southeast.   Few traders and brokers expect to see many regional price disparities this month.  These are driven by springboard buying in remote areas and few anticipate much of that activity in this weak demand environment.

While demand and prices for flat-rolled are declining, they have not fallen into an abyss, at least not yet.  Also, domestic sheet producers are still protected from imports.  That has enabled the mills to resist the pressure for deeper steel price cuts.  Still, several of the flat-rolled mills and other steelmakers cut the scrap tonnage they bought last month and are expected to reduce their buys again this month.

Integrated mills, in particular, are said to be under orders to use more home scrap and excess inventory instead of purchasing scrap from outside suppliers.  These minimal buys and the slide in steel output last month has instilled fear in the minds of dealers.  Despite the declines in steelmaking earlier in the month, output was up slightly last week.  It rose to 1,611,000 net tons while the capability utilization rate was 68.9%, according to the American Iron and Steel Institute.  A week earlier, the mills produced 1,605,000 tons and their operating rate had slipped to 68.6%.

Dealers are tightening their spending and inventories of obsolete scrap.

Obsolete scrap may not be facing as severe an over supply problem as prime scrap because the price cuts last month and earlier this year have slowed its intake.  When dealers cut their scale prices to match this month’s likely reductions it will crimp the flows even further.  Even if it doesn’t pose tight supply problems this month, it could impact the coming winter months when colder weather and snowstorms affect supply, processing of scrap in dealers’ yards and transport to the mills.  Also, October is the month when some mills begin to build their winter inventories of obsolete scrap to avoid shortages or delayed deliveries.

Shredders have lowered their feedstock prices in an effort to maintain profits on lower sales volume.  They no longer make as much money today on the Zorba and other nonferrous metals recovered from the shredding as they did in years past, and they are trying to compensate for that by improving their margins on shredded.  Some have slashed their buying prices to $100 per net ton for shreddables.
 
Another price cut this month will further discourage their main suppliers – auto wreckers and small scrap yards.  And it could shut down the peddler trade.  That supply stream provides obsolete scrap to small scrap yards and much of that material ultimately ends up as shredder feedstock.  The peddlers’ disappearance from the market late last year and in the first quarter of this year was one consequence of last year’s second half scrap price slide.

Also, much of the minimal domestic mill scrap buying in September was based on the ample tonnage of imported shredded scrap and bundles at some EAF-based sheet mills.  These supplies have been used up, said a Midwest trader, and U.S. mills have not been able to buy more at prices that are competitive with domestic scrap.

Likewise, imported pig iron is no bargain either.  The price at New Orleans is $260 per tonne.  It costs another $20 to $40 per ton to move it upriver.  That puts the price at between $280 and $300 per tonne delivered to the mills in the Midwest, making it an expensive alternative to busheling.  It's tough to justify using pig iron other than to dilute the residual or tramp elements in shredded and other obsolete scrap.

Nor are domestic steelmakers clamoring for more direct reduced iron (DRI).  The higher cost of the iron-richer pellets required to make DRI may be making it less attractive for some steelmakers.  Industry sources said the federal government’s import figures show only a single Panamax cargo of some 75,000 tonnes of iron pellets is being unloaded at the port of New Orleans every two weeks.  That’s a little more than half of what some expect to see arriving there.

Lastly, an East Coast trader said there may be little or no overhang from the exporters to offset any supply shortfalls in the inland regions.  U.S. East and Gulf Coast exporters have cut their buying prices to as low as $140 per gross ton for export heavy melt and even lower for shredded feedstock.  With their buying prices so low, they don't have much to offer to the domestic mills which typically want only their shredded scrap.

Export sales remain at low tide on all three U.S. coasts. Two U.S. East Coast yards booked orders from Turkish steelmakers last week.  The price for the bellwether 80/20 heavy melt inched up to $210 per tonne delivered to a Turkish port, up about $2 per tonne from the price paid for a smaller cargo sold by a week earlier by a U.S. steel mill-owned Gulf Coast scrap yard.  One trader said other U.S. exporters are holding the line on offshore sales at $210 per tonne for heavy melt.

Shredded Scrap Thermometer:  Shredded as a Substitute.

Inventories of shredded scrap and cut grades in dealers’ yards are down about one-third from the levels seen at mid-year and they probably will be off even more after dealers start cutting their buying prices this week in the wake of lower offers and fewer tons sold to steelmakers.  Mills may be looking to buy less scrap, but dealers will be offering less as well.  If obsolete scrap flows continue to decline, there may be a point where the mills find problems getting what they want.  For example:

• Last October, when offshore demand was weak, U.S. exporters and coastal shredders sold much of their output into the domestic market.  That created a glut of shredded scrap in some inland regions and drove prices even lower.  This year, according to some traders, the docks have no excess scrap to offer to the mills in the Midwest.

• There may be limits on how much plate & structural scrap or heavy melt dealers are likely to take in this month and, more importantly, are willing to sell at lower prices.  With winter coming, some may choose to withhold tons, thereby forcing the mills to buy more shredded as a substitute for any scarce supplies.

• Supply of busheling and bundles may be plentiful at this time, but that scrap reservoir is no horn of plenty.  Once it is drained, there are no alternatives other than imported pig iron and directed reduced iron.  Those supplies are easily and readily available, however.  Mills that are short supplies of busheling either have to pay higher prices to obtain scrap from remote suppliers or pay higher prices to encourage shredders to boost their output.

Steelmakers rarely run out of scrap.  Even those mills that own scrap yards normally maintain at least two weeks of scrap in inventory at their mills.  Those in remote areas may have as much as one month’s supply on the ground.  There are other strategies that can be seen as wild cards that can be played to ease pressure when supplies are short. These include:

• In addition to inventory on the ground, most mills also have a supply “pipeline.”  This includes tonnage still en route from purchases made in the past month but not shipped until the last week of the month.  This is the tonnage that buyers and brokers rely on as they haggle over prices in the first week of each month, the so-called buy week.

• A favored strategy by some brokers and mill buyers is the price to be determined purchase order or TBD.  These enable some mill to be assured that scrap will continue to flow into their mills during the buy week and eliminates the price negotiations.  The monthly scrap price listed in one of the accepted publications becomes the basis of the price for the TBD purchase order.



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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