Mike Marley’s Shredded Power #66

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #66

Mills now see ferrous scrap  as a buying opportunity.

October 12, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Ferrous scrap prices plummeted in most regions of the country last week.  As expected, industrial grades were off by an average of $30 per gross ton and obsolete supplies like heavy melt and shredded scrap tumbled by about $20 per ton.  The declines matched the price moves last month, and effectively lowered the prices of busheling and bundles in many regions to the same level as shredded scrap and five-foot plate & structural scrap.
 
It’s unusual to see such parity between these industrial and obsolete grades, and equally unusual to see price parity among the different regions of the country as well.  In the Detroit area, for example, mills are paying local dealers between $200 and $205 per ton for each of these grades.  Similar prices or near matches were reported in Cleveland, Chicago, Pittsburgh and at several mills in the South and Southeast.  No. 1 heavy melt is still trading at a discount, with prices ranging from $170 to as high as $190 per ton in these areas.
 
Lower mill-delivered prices were reported in the East where export yard buying prices are below the prevailing delivered-to-the-mill prices in the U.S. inland markets. But demand from the local mills in that region is weaker as well.
 
There were early reports of some Midwest mills buying shredded scrap at $190 per ton, but several traders said those were short-lived and only involved a few hundred to 1,000 tons in individual deals.  By week’s end, these were not being repeated.  A Chicago area trader said several shredders limited the tons offered at $20 per ton below last month’s prices.  If a mill wanted more, it would require a more modest reduction of, say, only $10 per ton.  Otherwise, he said there was no assurance shredders could obtain enough feedstock to fill those additional orders.  Some mills may be forced to raise their buying prices this week or next week to get more scrap, he said.
 
Parallels to the weak September scrap market disappeared after the prices started to settle last week.  First, instead of buying fewer tons as some had anticipated, most mills and their brokers were taking all that was offered.  Several dealers said mills were trying to buy more scrap this week at the now lower prices. Some simply wanted extra tons, but a few mills failed to obtain all they need this month.
 
Second, there was little or no springboard buying into scrap surplus areas like Detroit.  Buyers and brokers for EAF-based flat-rolled mills from the South and Southeast had been actively buying excess busheling and bundles in that region for the past several months, said one trader, but were absent this month.  It was unknown whether they were consciously avoiding the distant markets because they have ample supplies of busheling and bundles or if they were worried that it might undermine their efforts to lower scrap prices.
 
Third, some scrap yards owned by these scrap-rich mills had been calling rival mills last month and offering cheaper scrap, but they were silent this month.  Some had boasted that they had two months or more of inventory on hand or in their supply pipeline.  Either they didn’t have that much scrap, said one trader, or they’ve decided it might be better to own scrap now instead of selling it.
 
Obsolete scrap supply is tightening and mills see a buying opportunity.
 
Many dealers and brokers are calling the market this month “a buying opportunity” for the mills.  Some believe ferrous scrap prices are now at or near the bottom.  But dealers are qualifying that description and argue that it may be a buying opportunity solely for obsolete grades like shredded and heavy melt but not industrial scrap.
 
Most dealers buy busheling and bundles on long-term contracts with industrial suppliers and have a steady flow of that scrap coming into their yards each month.  Their biggest challenge is selling the existing industrial scrap inventory before this month’s output from those industrial plants arrives.  Even if mill prices for this scrap fall by $50 or $60 per ton, they can maintain their profit margins.  Their industrial contracts are indexed to published prices that are expected to move in line with the market each month.
 
That’s not the case for shredded scrap and cut grades like heavy melt and structural scrap.  Those flows are determined by the dealers’ buying prices.  Several shredder operators said the flows from auto wreckers, demolition contractors, smaller scrap dealers and peddlers are off by 30% and that the price cuts following this month’s drop in mill buying prices will trim intake even further.  Indeed, one Midwest shredder operator said the auto wreckers are selling only enough flattened cars to maintain cash flow.  Many are crushing cars and piling them up in the rear of their yards.  As a consequence, dealers offered less obsolete scrap to mills this month and probably will trim offers next month because of the anticipated decline in intake.
 
Many shredders are now paying between $100 and $110 per net ton for cars and other shreddable material and probably will cut those prices by another $20 per ton this month.  Several shredders have abandoned their past practice of paying high prices for cars and other shreddables and are trying to restore profit margins on their shredded sales to mills and foundries.  In the past, some were paying a “breakeven price” for feedstock.  They were relying instead on sales of Zorba and other nonferrous metals recovered from shredding to provide the profit margins for both their ferrous and nonferrous sales.  Those nonferrous prices have tumbled as well.

Dealers in many regions offered less scrap to the mills this month because they were worried about being oversold and still owing scrap to the mills as they head into November.  A Midwest trader said one mini-mill wanted to buy double what it expects to melt this month in order to avoid a potential shortage of obsolete scrap next month.  Most of the dealers were cautious about offering too much scrap.  Some believe intake will be off not only this month, but also for the rest of the year, he said.  They blame lower buying prices and the usual lessening of scrap inflows that accompany the expected colder weather.
 
The steeper slide in the industrial scrap prices in the past two months could encourage some rebar makers and other long products mills to begin using more industrial steel scrap.  They did that last year when busheling was available at lower prices than shredded scrap.  At the same time, some dealers are apt to hold some industrial scrap as well as shredded and structural scrap off the market because they believe supply is tightening.  The weaker prices in the South also created some supply shifts this month, said another Midwest broker.  Dealers in Kentucky and Tennessee were offering more scrap to mills in the North.
 
Shredded producers on the East Coast limited the downward pressure on shredded scrap there to decreases of $10 per ton and not the $20 per ton cuts sought by some mills.  Prices dipped to $190 per ton F.O.B. a barge and about $220 per ton delivered by railcar to mills in the Southeast from the coastal cities, industry sources said.  One trader said these shredders are getting competitive offers from both bulk cargo and containerized scrap buyers.  Dealers can get $210 per tonne for shredded scrap delivered to the docks in a container, he said.
 
Bulk cargo export prices also have rebounded.  U.S. exporters have booked new orders from Turkish steelmakers in the past week.  The price of the bellwether 80/20 heavy melt has risen to $215 per tonne delivered to a Turkish port.  That is up about $5 per tonne from the last deal and $8 from the low-water mark two weeks ago when a U.S. millowned scrap yard booked a sale at the equivalent $207 per tonne for the heavy melt portion of that cargo.  Offshore scrap buyers typically pay a $5 per tonne premium on shredded scrap.  That puts the delivered price for shredded shipped to Turkey at about $220 per tonne and the F.O.B. price on the vessel at a U.S. port at $205 per tonne.
 
Flat-rolled steel prices continue to decline and the sales outlook gets darker.
 
Still uncertain is the outlook for domestic sheet steel. Prices for hot-rolled coil have dipped to $480 per net ton and a few industry sources and analysts believe it could slip as low as $450 per ton before year’s end.  Declining steel sales could weaken scrap prices further regardless whether dealers limit the tonnage offered to the mills.
 
This month’s reductions in scrap prices may help some sheet mills maintain their $100 per ton margins on their products, but they are unlikely to persuade steel users and service centers to start buying more.  If anything, said one analyst, steel users will look for those scrap price cuts to be reflected in lower steel prices before they begin to restock inventories.  Also, he added, with the year’s end approaching, some may continue their hand-to-mouth buying and wait until January to begin rebuilding inventories.
 
Other factors cloud the steel horizon.  First is the worry that auto sales are slowing and that auto industry steel demand will fall.  Scrap dealers that supply auto foundries said their orders have slowed and now some steel mills that supply the auto component makers or OEMs (original equipment manufacturers) said their sales have declined as well.  The outlook is dimmer, said a Midwest mill buyer.  Second, domestic steel production continues to slide.  Raw steel output declined to 1,585,000 net tons last week and the industry’s capability utilization rate slipped to 66.8%, according to the American Iron and Steel Institute.  This is off by 1.6% from the previous week when production was 1,611,000 tons and the operating rate was 68.9%.
 
Last, domestic flat-rolled mills obtained protection from unfairly priced steel imports earlier this year, but now face new challenges.  Several mills have filed complaints alleging that Chinese steelmakers are attempting to circumvent the U.S. trade penalties on flat-rolled products by selling sheet steel to mills in Vietnam.  The Vietnamese mills galvanize it and export it to the U.S.  Whether U.S. trade officials will penalize the Vietnamese mills is unknown.  Galvanizing is seen as a major change to a steel product and thus may not be a circumvention of the trade rules.

Shredded Scrap Thermometer:  Shredders tighten their belts.
 
Are shredder operators trying to shed their reputation as the scrap industry’s free spenders?  It’s a reputation born out of the competition for feedstock in a highly competitive industry which many believe is overcrowded in the U.S.  In addition to battling each other, some shredder operators also face challenges from steel mill-owned shredders that pay competitive prices for feedstock.  There are several reasons for tightening the purse strings. These include:

• Prices paid for Zorba and other nonferrous metals are not as attractive as they once were. Also, some auto wreckers are stripping parts containing these metals from cars before they sell them to the shredders. That is lowering nonferrous recovery rates. A few shredders are mining their own fluff piles for more metals or installing advanced equipment to raise the value.  Most, however, realize that they have to improve the margins from the main product – shredded scrap – which is sold to steel mills and foundries.
 
• Shredded prices have dropped $90 since May.  As their selling prices began to decline, some shredders chose not to lower their buying prices accordingly.  They believed it was more important to maintain output at capacity in order to lower their overall operating costs.  This strategy failed for two reasons: a) prices continued to drop more than expected; and b) feedstock providers like junk yards and demolition companies have been withholding material from the market, believing that prices are too low and are ripe for a rebound. Hence, the shredders find themselves in the unfortunate position where they can acquire all of the feedstock they want only if they are willing to lose on every ton of shredded they sell.
 
Shredded may be the most widely used grade of ferrous scrap, used by integrated mills and foundries as well as the largest ferrous scrap users, the EAF-based mills.  It is also the most abundant. Two factors serve as wild cards that challenge any effort to limit supply.  These include:
 
• Captive steel mill shredders operate as cost centers. They don’t have to make a profit. Their goal is provide enough shredded for the mill at a cost that is less than what the mill would pay to independent shredders.  As a result, they can be formidable competitors.

• Shredders are bigger and more powerful these days.  They can tear apart thicker and heavier items and produce more.  Materials that once were baled and sold as No. 2 dealer bundles or sheared and sold as No. 2 heavy melt now are more likely to be sold as shredder feed and earn a higher price.



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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