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Steel News October 20, 2016 09:45:48 AM

Mike Marley’s Shredded Power #67

Michael Marley
ScrapMonster Author
The uncertainty about scrap supplies and demand has generated a mixed short term outlook. Some mill buyers and brokers are talking about a “soft sideways” market in November and December, but their decisions to buy all the available tonnage this month may be sending a different message – namely that they are worried about being short scrap this month or in November.

Mike Marley’s Shredded Power #67

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #67

Are mills buying less or will dealers hold back scrap?

October 19, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

The uncertainty about scrap supplies and demand has generated a mixed short term outlook.  Some mill buyers and brokers are talking about a “soft sideways” market in November and December, but their decisions to buy all the available tonnage this month may be sending a different message – namely that they are worried about being short scrap this month or in November.

Dealers are divided in their expectations. Some believe ferrous scrap prices have bottomed and will rebound.  Others are worried that steel demand is weakening and that excess supplies of industrial scrap will undermine efforts to seek higher prices for the seasonally diminished supplies of shredded scrap and heavy melt.

Though prices are down by as much as $30 per gross ton, and this is the second month in a row that prices have fallen so steeply, most mills got what they needed.  Some mills, hoping to build inventory for the fourth quarter, would have bought more if it was available at the now lower prices.  Others were content to cover their melt needs for October.  Scrap demand will be low again in November, they believe, and ample supplies of busheling and shredded scrap will be available.

If the mills’ supply pipelines were too low, said a Chicago-based broker, they would not have beaten the prices down as much as they have this month, particularly for the obsolete grades.  Also, he added, paying more after they had secured the tons needed this month would have sent the wrong signal to dealers.

But some dealers believe that the mills didn’t get all they needed and will be eating into their inventories.  Supplies of obsolete scrap have shrunk and may decline even further in the coming weeks.  The mills may operate with minimal inventories through the end of the year, said an Eastern trader, but will need to restock in January.  Prices will rise accordingly at that time, he predicted, because weather and other factors like overseas demand will limit supplies.

A Midwest trader said one EAF-based steelmaker there was buying all the tons that scrap suppliers offered this month though it was paying lower prices.  The same mill has its own scrap yards, he added, but was not offering much scrap from its yards to other mills and to foundries as it usually does each month.  That’s a sign that prices may be at the bottom, he said.

Several dealers put a limit on shredded scrap and other obsolete grades that they offered to the mills this month.  They probably will do the same in November.  Mill buyers and brokers complain that such actions are aimed at forcing the mills to raise prices.  Some dealers, however, said they limited the tonnage offered this month because they may not be able to fulfill orders.  Intake of obsolete scrap will decline because of the price cuts and drop even further as colder winter weather arrives.  That will affect both scrap collections and processing.  If prices bounce back in January, they could still be filling old orders at the prior month’s lower prices yet be forced to pay more to auto wreckers, peddlers and others to obtain enough scrap and shredder feedstock.

Obsolete supplies may be tighter, but busheling and bundles are plentiful.

Not all are convinced that scrap prices will rebound soon.  Another Midwest dealer described the obsolete scrap intake at his and other yards in the region as “pathetic,” but added that flows of industrial scrap from the auto plants and the auto industry’s suppliers were strong.  Others likewise have no excess obsolete scrap, he said, yet they are wary of piling up too much busheling and bundles.  On-going sales of that scrap could undermine any hopes of seeing higher prices for the obsolete grades.

Driving that decision to sell all of their industrial scrap is their fear that the flat-rolled steel sales won’t rebound in the near term.  Year’s end is approaching, and both steel service centers and steel users are minimizing their inventories.  Steel warehouses may continue to run lean unless the domestic mills cut steel prices.  Hot-rolled coil prices are now below $500 per ton.  The mills may soon announce price increases with the hope they can avoid a repeat of last year’s pricing death spiral.  Hot-rolled coil prices dropped below $400 per ton in the second half of last year.  This year, trade penalties have limited unfairly priced imports and could give them enough courage to push for higher prices.

But domestic raw steel production has seesawed in recent weeks.  Last week it inched up to 1,590,000 net tons and the industry’s utilization rate rose to 67.0%, according to the American Iron and Steel Institute.  A week earlier, steel output had slipped to 1,585,000 tons and the operating rate was 66.8%.  Also, Ford Motor Co. announced this week that it will shut down four assembly plants for one or two weeks to bring production in line with lower car and truck sales.

Still, some dealers believe the mills will need to restock their scrap inventories in January and said they expect steel demand and prices to rebound.  One Midwest trader said dealers are in better financial shape this year than they were in 2015 and can afford to hold scrap off the market for a month or two.  Obsolete scrap supplies, in particular, are not expected to rebound in November and December.  “We offered fewer tons to the mills this month and will offer even less in the next two months,” he said. “We don’t want to oversell and end up owing scrap to the mills when prices rebound.”

But another trader said dealers who expect prices to bounce upward in January are living in the past.  Steel mills today have plenty of strategies for dealing with such shortages.  They can make “quiet deals” with a few big scrap processors and offer price-to-be determined (TBD) deals to others and thus ensure a steady flow of scrap in the first week of a new month while they haggle with recalcitrant suppliers.  More important, all of the major EAF-based steel mills have their own captive supply.  That includes shredders as well as long term contracts with automakers and independent stampers.
 
Shredded supplies have dropped more steeply in rural regions than in the cities.

Flows of obsolete scrap have slowed because of the price cuts this month.  But the supply declines have not been as pervasive as some expected.  Shredders in the major metropolitan areas haven’t seen as much of a cutback as those in the rural regions have faced, said a Midwest trader.  City scrap flows are off by about 20% to 25% from the levels seen in May, the month when intake was at its peak, he said.  In rural areas, though, the flows are off by as much as 40%.

Despite the supply decline, shredded scrap prices were off by the same amount as busheling and bundles in some regions.  Several dealers in the Southeast said both prices dropped by $30 per ton though shredded supply has tightened and busheling has not.  Both of the rival grades are at the same level, about $200 per ton on a delivered to the mill basis, in most regions.  In the South and Southeast and a few other regions, that has persuaded long products mills to substitute busheling for shredded scrap.  That may have helped to keep shredded prices from rebounding while also providing these mills with better metal recovery rates in their furnaces.

But shredded price declines were anything but uniform from region to region.  While prices declined $30 per ton in the South, they dipped by only $10 per ton in some major East Coast yards that are regular monthly suppliers to mills in the Southeast.  Shredder feedstock buying prices likewise spanned a wide range within several areas as well.   Some in the Midwest are paying less than $100 per net ton for light iron and slightly higher prices for cars with engines and drive trains.  Others there are paying as much as $130 per ton or more for the same material.

Foreign integrated mills may be pushing scrap demand and prices higher.

Stronger offshore demand and prices seem to be running counter to the pace in the domestic U.S. scrap market, however.  That may be stirring up new concerns about supplies of heavy melt and shredded scrap in regions like the U.S. East Coast.  Rising demand for scrap in India and Turkey may be putting a new strain on international supplies, said a West Coast exporter.

Integrated steelmakers in Turkey and India have been buying and using more scrap in recent weeks.  The recent and steep rise in coking coal prices has driven their steelmaking cost higher and they are trying to lower these by using more scrap and consuming less blast furnace iron, said one U.S. trader.  Indian mills are buying bulk cargoes as well as containers of shredded scrap from offshore suppliers.  Demand for foreign scrap has intensified in the two countries.

Export prices are on the rise in the eastern Mediterranean and in southern Asia, said another U.S. exporter.  Turkish mills paid as much as $221 per tonne for 80/20 heavy melt delivered to their ports, up by about $6 per tonne from a week ago.  Indian steelmakers are paying $210 per tonne for containers of shredded at the East Coast ports.  That’s $10 per ton higher than delivered-to-the-mill prices in the Midwest.  Coastal shredders have lower freight costs delivering containers to the docks. One trader said it cost about $10 per ton to haul a container to the waterfront by truck, whereas the rail freight to northern Ohio or western Pennsylvania may be as much as $40 per ton.

Some domestic mills may not miss that exported shredded scrap if they are reducing inventory.  If offshore demand continues to strengthen, however, they won’t be able to turn to the coastal shredders and export yards to counter the higher prices sought by their local dealers in January.  They have done that in the past.  The exporters and shredders may sell forward and have little to offer the domestic mills.  Worse, the exporters may be competing with the domestic mills for obsolete scrap.

Shredded Scrap Thermometer:  Shredded—Is it short or cheap?

Reports that some domestic steel mills were able to reduce their prices for shredded scrap by the same amount as their now lower offers for busheling seems surprising.  Output of the fragmented scrap has declined as a result of the lower steel buying prices and the shredder operators’ subsequent cuts in the prices offered for shredder feedstock.  If anything, reduced output would be expected to firm up shredded prices.  There are reasons why that has not occurred. They are:

• Cheaper busheling prices are an incentive for some rebar makers and structural steel mills to discard their usual melt practices and use more industrial scrap. The price is attractive, and the higher yields help the melt shop to produce more steel for the same price.

• Some steel mills have their own shredders, but they also depend on a few outside shredded producers. When that mill is producing less, outside suppliers are the first to receive lower offers for their scrap.  Some nearby shredders may expect to sell a predetermined portion of their output to that mill each month and have little alternative regardless how low the new prices may be.
• Shredders with their own feeder yards have an advantage over rivals without such subsidiary operations, but they also face challenges when feedstock continues to come through the gates despite lower scale prices.  Shredding the excess supply and selling it, even if it incurs a loss, may be their only solution.

Shredded scrap is a staple at virtually every steel mill or foundry.  Any weakness in shredded scrap prices and demand is usually short-lived.  Two factors serve as wild cards that reaffirm its primacy as the most widely used grade of ferrous scrap.  These are:

• Better separation of non-ferrous metals has made it more uniform as ferrous material.  Even the ferrous mills – once outspoken critics – are now believers.

• Most pieces of shredded scrap are no larger than a fist. Hence, its density makes it the ideal material for loading into a charge bucket in a melt shop or for loading into a railcar or a shipping container for delivery to a distant steel mill.


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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