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Steel News October 27, 2016 08:27:54 AM

Mike Marley’s Shredded Power #68

Michael Marley
ScrapMonster Author
Ferrous scrap prices have found a floor, according to two steel executives, and that has encouraged dealers to expect higher offers when the mills buy their November’s melt needs. John J. Ferriola, Nucor Corp.’s chief executive, and Mark D. Millett, his counterpart at Steel Dynamics Industries Inc., told industry analysts last week that they believe scrap prices have bottomed.

Mike Marley’s Shredded Power #68

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #68

Dealers expect scrap prices  to rebound in November.

October 26, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Ferrous scrap prices have found a floor, according to two steel executives, and that has encouraged dealers to expect higher offers when the mills buy their November’s melt needs.  John J. Ferriola, Nucor Corp.’s chief executive, and Mark D. Millett, his counterpart at Steel Dynamics Industries Inc., told industry analysts last week that they believe scrap prices have bottomed.  Both stopped short of forecasting an uptick in prices, but several dealers took those statements as a signal of better days ahead.  They believe that scrap prices will be up between $10 and $20 per gross ton next month.

The combination of low inventories at the mills, reduced obsolete scrap flows into dealers’ yards and the spike in ferrous export demand are the main drivers.  If prices do rise, it will be an abrupt turnaround from the past two months when obsolete scrap prices fell by about $20 per ton and industrial grades dropped  by $30 per ton in each month.

Steelmakers’ assertions that scrap prices have bottomed might be an effort to encourage steel service centers and other steel users to start replenishing their inventories.  In addition to making more work for the mills, the buying might also halt the downward spiral of sheet prices.  Hot-rolled band is now at about $470 per net ton, down from more than $600 per ton earlier this year.  Though the domestic sheet producers obtained some protection from unfairly priced steel imports earlier this year, they nevertheless are worried that sheet prices could continue to slide.  Hot-rolled coil prices dipped to as low as $350 per ton in the second half of last year.

Add to that the announcements of price increases by flat-rolled steelmakers.  Nucor, U.S. Steel Corp. and California Steel Industries hiked sheet prices by $30 per net ton last week.  Three more mills, ArcelorMittal, NLMK and AK Steel Corp., joined the parade this week.  Whether more will climb onboard is unknown.  Also uncertain is whether these increases will stick.

Lower prices and changes in melt mixes have shrunk the scrap supplies.

Another concern is the likelihood that dealers will offer less scrap to the mills next month.  Scrap dealers, anticipating less intake because of the back-to-back price cuts, offered fewer tons to the mills this month and are expected to trim their tonnage offers even further in November.   Many dealers have already finished shipping their orders, but some mill buyers in the South and Southeast said deliveries are slower than they anticipated and that they expect a few suppliers will end the month still owing them plenty of scrap.  That could be a welcome benefit to some mills.  They will still have scrap in the supply pipeline at the beginning of November and, if prices rise, they will be paying last month’s lower prices for that scrap.

While much of the shortfall involves obsolete grades like shredded and heavy melt, some are worried that supplies of busheling will feel the pinch next month.  Shredded and busheling prices are now at the same level.  Consequently, several long products mills have changed their melt mixes and are using more of the industrial steel scrap.  It’s been available at a reasonable price and provides a higher metal recovery rate than shredded.
 
Others believe shredders and dealers along the U.S. East and Gulf Coasts will offer fewer tons because of the spike in offshore demand.  Foreign integrated steelmakers as well as the overseas EAF mills, which are the usual international scrap buyers, are buying more scrap from U.S. and European exporters.  The integrated mills are using that additional scrap to offset the higher cost of coking coal and its impact on the cost of making iron in their own blast furnaces.

U.S. exporters sold four cargoes to the Turkish steelmakers last week and the price paid for 80/20 heavy melt rose to $230 per tonne delivered to a Turkish port.  That means the exporters will be shopping for about 150,000 tonnes of heavy melt and shredded to fill those orders.  Additional tons may be needed if they book more orders this week.  It is unlikely that they will be able to gather that much scrap from their own feeder yards and other coastal scrap suppliers.  The exporters upped their buying prices by $10 per ton last week and are expected to raise them another $10 this week.  The export sales flurry means they’ll have little or no extra scrap to offer to local mills and those further inland next month.

If they can’t find enough scrap from local suppliers, the exporters might have to buy from dealers in western Pennsylvania and eastern Ohio, putting them in competition with the mills in those regions.  A Pittsburgh area broker said several dealers have told him that they have not yet seen any additional offers from the docks, but they believe they will be coming in the next week or two.  They expect him to match those offers if he hopes to buy much scrap for local mills, he said.

The Turkish steelmakers and bulk cargo exporters are not the only foreign competitors posing challenges for the domestic mills.  Indian traders are bidding up the price of shredded scrap along the U.S. East Coast.  They are paying between $205 and $215 per tonne for containers loaded with shredded and dropped off at the docks.  This is cramping the supply for some mills in the Southeast U.S. that buy shredded scrap from dealers in New York, Philadelphia and Baltimore.

One Indian trader said he prefers buying from East Coast scrap dealers because he can persuade them to put as much as 25 tonnes of the fragmented scrap into 20-foot equivalent units (TEU).  That lowers per tonne ocean shipping costs, he explained.  West Coast dealers are unwilling to do that because of the weight restrictions on the highways and at the docks.

Export demand is better and winter’s coming, but steel demand is weaker.

Obsolete flows into dealers’ yards have fallen by as much as 40 percent and probably will decline further as the colder weather arrives.  But some brokers and mill buyers argue that overall steel output has declined and may not revive as much as dealers and some mills hope.  Domestic raw steel production totaled 1,597,000 net tons last week, according to the American Iron and Steel Institute, while the industry’s capability utilization rate was 67.3%.  That is up from the previous week when steel output was 1,590,000 tons, but the overall pace of U.S. steel production has been sliding since midsummer when steel output was averaging more than 1,700,000 tons per week.

November also is the first month of the holiday season and some mills will curtail production later in the month.  Some will close for two or three weeks before and after the Thanksgiving holidays either because of slower steel sales or to carry out scheduled maintenance work.  Others will cut back during the first week or two of winter hunting season when many of the mill workers take vacation.  Several retail scrap yards also close at that time because many peddlers are out in the woods and not scavenging through the local dumpsters.

One Chicago-based broker said a few mills may raise their scrap prices more than a few dollars per ton next month to bulk up on supplies ahead of the colder weather.  Others minimize their purchases to avoid carrying too much inventory on the books at the end of their fiscal year.

Some dealers are counting on those inventory reduction practices and don’t plan to offer much scrap in either November or December unless the mills are willing to pay substantially higher prices.  A Detroit area trader said he and others had a better year financially in 2016 than in 2015. They will hold scrap off the market until January when they expect to sell it at higher prices, he said.

Whether such a supply squeeze boosts scrap prices as much as some dealers hope is questionable.  The largest EAF-based mills may not feel the pain as much as the smaller mills.  Likewise, the integrated mills can rely more heavily on their own blast furnaces and home scrap to meet their raw steel needs.  The four biggest EAF-based players— Nucor, SDI, Gerdau and Commercial Metals Co.—have their own scrap yards and shredders.  Indeed, one Midwest trader said SDI’s OmniSource unit may have jumpstarted the scrap hoarding process this month.  In addition to providing scrap for its corporate parent’s mills in the Midwest, OmniSource yards are regular suppliers to other mills and foundries in the Midwest and Southeast.  This month, however, some scrap users said they were unable to buy much from the mill-owned scrap processor.

There were supply shortfalls elsewhere as well.  A mill-owned shredder in Canada was not operating this month because its nonferrous metal recovery system is being replaced. Thus, its sister mills, which often use as much as 60% shredded to make their steel products, used only 30% shredded in their EAFs this month.  They tapped into the area’s abundant busheling supplies available from other dealers.

Nucor, in addition to its vast network of scrap yards and brokerage offices, also has two direct reduced iron plants that supply its mills in the South and Southeast.  The big steelmaker said its raw materials operations (Joseph and the DRI plants) were profitable in the past quarter, but the company also has relied on imports of shredded scrap and No. 1 bundles from exporters in the U.K. and Western Europe this year.  Whether it will bring in more offshore scrap next month is unknown.  A U.S. exporter said British and Swedish traders rejected offers of $200 per tonne for their shredded scrap a month ago from an unnamed U.S. buyer.  That was the price delivered to the port of New Orleans, he said. They got higher bids from Asian steelmakers.

Shredded Scrap Thermometer:  Gauging the supply pipeline.

It is becoming more difficult to gather enough feedstock and determine how much shredded scrap is available for the mills and foundries each month.  Part of the reason is the diversity of the supply stream.  There are more shredders today than there were twenty years ago, and the operators are a diverse lot – not just a handful of large scrap dealers as was the case in the past.  Wrecked cars once made up much of the feedstock for most shredders.  Now the supply base includes demolition contractors, peddlers and even the small and medium-sized scrap dealers who are not owned or affiliated with a shredder.  The problems for those trying to obtain enough tonnage include:

• Paying a competitive price and maintaining a profit margin when competing against a captive steel mill-owned shredder that serves only one nearby mill or an independent shredder located on the mill’s property.  Mill-owned rivals may not be required to show a profit and on-site shredders have no freight costs.

• Determining an adequate price that will draw out feedstock.  Auto junkyards and demolition contractors have taken a page from the scrap dealers’ playbooks.  If prices are too low, they will “sit on their scrap.”  Auto wreckers will sell parts, and after being stripped clean, they will flatten the car bodies and stack them in the back of their yards.  Demolition contractors will let corrugated steel siding and other shreddables pile up on-site.

• Since shredded scrap is a commodity used worldwide, some U.S. suppliers must decide which market gets all it needs in tight supply situations.  Selling all to the offshore buyers may be the most profitable decision, but those buyers can vanish for several months. Conversely, a smaller domestic mill may be a Steady Eddy consumer that buys a few thousand tons every month.

Shredded scrap may be the most widely used grade of ferrous scrap, but it isn’t the only raw material that mills must use.  Other grades of ferrous scrap can be substituted as well as alternate materials like direct reduced iron and imported pig iron. These serve as the wild cards in the supply deck.

• Busheling is often a more desirable substitute when supplies are plentiful and EAFbased flat-rolled mills aren’t buying much.  Last year, when the busheling prices slipped below shredded prices, many of the long products makers rewrote their melt formulas to allow them to use more of the higher quality and what was then cheaper industrial steel scrap.

• Nucor ostensibly build its DRI plants to provide alternate and affordable supplies of melt materials that would ease its reliance on busheling and bundles to make sheet steels.  But the big steelmaker has also used DRI to make structural and plate products.  That is not unlike what steelmakers that operate DRI plants built in natural gas-rich countries in the Middle East do.


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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