Mike Marley’s Shredded Power #74

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #73

Domestic demand pushes  prices up by $50 per ton.

December 7, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Ferrous scrap prices have risen by $50 per gross ton this week driven by a combination of rising steel demand, tight supplies of some grades of scrap, and the lack of competitively priced alternative materials like imported pig iron and foreign scrap.  Another supply threat U.S mills face is a potential surge in offshore demand that could siphon off scrap from coastal regions.  This includes several areas that some mills in the Southeast tap each month either to fill supply shortfalls closer to home or to keep local prices from rising too steeply.

The first deals were made on Monday and saw scrap prices rise by $50 per ton in Detroit and by $40 per ton for one steelmaker in Chicago.  These gains surpassed the $30 per ton increases that steel mills had proffered late last week and which matched the increases seen in the first week of November.  Several dealers rejected those earlier offers and countered with demands for raises of $40 per ton or more.  Many are expecting the domestic sheet mills to share part of the $140-per-net-ton gains they have obtained in the past month, said one Chicago area trader.

By Tuesday afternoon, prices were marching upwards in the Southeast and elsewhere in the Midwest.  Shredded scrap was taking the lead in the South, said a Birmingham-based trader, with the price up by as much as $50 per ton at some mills.  These gains mark a rebound from the steep price reductions effected by local mills over previous months, and reflect supply shortages due to reduced flows of feedstock to many dealers’ yards because of the low prices.  Also, he added, some mills were having problems buying much shredded scrap from remote suppliers.

It’s payback time for the Detroit area mills.

Detroit is regarded as the price pace setter for the US, and one unusual twist to the buying this month was the $10-per-ton differential in Detroit over the increase in Chicago.  Without it, prices would have been up by $40 per ton in both cities and that might have served as the pace setter for other regions.  But that extra $10 represented a “catchup” for the lighter increases Detroit area mills got from local suppliers last month and which several area dealers expected to recoup this month.

Detroit area mills, as is often the case, were the early buyers in November.  They paid a modest increase of $20 per ton, but only got part of what they needed.  Not wanting to alert local dealers that they were still short scrap, they quietly reached out to dealers in neighboring areas and paid higher prices for additional scrap.  That included higher freight costs from those areas and a premium that they might as well have paid to the Detroit scrap dealers.  Such springboard purchases are an anomaly since Detroit is a scrap surplus area.  These not so secret springboard buys also heightened the expectations for dealers in surrounding areas.  Consequently, mills in these regions had to pay increases of $30 or more per ton, and not $20, to hold onto local scrap supplies. Several blamed the invaders from Detroit for the added cost.

The $50-per-ton increase boosted the delivered-to-mill prices of shredded scrap in Detroit to $270 per ton and raised No. 1 bundles to $275 per ton.  That matches the price paid by the Chicago mill that was the first to buy shredded scrap there this week.  The bundles price in Chicago is about $5 per ton higher at $280, however.

That mills in the Detroit area were willing to raise prices by $50 per ton regardless of the reason was enough for dealers elsewhere to seek matching increases.  This included some in the South and Southeast who had seen their prices beaten down drastically in September and October.

Also, some Detroit area traders said that they expect to see EAF-based sheet makers from other regions shopping in the Detroit area this week for more busheling and bundles.  They are hoping to supplement shortfalls in the industrial scrap supplies in their local markets. Whether there will be enough to fill the needs of both the local and distant mills is uncertain.

Auto sales were strong in November and production likely will continue at a steady pace, a Detroit-based dealer said, but the U.S. automakers typically close many assembly and stamping plants during Christmas week.  That could mean a loss of about 25% of the auto industry’s scrap output this month. Yet, many domestic sheet mills will be operating during the holiday week, and they will probably need more industrial scrap.

Higher prices for other steel products have whetted dealers’ appetites.

Prices, particularly for flat-rolled steel, have been rising at a steady clip in the past month, a reflection of stronger demand for those products.  But they are not alone on the price escalator.  Several long products mills posted increases of $30 per net ton for merchant bars and structural steel products.  These came a few days after the same mills hiked rebar prices by $25 per ton.  Plate prices have climbed by as much as $100 per ton in a pair of moves in the past month and wire rod prices are up by $40 per ton.

The latest sheet price hike, the fourth in the past month, was $40 per ton and raised the hot-rolled coil price to about $560 per ton.  Cold-rolled coils are averaging $775 per ton.  Price increases are one sign of the market’s strength.  Order lead times are another, and they continue to stretch out as well.  Delivery dates for hot-rolled coil range from three to five weeks, while cold-rolled is out to eight weeks.  Domestic raw steel production also rose last week.  Raw steel output totaled to 1,635,000 tons and the industry’s capability utilization rate inched to 68.9%, according to the American Iron and Steel Institute.  That is up 2.3 percent from the previous week.

This could pose problems for some of the flat-rolled mills that must fill orders for their products while facing recalcitrant scrap suppliers looking to recoup money given up in past months.  Also, though it is difficult to determine, several dealers said they are still having problems getting scrap and shredder feedstock,  and expect the obsolete scrap flows to slow this month during Christmas week and even more so if temperatures turn colder.

Most domestic mills will be looking to buy the same amount of scrap this month as they did in November.  A few smaller mills had outages for a few days at the end of November and in the first few days of this month.  Others will have lengthier closures at the end of the month because they have paired the Christmas holiday shutdown with scheduled maintenance work.  Some of these mills could be closed during the first week of January as well.

Others will be running through the holidays, but will have no excess scrap on hand or in the delivery pipeline.  Reduced obsolete scrap availability may be one reason, but a Midwest broker said dealers may hold some scrap off the market this month despite the $50 per ton increase.  Dealers may be willing to wager that the mills will have to raise prices again in January, he said.

Some mills are already having problems getting dealers to agree to sell even with the $50-per-ton increases, a northern Ohio trader said.  One mill in that region offered shredders $280 per ton, an increase of $40 per ton from last month, he said.  It upped its offer to $285 per ton this week, but has only filled a part of its planned buy of about 35,000 tons.  Two nearby shredders have scaled back their output, another has closed and shredders in the eastern Ohio have promised their output to the mills there.

And domestic mills may have trouble pulling shredded scrap from the U.S. East Coast unless they pay a hefty premium.  Mills in Ohio and elsewhere in the Midwest, as well as those in the Southeast, may have to pay bigger premiums not only to cover the added freight costs but also to compete with the overseas buyers at the docks.

Export sales may be in the doldrums, but that may not last.

Export demand, particularly from offshore markets like Turkey, disappeared in the past week, but U.S. traders said it would be a mistake to see that simply as weaker foreign demand.  The Turkish mills and their buying agents are waiting to see where prices settle in the U.S. this month before they make or accept any new offers, one East Coast exporter said.  He still has orders to fill and he expects overseas demand to rebound.

Scrap is seen as the better bargain here and at many overseas mills, said another trader.  Pig iron prices are now at $350 per tonne for iron to be delivered to the port of New Orleans in February.  Foreign pig iron bought two months ago and now available to U.S. mills carried a price tag of about $300 per tonne delivered to a U.S. Midwest mill, a premium of $20 or more over the current price of busheling.

Earlier this year, the extremely low price of Ukrainian and Russian steel billet made it cheaper for Turkish mills to import and re-roll billet into rebar, than it was for them to make it from steel scrap.  Steel billet now costs about $410-415 per tonne delivered to mills in Turkey, which makes it economically unattractive to re-roll when compared with the $275 per tonne price the Turkish mills paid for 80/20 heavy melt a week ago.  It costs about $90-100 per tonne to convert scrap into billet.  Thus, a Turkish mill can buy foreign scrap and turn it into steel billet at an overall cost of about $365.  That’s $50 per tonne cheaper than bringing billet across the Black Sea from Russia or Ukraine to make rebar and structural steel products.

Meanwhile, on the West Coast last week exporters booked new sales to steelmakers in South Korea and Southeast Asia. These are in addition to the several cargoes sold to Chinese mills a few weeks earlier.  Containerized demand and prices have also bounced back, said a West Coast exporter.  Much of the Asian demand is driven by the now higher cost for iron ore and coking coal.  Several of the BOF-based mills there are using more scrap in their melt mix in an effort to make more steel and lower their overall production costs.

Shredded Scrap Thermometer:  Bargaining for one month or two?

Shredded scrap prices already have risen by $50 per ton though the buying by domestic mills only got started three days ago and bargaining is still underway in many regions.  Some steelmakers thought they would be able to buy with more modest raises of $30 per ton, matching the increase they agreed to last month.  But dealer resistance is stronger than some anticipated and could create new hurdles for the mills and drive prices higher next month:

• Price increases normally serve as incentives to smaller scrap dealers and auto wreckers, encouraging them to sell more shreddable materials and old cars and thus refill the shredded reservoir.  But this is year’s end and some suppliers may choose to wait until January to sell, either because they have less scrap on hand or because they believe prices will be even higher then.

• Domestic EAF-based mills are not the only scrap consumers looking for more material.  Even with the stronger U.S. dollar, scrap is now cheaper than other metallics and CIS steel billet.  Thus, scrap is a more economical buy, not only for overseas EAF mills, but also for the foreign and domestic integrated steelmakers. Indeed, some may be willing to pay more for scrap if it enables them to offset the now-higher costs of coking coal and iron ore.

• If offshore demand rises, it could deny domestic mills supply from U.S. scrap exporters.  In 2012, when the prices were soaring and harsh winter weather hindered both the processing and transport of scrap in regions like the Midwest, domestic steelmakers bought much of the shredded scrap that was sitting unwanted on the docks because overseas demand was so poor.  That relief may not be available or might come with a higher than expected price tag now.

Though scrap prices may be rising and the supply is constrained by seasonal factors and dealer resistance, there are still a few “wild cards” that could help domestic mills cope with the challenges. These are:

• The domestic steel industry is still operating at less than 70% of its capacity.  Thus, several mills are not running full out, and as a consequence, are not consuming all of the scrap available to them.  Dealers who are their main suppliers will be looking to sell that material to other steelmakers.

• All four of the major EAF-based steelmakers have their own scrap processing and trading divisions.  Some have enough shredders and balers, and can produce enough scrap prepared to meet the needs at the corporate parent’s mill specs.  They may not be located next-door, but that doesn’t prevent them from shipping scrap across several states if needed and paying the higher freight costs.  Concerns about supply always take precedent over scrap costs.

The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures in early 2017.  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 published by Platts.  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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