Mike Marley’s Shredded Power #78

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #78

Export helped to minimize  the upward price pressure.

January 11, 2017

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

The inland steel mills, and the U.S. East Coast shredders and exporters came to each other’s rescue this month.  For the mills, particularly the have-not steelmakers that lack their own captive scrap supplies, tapping into those shredded scrap piles in the coastal areas helped to limit the scale of the price increases.  For the exporters and shredders that sell much of their output to the offshore market, the springboard domestic demand was a welcome outlet this month taking in scrap that was not being sold overseas.

Shredded scrap prices rose to between $325 and $330 per gross ton delivered to the mills at week’s end.  That’s up about $30-35 per ton from last month’s level.  Earlier in the week, though, some mills in northern Ohio were offering coastal suppliers as much as $345 per ton for shredded scrap.  Mills further west, where local supplies of shredded were more abundant, paid between $305 and $310 per ton.  Again, these prices were up by about $30 per ton from December.

Busheling climbed to $340 per ton and higher in some spot market deals in regions like western Pennsylvania and northern Ohio, up as much as $50 per ton.  Like shredded, higher offers from some mills were dictating the prices earlier in the week.  One mill paid as much as $355 for truck deliveries from nearby scrap yards, an indication that its inventories of prime industrial scrap were depleted.  In the Southeast both the local and remote prices of busheling rose by as much as $40 per ton.

Despite all the early buying in northern Ohio, scrap prices began to settle by Thursday afternoon when several Detroit area mills bought all or much of the tonnages they needed for the month.  They agreed to increases of $40 per ton for busheling and bundles, and hikes of $35 per ton for shredded scrap and the other obsolete grades.  Though the price increases are uniform, the actual mill-delivered prices have widened because of on-going purchases from outside the region, mainly from the East Coast.  Shredded prices now range from $305 to $320 per ton in the region while mills have paid from $315 to $325 per ton for busheling.

Similar patterns followed in other regions by Friday.  Mills in the Chicago area are paying up $40 per ton for industrial steel scrap and have raised their offers for obsolete scrap by $35 per ton.  Likewise in the South, though some in the Southeast were able to limit the increases on shredded scrap and cut grades like No. 1 heavy melt to $30 per ton.  One trader in the region attributed that to excess supplies of shredded scrap still being offered to the area’s mills this month, both from local shredders and some coastal suppliers from the Northeast.

The price hike engine that thought it could…

The domestic price spiral fizzled out late Friday after most of the mills had secured the orders for the tons they needed this month.  One Midwest trader attributed that to the combination of the shredded supplies from the east coast and decisions by several dealers to sell what they had accumulated in their yards in the past two months and what they expect to see coming through the front gates later this month.

This is also the third month in a row that prices have risen.  Despite much of the “posturing” by dealers earlier in the week and their initial refusals to back down on demands for increases of $50 per ton, one Detroit area broker said most recognized that prices have climbed by $100 per ton in that timespan and the likelihood of yet another rise in February might be pushing the limits.

Also, by Monday morning some traders were expressing concern because prices had softened late last week and could decline further this week.  One major EAF-based mill has yet to buy all the scrap it needs this month, said a Chicago area trader.  Its buyers held back because they believe some dealers have not sold all they have and may choose to dump more scrap even with new offers down by $10 per ton or more, he said.

Some brokers and traders were troubled by the lack of clarity on prices at week’s end.  Several mills made purchases earlier in the week on a price to be determined basis, said a Midwest broker.  Many of these so-called TBD deals are priced based on the published prices on either the first Friday or the second Monday in some industry publications.  Yet some mills and their brokers may continue to buy more scrap this week and possibly at lower prices.  That could create problems not only in determining whether they have overpaid for scrap, he said, but also for determining the scrap surcharges added onto certain steel products.

Others are worried that export demand will not rebound because U.S. scrap prices have risen so much this month and the value of the dollar has made U.S. scrap more expensive.  Consequently, the exporters and dealers on the coast may continue to offer more scrap to domestic mills this month and again in February, if both the bulk cargo business in Turkey and the containerized demand from southern Asia remain in the doldrums.  Another concern is the report that a major EAF-based mill bought four cargoes (or about 150,000 tonnes) of bundles and shredded from western European scrap exporters last month.  These are expected to arrive at U.S. Southeast and Gulf Coast ports later this month and could dampen scrap demand in February.

Nevertheless, the reverse flow of shredded scrap from the docks and the coastal areas was enough to fill the increased needs for many of the pipe and tubing mills and the steel SBQ bar makers, whose appetites have been strengthening.  One indication of that was the American Iron and Steel Institute’s report that domestic raw steel production rose by 6% last week to 1,684,000 net tons and the industry’s capability utilization rate moved up to 71.0%.  Steel output in the Christmas holiday-shortened previous week was 1,592,000 net tons and the utilization rate was 67.1%.

Though U.S. mills are busier, several traders said the outlook for scrap supplies is mixed.  One broker for a major EAF-based steelmaker predicts that prices will decline in February.  He pointed to the lack of offshore sales, too much scrap offered to domestic mills and cheaper imports from Europe.  But a buyer at a rival mill said supply will balance demand and prices will be unchanged.  Both mills have their own scrap divisions but followed different buying tracks this month.  One bought from outside suppliers as well as its own yards, while the other limited its scrap unit’s sales to other consumers and redirected much of that material to its own mills.

Higher prices will draw out more scrap, but will cold weather slow processing?

Dealers believe flows will increase now that prices have risen.  Indeed, many of the shredders in the Midwest have hiked buying prices for old cars and other shreddables by $25 per ton.  Some in the East are up by as much as $30 per ton.  Many are paying about $200 per net ton for shredder feedstock, said one trader, and that has boosted the flow into several yards.

Two other conflicting and yet-to-be determined factors could affect scrap availability and prices this month and could offset potential supply changes.  First is the absence of much offshore demand.  Turkish steel markets remain weak and prices of key steel export products like rebar are stuck at about $425-$430 per tonne F.O.B Turkish mill.  That has hampered sales, but it is also making it difficult for the Turkish mills to justify buying U.S. scrap.

Exporters and shredders on the East Coast obtained about $290 per ton F.O.B. a rail car at their yards for shredded scrap.  The mill-delivered prices are about $330 per ton and rail freight costs are between $35 and $40 per ton.  Turkish mills probably must pay a comparable delivered price to take that scrap away from U.S. mills.  Converting scrap bought at $330 per tonne into rebar costs between $130 and $150 per tonne, making the production of these steel products from U.S. scrap a loser.  Thus, the exporters and Eastern shredders may be offering their shredded scrap to Midwest mills again next month if the Turkish mills don’t buy.

But will they have much to offer?  The other factor is whether dealers will be able to process and deliver more scrap.  Colder temperatures and snowstorms that hit both the New England area and the South last week could obstruct output and shipments.  Snow and colder temperatures don’t just impact deliveries.  They also limit operations in most yards because dealers store and process ferrous scrap outdoors.

When temperatures drop to 10 degrees Fahrenheit or lower, as they did in some regions of the Midwest and New England last week, that slows work.  Cranes, front-end loaders and other equipment that rely on hydraulic systems, often must be warmed-up by idling for an hour or more each morning before they can be operated.  Also, they have to shut down earlier than usual.  Colder temperatures also make metal machine parts like buckets and   blades more brittle, and thus, more prone to breakdowns.  On those bitter cold days, dealers must weigh operating a shearer or a baler, against the prospect of losing several days of production due to a busted key component that may take several days to replace.

And weather may be a significant factor this week and next.  Heavy rains were causing havoc in California and other western states earlier this week.  That storm is moving across the country, and another is close on its heels.

Shredded Scrap Thermometer:  The all-purpose scrap.

Shredded scrap may be the most commonly used form of ferrous scrap.  Almost every steel mill and foundry uses it in varying amounts.  For those few that don’t, it’s usually because shredded is incompatible with some melt shop equipment like a scrap preheater.  Shredded was not always as popular as it is now.  In the 1990s, melt shop foremen in most BOF melt shops would unequivocally reject shredded as too dirty to use to make their steel products.  All that changed with the introduction of advanced metal recovery systems at many shredders and their impact on melt shop practices.   These systems include:

• Eddy current systems, which were among the first.  These used an electrical charge to kick small pieces of nonferrous metal off a shredder’s conveyor belt, and had a big impact in terms of producing a more chemically uniform ferrous metal. The goal was to recover the more valuable nonferrous metals and not let them go to a landfill as shredder residue or “fluff.”

• With shredders able to produce a ferrous product with less “tramp” elements like copper and lead, steel mills were able to rely on its consistency.  BOF-based mills, traditionally big users of auto bundles because of their cleanliness and density, now derived similar benefits from shredded scrap. Some traders believe that diminished the importance of auto bundles as a scrap price indicator.

• Separating nonferrous metals into new scrap commodities like “Twitch” and “Zorba” created new product lines for many shredders. Some were so profitable that many shredders were able to use revenues from those sales as their profit margins and raise the prices they paid for feedstock.

Growth in the use and demand of shredded scrap by steelmakers and foundries has created an oversupply of processing equipment, thus introducing new “wild cards” into the price and supply calculation.

• As shredded scrap became more popular, it seemed like every scrap yard wanted a shredder to boost its revenue stream.  At one time, there were more than 350 shredders operating in the U.S., including several huge mega shredders that could produce two to three times as much tonnage if enough feedstock was available, and if mills actually wanted that much shredded scrap.

• Today, some shredders are operating only one day a week or have been idled all together.


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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