Mike Marley’s Shredded Power #81

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #81

February’s outlook weakens because of export’s decline.

February 1, 2017

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

The pricing outlook for ferrous scrap dealers has darkened in the past week because of the continued slide in U.S. export prices. The latest deal between a U.S. exporter and a Turkish mill was made late last week and it dropped the price of the bellwether 80/20 heavy melt to $240 per tonne delivered to a Turkish port. That isoff by more than $15 per tonne from the previous sales earlier in the week and down more than $40 per tonne from the offshore market’s high point earlier this month.

Some dealers and mill buyers now are talking about a potential decline of $30 or $40 per gross ton in the obsolete grades like shredded scrap and heavy melt and a sympathetic slide of $10 or $20 per ton or more in busheling and bundle prices. The steepest drops are expected to be seen in regional markets like the northern Ohio and U.S. Eastern and Southeast regions which are closer to the export activity and where prices spiked by $40 per ton or more earlier this month.

Railcar shortages plague dealers and mills in several regions.

But some are sticking by their predictions that obsolete grades will drop by only $20 per ton next month and industrial grades will be unchanged. Their certainty stems from reports that several mills have not gotten all the scrap they bought this month and may not cancel all their undelivered orders. Dealers have problems finding enough railcars. Some mills in the Midwest and Southeast are still waiting for many of those springboard purchases they made from the East Coast export yards and major Eastern shredders.

The problem is especially severe in the East, said a Philadelphia area trader. He blamed this on a failure of the railroads to provide enough cars to carry the usual shipments and the additional shredded scrap sold to distant mills. Another dealer said the current situation is like the railcar shortage during the winter of 2012 which delayed scrap shipments for two or three months. At that time, unusually cold temperatures, snowstorms and a shortage of railroad switching crews were blamed for the problem. Weather has not been a factor this year, however.

In addition to the current car shortage, said another trader, it is also unlikely that the cars which carried shredded scrap from New York, Philadelphia and other Eastern cities to the Midwest in January will be returned to the coast soon. Many could remain in the Midwest circulating between scrap yards and steel mills there for several months.

Dealers have complained that the railroads haven’t brought more gondola cars out of their reserve fleets. The transport situation had become so desperate that some midsized dealers were calling larger dealers who own or lease railcars and trying to rent those.

Fear that prices could fall further has some dealers selling all their tonnage.

Uncertainty breeds chaos in the market. Some dealers are unsure that the prices will stay at these levels or worry that they could fall even further in coming weeks. Those who lack rail sidings and have only one or two local steel mills or the docks as outlets may decide to unload more scrap to avoid steeper losses. Such dumping might encourage the docks to drop their prices even lower, either because they can or to reduce the intake if too much scrap is coming through the gates each day.

Another Eastern trader said a few dealers have made early offers to domestic mills at lower prices, but the mills and their brokers rejected those and are content to wait and see where the market settles. These included offers of shredded scrap at $285 per ton delivered to the mill, down about $20 from the average price in many regions this month. Even though some steelmakers are running well and need more scrap, he said they are prepared to wait, possibly until next week before they make any substantial buys.

But, he added, shredded prices could be under more pressure in the Southeast if the exporters and other suppliers on the East Coast offer more tonnage there. Without enoughrail cars, they may choose to ship more shredded by barge to those mills. Prices could be in a freefall, said another dealer, but noted that could change quickly if offshore buyers become more active. Their buying could put a floor under the market

Exporters have slashed their buying prices for heavy melt to $170-180 per ton in the past week, said an Eastern dealer. Two weeks ago, they were paying as much as $235 per ton for the same scrap. But he also doubts that they are getting enough scrap at the now lower price levels. Despite the rail transport problems, some shredders are short scrap. They gobbled up all the junk cars from auto wreckers and were still paying smaller scrap yards as much as $220 per net ton for light iron and other feedstock as late as last week, he said.

And there are no huge piles of scrap in the exporters’ yards, he said. He believes that they will ship much of their heavy melt overseas as bulk cargoes but sell more of their shredded to U.S. mills. With 80/20 heavy melt selling at $240 per tonne, exporters can get only $245 per tonne for their shredded scrap since Turkish mills pay only $5 per ton over the heavy melt for imported shredded scrap

Deducting ocean freight expenses of $20 per tonne and stevedoring cost of about $15 per tonne leaves the export yards with a shipping point price of $210 per tonne. Even if domestic shredded prices, which averaged $305 per ton in many regions this month, drop by as much as $40 per ton, exporters would still net a better price at home than they are likely to get overseas. Also, said another Philadelphia area trader, the now lower prices at the docks could be enough to lure the Indian buyers back to this region. They are buyers of shredded scrap in containers, but they abandoned the U.S. East Coast in November when U.S. scrap prices began to rise.

A steeper price drop will bring some regions in line with lower-priced areas.

A Midwest trader said he isn’t worried if prices drop by as much as $40 per ton in Ohio. Such a steep slide would only bring the prices there in line with the prices elsewhere in the Midwest, which he expects will fall by $20 per ton. Shredded prices in Cleveland and the Pittsburgh areas stood at $320-325 per ton on a delivered to the mills basis this month while the same scrap was sold for $305 per ton in Chicago and Detroit.

Despite the transport problems, many dealers still expected the mills that normally cancel unshipped orders to do that by Jan. 31. Some dealers had oversold scrap because prices had risen for the third month in a row. They sold “some paper”, as the jargon in the scrap trade describes such business, which means they hoped to get more scrap coming across the scales than they normally see each month. Yet, some were scurrying around last week buying more feedstock to meet those extra orders. Others like one Eastern shredder said he couldn’t meet those commitments and has cut his buying prices in anticipation of lower prices from the mills in February.

Steel and scrap demand is probably strongest in the Midwest. Two EAF-based mills in the Detroit area have bigger scrap purchases planned in February. Also, several Chicago area mills and those along the lower Mississippi River, like those in Ohio did not get all the tons they bought from remote suppliers this month. Another indication of rising steel output came from the American Iron and Steel Institute. Domestic raw steel production rose to 1,736,000 net tons last week, the AISI said, and the industry’s capability utilization rate climbed to 73.3%. That’s up 1.9 percent from the previous week when steel output totaled 1,703,000 net tons and the operating rate was 71.8%.

If the pessimistic talk about scrap prices continues and the mills are slow to buy scrap for February, that could also affect steel sales and prices. Steel buyers are apt to withhold orders if they believe the scrap prices will fall more drastically than the $20-per ton drop that many have predicted, said a Birmingham-based broker. At present, hot-rolled band prices are stable at $630 per net ton and cold-rolled sheet is $830 per ton. Order lead times are also unchanged at four weeks and eight weeks, respectively. Steel plate prices are rising as well, but one major long products steelmaker has canceled an announced increase in its structural steel prices.

Winter weather has not impacted scrap flows and processing thus far and several dealers said the intake from some suppliers remains steady. Others are concerned that flows could subside in February when buying prices sag. Many of the auto wreckers have sold all the excess cars that they had piled up, said a Midwest shredder operator. Intake from demolition contractors and smaller scrap yards has been good, he said, but that could dry up, because shredders have begun to cut their buying prices.

The steep drop in export prices and its potential for driving down domestic scrap prices in February may have left one scrap importer with four or five expensive cargoes of imported scrap from western Europe. That scrap, industrial bundles and shredded, reportedly was bought in December and early January. Some will be at more than $300 per tonne when it arrives at U.S. ports, industry sources said.

Shredded prices are expected to fall below $300 per ton. Busheling and bundles prices could drop to $300 in some regions. A Midwest trader said he would not be surprised if the importers are offering that scrap to mills other than those it was originally purchased for. “If they manage to sell it to others and keep them out of the market next month,” he said, “that might allow them to lower domestic scrap prices more than expected and average down the cost of those imports.”

Shredded Scrap Thermometer: Shredded’s biggest bottlenecks.

Several domestic steelmakers relearned basic supply lessons this month in terms of how tough it can be to get scrap delivered in a timely manner by less cooperative railroads. Bigger mini-mills have coped by adding a shredder as a captive operation at some mills. Others have been fortunate enough to have a key scrap processor build one nearby. At one shredder in Canton, OH, they don’t wait for a railcar to deliver the fragmented metal to the mill. They haul it across the street in huge off-road mining trucks. Transport and finding enough feedstock are the crux of the problem for most mills and shredders, and can manifest in various ways:

• Only a handful of steel mills and scrap companies have their own railcars to carry shredded from distant locations. Others must rely on the railroads to provide them with enough gondola cars. But the railroads often complain that “gons” are their worst revenue providers and usually make only one trip a month from a scrap yard to a steel mill. Thus, moving them from distant sites while they are empty is not a priority at times when more profitable or perishable freight must be delivered.

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