Mike Marley’s Shredded Power #62

Ferrous scrap prices hit the skids this month, with busheling and bundles falling by $30 per gross ton and obsolete grades tumbling by as much as $25 per ton. The drop in the industrial scrap prices was expected and follows price cuts in these grades in both July and August.

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #62

Prices drop: A one-month decline or a death spiral?

September 13, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Ferrous scrap prices hit the skids this month, with busheling and bundles falling by $30 per gross ton and obsolete grades tumbling by as much as $25 per ton.  The drop in the industrial scrap prices was expected and follows price cuts in these grades in both July and August.  The declines in prices of shredded scrap and cut grades stunned many traders, however.  Most had expected a “soft sideways” market, with these prices dropping by no more than $5 or $10 per ton.

Steelmakers in the Detroit area made the first major buys for the month and set the pace for the other regions.  They cut mill-delivered busheling and bundles prices by $30 per gross ton at mid-week and pushed the prices for shredded scrap, heavy melt and five-foot plate and structural scrap down by $20 per ton.  These dropped the busheling and bundles prices to a range of $230 to $240 per ton while shredded and plate and structural prices sagged to between $220 and $225 per ton.

Purchases in the Midwest and the South follows that pattern later in the week.  Industrial steel scrap prices were off by as much as $35 per ton while the price tags on shredded scrap and heavy melt were marked down by an average of about $20 per ton.   Shredded prices on the U.S. East Coast, already as much as $25 below mill-delivered prices elsewhere in the country, declined by only $10 to $205 per ton delivered to the mill.  Plate and structural scrap prices there were down by $20 to $190 per ton and No. 1 heavy melt slipped to $175 per ton, off by $15 from last month’s level.

There are a few scheduled production outages, at two mills in the East and one in the Midwest.  More influential, according to several dealers, was the near industry-wide cutback in scrap intake this month.  Mills in several regions, both integrated producers and EAF-based steelmakers, reduced the volume of scrap bought, a possible indicator of weaker overall steel demand heading into the last quarter of this year.  That threat may have persuaded some dealers to unload much of their inventory this month.

Scrap price cuts spurred by sagging hot-rolled sheet demand and prices.

The EAF-based flat-rolled mills led the push for lower scrap prices.  The combination of weaker demand for hot-rolled coil and its eroding price are seen as the main reasons for the mills lowering their scrap prices.  But traders said these mills also have plenty of industrial scrap from U.S. suppliers, imported scrap from Europe and pig iron from Brazil and eastern Europe.  This material is either on the ground at their mills or en route, said a Chicago-based trader.

Brokers for a major sheet producer sought reductions of $40 per ton on busheling and bundles, and $30 per ton on shredded scrap.  They got cuts of $30 and $20, respectively, from their suppliers.  Significantly, they also made few, if any, springboard buys in industrial scrap-rich areas like Detroit.  Remote scrap buys, particularly of industrial steel scrap, have been an integral part of EAF sheet mills’ monthly scrap purchases this year.  One Midwest sheet mill didn’t abandon its Detroit suppliers completely.  The mill cut its springboard prices by $30 per ton, yet dealers said that price, $255 per ton for busheling, was strong enough to take some industrial scrap away from a rival.

That the mills wanted to trim obsolete scrap prices was no surprise.  That they got $20per-ton reductions stunned several traders.  Local plate and structural scrap supplies were seen as tight in several regions, but two Midwest flat-rolled mills killed their springboard buying plans for this scrap.  In past months, these remote buys bolstered cut scrap prices in several regions.  Cancelling those purchases this month erased the premium price and freed up supplies of plate and structural scrap.  Local mills in several regions lowered their offers for this seemingly scarce scrap by between $10 and $20 per ton and got all the tonnage they needed, said one broker.

Traders had mixed feeling about the influence of export buying or lack thereof on the domestic scrap demand and prices.  There was little overseas activity last week and this week saw U.S. exporters sell only two cargoes sold to Turkish steelmakers.  Prices paid for the 80/20 heavy melt portions of these were $220 and $221 per tonne, off by about $7-8 per tonne from the previous sales a week ago.  Sales of shredded scrap in containers and by barge from U.S. East Coast yards dipped by about $10 per tonne this week, down to a range of $205 to $210 per tonne loaded in a container and dropped off at the docks.

Service centers and integrated mills are buying fewer hot-rolled coils.

Less steel buying by steel service centers is at the core of the downturn in scrap demand and prices.  The steel warehouses saw the mills push through scrap price cuts in the past two months and are waiting to see matching reductions in steel prices, a Pittsburgh area broker said.  Steel demand from the auto industry is a little weaker, he said, but none of the mills serving the auto industry are sounding any alarms.

A buyer for one flat-rolled mill said getting steel orders has become a struggle.  Steel buyers are unsure how long the current scrap price decline will run.  Last year, scrap prices went into a five-month tailspin.  Some are wondering if they’ll see an encore performance this year and will make minimal steel purchases.  They want to be sure that both scrap and steel prices have bottomed before beginning any major restocking.

Some steel executives have said they expect hot-rolled sheet prices to remain well above $500 per ton, but others in the steel and scrap industries believe they will decline.  Steelmakers probably realize prices will slide in the near future, said a trader in the East, but are lowering scrap prices ahead of any potential steel price decline.  They are hoping to preserve their healthy margins as long as they can, he said.  Some EAF-based mills are posting gross profits of more than $100 per ton on their hot-rolled coils and bigger gains on their cold-rolled and galvanized sheet products.

Steel service centers are not the only buyers showing less interest in EAF-produced hotrolled coil.  The integrated mills, which had been buying it from the EAF mills and rolling it into cold-rolled and galvanized sheet, are reducing their purchases.  Some are relying more heavily on their own steelmaking operations, said a Midwest trader.  As an example, he said one major integrated mill will bring a blast furnace back on line in Chicago this month although it is reducing raw steel production at its other U.S. mills.  The additional slabs will be shipped to a rolling mill in the South.   Likewise, a Detroit area integrated mill cut its scrap purchases by one third this month and will use more iron ore and coke to make its sheet steel products, he said.

The integrated mills may be focused on keeping a tighter grip on higher-value, low residual sheet products for the automakers and abandoning the hot-rolled coil markets.  Foreign steelmakers that were not slapped with unfair trade penalties earlier this year now are offering lower-priced, hot-rolled coil to U.S. steel users.  That could leave the domestic EAF-based mills to battle any new foreign steel onslaughts alone.  “They stopped imports from China and Brazil, but now here comes Turkey and Vietnam,” said another Eastern trader. “It’s like they’re playing whack-a-mole.”

Also, competition is less intense in the cold-rolled and galvanized sheet markets.  Those products are trading in the $760-780 per net ton price range and order lead times are six weeks or longer.  Hot-rolled coil is available at between $520 net ton and order backlogs are now only two weeks or less.

Industrial scrap may find other homes, but obsolete scrap has other problems.

Busheling and bundles may have been the main price target, but the sheet mills’ success in cutting obsolete prices may block sales of industrial steel scrap to rebar and structural steel producers.  There is still a modest premium of between $10 and $20 per ton in the price of busheling over shredded scrap.   But several traders said they are not certain that’s enough to discourage the long products mills from buying busheling.  If shredded supplies decline as drastically as some dealers anticipate or export demand rebounds, these mills may have no alternative but to buy busheling.

A trader in the Southeast said he believes the long product mills will step in and buy more busheling.  Dealers will drop their offering prices low enough to compete with shredded scrap to dispose of the busheling before too much accumulates in their yards.  Unlike shredded and heavy melt, lower scale prices won’t reduce the flow of industrial scrap into dealers’ yards.

Obsolete scrap flow into dealers’ yards have slowed, but mill demand has weakened so severely that it is offsetting the declines in supply.  Shredders probably will cut their feedstock prices by at least $20 per ton this month.  That is likely to further reduce the intake from auto wreckers, demolition contractors and other suppliers.  Some traders said flows dropped in response to shredders lowering prices in late May and June.  Those price cuts and unseasonably high temperatures kept intake from rising as much as anticipated, however.

If prices continue to decline, the bigger problem for many dealers will be the less obsolete scrap moving through their yards.  This could be especially difficult for those with shredders, other expensive equipment, and a large staff of yard and office workers.  These dealers aren’t simply facing a margin squeeze, said one shredder operator in the South.  They have higher fixed costs and face heavier losses if they fail to generate sufficient revenues to pay the bills.

Shredded Scrap Thermometer:  Feed a mill, starve a shredder?

Intake of feedstock has been poor throughout the summer and shredder operators have blamed poor flows on low prices and the persistence of high temperatures and humidity during July and August.  This month’s $20-per-ton reductions will only serve to shrivel the flows of shreddable materials even further, they argue.   But others contend that the domestic mills may need less scrap if steel demand is weakening and have alternative supplies as well. These include:

• If sheet mills aren’t buying as much busheling and bundles, dealers handling industrial steel scrap will trim their prices and offer this higher quality scrap to the long products mills that normally don’t need much of it.  Few yards can afford or are willing to amass huge piles of industrial scrap these days, especially when they are aware that the same volume will be coming through their gates this month and next regardless how low mill prices sink.

• A cheaper price isn’t the only factor that can make this scrap more attractive than shredded.  Busheling also provides higher percentage of metal recovery than shredded scrap and thus more steel output from their melt shop.  That’s a plus for rebar makers and other non-traditional users of industrial steel scrap.

• EAF-based sheet mills limit their consumption of shredded scrap, typically to no more than 20% of their melt mix.  They also are less dependent in domestic supplies of industrial steel scrap as they were 25 years ago when they first evolved, but they aren’t using more shredded scrap.  Instead, they own scrap yards that supply busheling and bundles. Some also rely more directly on alternative raw materials like direct-reduced iron and also import industrial scrap.

Shredded scrap remains the most commonly used ferrous scrap product even when there are fewer cars and appliances to turn into fist-sized pieces of metal. That’s a wild card that helps to bolster its value and keep the prices from falling too far.  Others are:

• Shredders learned that they could boost revenues by recovering higher-value nonferrous metals like copper and aluminum from the cars and other items they ripped apart.  Another benefit was the new level of cleanliness in the final product.   Without the so-called tramp or residual nonferrous metals, shredded became a raw material for many integrated steel mills and thus increased its consumer base.

• Because of its size and density, shredded is also a desirable commodity for both bulk cargo scrap shippers and the traders who buy and sell containerized ferrous scrap. For the bulk shippers, the layer of shredded at the bottom of a ship’s hold serves a cushion protecting the vessel from damage when thicker material like heavy melt and bonus grade scrap is loaded.  For containerized buyers, it can be easily loaded in the smaller TEUs (twenty-foot equivalent units) which incur lower per tonne ocean freight costs.


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.      


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