Mike Marley’s Shredded Power #101

Dealers can’t get enough railcars to deliver scrap to the mills. This isn’t a new problem, but it seems to be getting more severe.  Now, it involves not only the cars owned by the railroads but also those owned or leased by dealers and brokers. Indeed, the availability of railroad-owned cars has gotten worse, with one major eastern carrier announcing that it was pulling more cars off its tracks for repairs or to mothball poorly used pieces of its rolling stock.

In line with its announced plans to reduce its workforce and minimize usage of its least profitable equipment, CSX Transportation sent out notices to its scrap industry customers last week that its fleet would shrink.  CSX is one of two Class 1 or largest railroads that serve much of the country east of the Mississippi River.  Norfolk Southern is the other.

Several dealers said that while they were unhappy about the cutbacks announced by Jacksonville, FL-based CSX, they acknowledged that the big railroad had notified them of the changes.  Several other railroads, both large and small have said nothing about cutbacks in service and equipment, according to a Chicago-based trader, but they are not proving them with enough cars.  His company also deals with western and Canadian railroads since it ships scrap to steel mills in those regions as well.

The big railroads are not the only carriers telling scrap dealers that fewer cars are available these days, said another Midwest trader.  His traffic manager ordered 10 cars from the local railroad and was told he could only have five.  “Okay”, he said and asked if he could get the missing five cars next week?  “Nope” was the reply, the trader said.  He can only get five cars next week regardless whether he orders 10, 15 or 20 cars.

Fewer railcars limits springboard scrap purchases from remote areas.

Less railcars creates added problems for both dealers and steel mills. First, the lack of cars limits the range of purchases by brokers and mills unless they or the scrap dealers have their own fleets. Scrap sold to local mills can be delivered by truck, but purchases by distant mills generally require rail transport.  Thus, earlier this year when shredded supplies in the Midwest were tight, mills there countered local dealers’ demands for higher prices. They reached out to exporters and other shredded producers on the U.S. East Coast, bought shredded scrap from them at competitive prices and limited their purchases from local dealers.

The unavailability of railcars isn’t new; it’s a chronic problem. This time, however, several dealers and mill buyers complained that the availability problem is getting more severe each week. An eastern Ohio buyer said shipments that he was expecting to receive before the end of May didn’t arrive until the second week of this month.  Phone calls and text messages to brokers and dealers produced apologies and replies from dealers that they could not get enough railcars.

Another reason cited by some dealers was the mills’ decisions earlier this year to buy more shredded scrap from the East Coast suppliers because export demand was so weak. They felt that they could use those supplies to minimize their local purchases and keep local prices from rising too swiftly.  Unfortunately, railroads there are not required to return those cars to their original destination as quickly as possible.  And with fewer switching crews at work these days, empty cars will sit in a competing railroad yard for longer periods.

Even the leased and dealer-owned gondola cars are not getting much priority, said one East Coast trader. His company owns several gondola cars and used these to ship shredded to a mill in the Midwest two or three months ago, he said.  They were empty and sitting in a railroad switching yard for several weeks despite his phone calls to the railroad demanding this return.

Railroads are not the only offenders in this score. Steel mills sometimes delay unloading scrap from leased or dealer-owned railcars because they are rarely assessed demurrage charges for failing to release those cars back to the railroad.  The railroads, on the other hand, will impose these charges if the cars aren’t returned within five or seven days after it is unloaded.  The charge is typically $100 per day.

In an ironic twist four or five years ago, a Canadian steel mill threatened to stop shipping its finished steel products by rail and to use trucks instead or impose a reverse demurrage charge because a Canadian railroad had not removed any of its empty gondola cars from the mill’s rail siding for several months.  A Canadian scrap trader said demand for gondola cars was weak at that time and the railroad was using the steel mill as a rent-free storage site for its cars.

Because of the car shortage, a Midwest mill buyer said that even some of his nearby scrap suppliers were shipping shredded scrap in trucks. He usually specifies in his purchase orders that the shred be delivered by rail.  However, much of it was coming in trucks from scrap yards both near and far.  Consequently, he now had three or four trucks to unload and inspect immediately instead of a single gondola car that could be parked on a siding and checked later.  That also pushed up the due dates for paying for that scrap.

The impact of these railcar shortages varies from region to region. In a scrap surplus area like Detroit, industrial steel scrap like bundles and busheling is delivered to local steel mills by truck directly from the automakers’ stamping plants.  That minimizes the use of rail and eliminates the need for trans-loading–i.e., hauling the scrap back to the dealer’s yard, dumping it and then reloading it on to another truck or a railcar.  Shipping it to mills in neighboring regions like Indiana and the Chicago area as well as more distant mills in the South and Southeast requires railcars.

Railroads are unhappy with the utilization rates and damage to their gondola cars.

Most railroads regard these as their most poorly used freight cars. Gons, as they are called, typically make an average of one trip per month versus the more versatile box cars and flat cars. The latter carry containers that make up the bulk of the railroads’ share of intermodal freight transportation.

Also, one scrap traffic manager explained, railroads often complain that gondola cars require a disproportionate amount of maintenance. They carry heavy loose material like plate and structural scrap which can damage car sides during loading and unloading.  They are sometimes returned to the railroads “dirty.”  In other words, soil, stones and other unwanted material is picked up from the ground in a scrap yard when the scrap is loaded and left in the car after the material is unloaded.  Steelmakers have yet to find a method to convert soil and rocks into steel unless these materials are rich in iron.

Because scrap deliveries were so slow last month, several mills didn’t cancel all their unshipped orders at the end of May even though they were lowering prices for shredded and other obsolete grades like heavy melt. The reasoning, according to one mill buyer, was that he was only dropping his price on cut grades by about $5 or $10 per gross ton and it wasn’t worth the risk of losing those supplies if shipments were still delayed.

Several dealers said the flow of obsolete scrap and shredder feedstock continues at a steady pace and as a result of the shipping problems, inventories of shredded and cut grades in some dealers’ yards are rising.  “It’s not falling over the fences yet,” he said, “but the piles are getting higher.” Some dealers have reduced their scale prices, he said, but that has not made a  noticeable dent in intake.  That’s not surprising he said, since some smaller yards and demolition contractors are busy at this time of the year.  Also, he added, if they suspect prices will fall even further, they will continue to dump scrap on the market to avoid getting lower prices next month.

Little or no changes are expected, at least for industrial steel scrap prices.

Despite the transport woes, many dealers said they don’t anticipate much change in scrap prices in July. Most believe the demand for bundles and busheling will set the market’s pace.  Output of prime scrap is expected to be off by as much as one-third because of the extended vacation shutdowns at the auto industry plants in July as the automakers try to rein in their rising inventories of new cars.

Most of the mills are well-stocked with scrap even though deliveries are a problem. Many have been buying steadily for several months and have amassed adequate supplies of scrap, said a Chicago-based broker.  Whether they will try to lower their offers for shredded again this month, is unclear now, he said.  Shredded prices dipped by an average of $10 per ton this month. The price differential between shredded and busheling has risen to as high as $95 per ton in regions like northern Ohio where mills are paying as much as $390 per ton for busheling and bundles while shredded prices are $295 per ton on a delivered to the mill basis.

Meanwhile, domestic steelmakers are awaiting final word on the U.S. Commerce Department’s section 232 trade investigation. The industry is hoping Commerce officials will recommend that President Donald Trump will impose higher tariffs and/or quotas to limit steel imports.  The industry has argued that the increased imports threaten the viability of certain steel mills.  If those mills shut down because they can no longer compete with unfairly priced foreign steel imports, it could threaten the supply of certain steel products needed by the U.S. military and the overall strength of the U.S. economy.

Domestic raw steel production inched up 1.2 % last week to 1,739,000 net tons from 1,718,000 tons the prior week, the American Iron and Steel Institute said.  The industry’s capability utilization rates rose to 74.6% from 73.7% the prior week.

Shredded Scrap Thermometer: Substituting shredded for busheling.

As the price spread between busheling and shredded scrap rises, dealers with excess tons of shredded piled up in their yards openly question why more mills aren’t substituting shredded for the now more expensive prime industrial steel scrap.  It’s a valid question especially with the likelihood that busheling supplies declining by about one/third this month because of the scheduled vacation outages at auto industry stamping plants this month.  There are some sound reasons why steelmakers, particularly the flat-rolled mills, may be hesitant about using more shredded scrap. These include:

• Despite all the advanced systems designed to recover nonferrous metal from shredders and thus prevent contamination by copper and lead, there is still some that escapes into the ferrous supply. Even if it’s just a copper washer attached to a steel bolt, that could be enough nonferrous to tilt the unwanted amounts of these nonferrous metals over the limits.

• Busheling and bundles are no longer as clear of these residual elements as they once were.
Automakers and others are using more EAF-produced sheet steel products.  As more of that scrap is recycled, the undesirable nonferrous metals are accumulating in the scrap.  That’s why many of the EAF melt shops use a substantial amount of pig iron–at some, as much as 20% of the furnace charge–to dilute the residual elements and make certain they don’t exceed the specs for those sheet products.

• Some of the EAF-flat-rolled mills now own scrap yards that have contracts with industrial scrap generators like the automakers.  Consequently, they have few choices other than to use that scrap regardless of the prices.  Otherwise, it will begin to accumulate in their scrap yards. Unlike obsolete scrap, it is not price sensitive and will keep coming each month as long as the stamping plants are punching out more doors and trunk lids.

Though some dealers are complaining about shredded starting to pile up in their yards, they nevertheless have the “wild cards” to control such excess accumulations.  These include:

• Lowering their scale prices.  Initially, some suppliers will dump more feedstock on them, but
ultimately, they will cut back.   Wreckers will remove resalable parts like radiators and lead-acid batteries, flatten what remains and pile those cars up in the rear of their yards until prices rebound.

• Shredded scrap is still the most widely used form of ferrous scrap and dealers usually have a
diverse and substantial number of outlets to sell to.  All steel and iron makers from the big integrated mills to the small iron casters making sewer lids use shredded scrap.  Busheling and bundles have a more limited market that includes flat-rolled mills and a handful of specialty bar producers.


The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures on September 20.  The contract will trade in 10-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.