Mike Marley’s Shredded Power #120

Detroit area steel mills cuts their prices for busheling by $10 per gross ton, but kept their offers for shredded scrap and cut grade unchanged from last month’s levels. Those moves have been copied by two small EAF-based mills in the East, but by Thursday afternoon it is yet to be determined whether steelmakers elsewhere in the Midwest and in the South, will follow that pattern with their scrap purchases. The disparate price moves suggested an excess supply of prime industrial scrap in some regions, but a tightening in the availability of obsolete material.

Two Detroit area mills initiated the price cuts on Wednesday, the first day of the month.  Both are EAF-based steelmakers–one is a sheet steel producer; the other is a special quality barmaker.  That they sought and obtained the price cut on busheling so early in the buying week surprised some dealers and traders.  Frequently, when mills are trying to lower prices, the negotiations with dealers could stretch out until the week’s end or possibly into the second week of the month.

If the busheling price cuts succeed in other regions, this will be the second month in a row that steelmakers have cut industrial steel scrap prices. Last month, they slashed their offers for busheling and bundles by as much as $40 per ton, but limited the price reductions for cut grades and shredded scrap to $25-$30 per ton. Thus, the mill-delivered busheling prices in the Detroit area are now down to an average of $330 per ton while shredded scrap remains at $270 per ton.

Oddly, these reductions come shortly after domestic sheet mills sought to increase the base prices for their hot-rolled, cold-rolled and galvanized sheet products by $40 per net ton. Sheet steelmakers, particularly the EAF-based mills, usually don’t lower scrap prices at the same time they are raising steel prices.  One of their traditional arguments has been that they need steel price increases to pay for higher scrap costs. Also, steel users would expect the mills to pass along any reduction in their scrap costs by lowering steel prices.

If the $10-per-ton drop prevails in other regions, it will narrow the price gap between busheling and shredded scrap. This gap had grown to $70 per ton in Detroit and as high as $90 per ton in other areas of the Midwest.  That spread, the so-called busheling premium, is based on the cleanliness and better metal recovery rates of busheling over shredded scrap. In the past, however, this typically averaged about $20 or $30 per ton, but has risen in the past year because of the strength of the demand from the EAF-based flat-rolled mills, the largest users of busheling.

Also since busheling is the main grade of scrap used by EAF-based sheet producers, the now-higher premium over shredded has altered their raw materials cost formulas in other ways as well. Imported pig iron and direct-reduced iron, for example, are alternative materials used to dilute contaminants in scrap.  These are more expensive now, because their prices are based on the busheling price and not on the less expensive grades like shredded scrap or heavy melt.

Excess supplies and less consumption is undermining industrial scrap prices.

Scrap traders in the Midwest attributed the mills’ decision to push for a price cut on industrial grades to a combination of several other factors as well. First, said a Midwest dealer, was the cutback in prime scrap usage by several integrated steelmakers, both in the U.S. and in Canada.  Scrap accounts for no more than 20% of the raw materials the integrated mills use and thus represents a smaller increase in raw material costs.  Still, he said the computerized scrap buying programs that many mills now use to make their buying decisions are urging them to ignore busheling and bundles, and buy shredded and cut scrap.  Several mills have done that for the past few months and that has created industrial steel scrap surpluses in some regions.

That leads to reason No. 2.  A northern Ohio trader said much of that excess supply of busheling and bundles in recent months has been coming not from Detroit, but from Canada. Integrated steelmakers there have cut their intake because of the costs.  Consequently, several large Canadian dealers have sold much of their prime scrap to U.S. mills.

Dealers there and in the U.S. that handle thousands of tons of industrial steel scrap sometimes panic when they can’t sell much industrial scrap.  Also, it will continue to flow into dealers yards each month at the same pace. Its supply is determined by the output of automobiles, appliances and other durable goods and not what scrap dealers or steel mills will pay for it.

In addition to having little control over the flow of that scrap, dealers also have little control over the price.  Dealers purchase busheling and other grades of industrial scrap on long-term contracts of a year or more and pay prices that are based on published indices. Declines of $10 or $20 per ton aren’t that significant.  Drops of $40 per ton, as was the case in October, won’t be recouped until the market rebounds and scrap prices rise by that much.

Third, and more specific to the Detroit area, North Star Bluescope Steel LLC will buy less scrap this month. The Delta, OH-based sheet mill is the biggest busheling user in the region and its actions often sets the pace for price moves there and elsewhere. A scheduled maintenance outage this month, excess inventory on the ground at its mill, and/or the Thanksgiving holidays may account for the reduced intake, said a Detroit-based dealer.  He estimated that the mill will buy only 60,000 tons of busheling this month, down about 30,000 tons from its usual monthly buy. There are several other mills in the Midwest with outages planned this month as well. That could contribute further to the oversupply of industrial scrap.

Last, another Midwest trader said there were mixed messages from the mills in terms of the end-of-month order cancellations earlier this week.  Dealers often regard cancellations of undelivered scrap as an indicator that the mills will be lowering their scrap prices in the next month.  Those smoke signals were confusing this time, however.  A few mills canceled all their unshipped orders, while other were selective. Some cancelled only the undelivered prime industrial scrap, or only the purchases from distant suppliers and dealers who are not their regular month-in, month-out suppliers.

Domestic steel production didn’t point to any significant weakening in steel demand.  Raw steel output totaled 1,739,000 net tons last week, according to the American Iron and Steel Institute, while the industry’s capability utilization rate inched up to 74.6%. Output is up 0.5% from the previous week when the mills produced 1,731,000 net tons and the operating rate was 74.3%.

When prices drop as drastically as they did in October –$40 per ton for bundles and busheling–many dealers are anxious to unload as much of the industrial scrap as quickly as they can.  The primary goal is to minimize their losses on that material, but there is also the fear that yet another steep price cut could follow if scrap demand is weakening or the market is overstocked.

Some, however, may decide they have little choice but to stockpile the expensive material, sell enough to cover operating costs and wait for a turnaround in both demand and prices.  The modest price cut for busheling this month may trouble some scrap dealers, said a Chicago area trader, yet he is in no hurry to sell much of his scrap.  Another Midwest dealer said he may hold back some busheling and bundles this month and again in December.  He’ll sell enough to raise some cash, he said, but he doesn’t see demand improving much this month or in December.  He is willing to risk waiting until January and hopefully see demand and prices rebound.

Offshore scrap demand is steady and prices continue to inch upward.

One factor working against the likelihood of lowering obsolete prices was the on-going strength of the export market. An Eastern trader said that over the last several weeks, the exporters have been booking an average of three or four bulk cargoes per week.  Most are for delivery to Turkish steel mills, he said, but they also have orders from mills in South America and Southeast Asia as well. Another industry source said he did a recon of the major export yards in northern New Jersey this week. At one, a cargo of shredded was being loaded.  At the other two, he said that there was enough heavy melt on the piers to fill two more boats.

All of this, said the trader, points to the likelihood that the exporters have plenty of export orders and have little interest in selling much scrap to domestic mills in the Midwest.  The latest sale to a Turkish mill lifted the price of 80/20 heavy melt to $308 per tonne delivered to a Turkish port.

The U.S. East Coast export yards are offering small local yards $235 per ton for export heavy melt and some of the larger or distant yards as much as $250 per ton.  The Midwest mills are paying an average of $260 per ton for the higher quality No. 1 heavy melt and $270-275 per ton for shredded. The Eastern trader said he was impressed by the price discipline the export yards were displaying these days.  This is unlike past years, he said, when they would sometimes overpay scrap yards for emergency deliveries of heavy melt. This would occur when they had a ship in port and risked incurring expensive demurrage charges because they didn’t have enough scrap to fill the vessel.

Bulk cargo orders are not the only offshore market showing strength.  Demand for shredded scrap in containers has climbed and the overseas buyers are paying $310 per tonne for a loaded container and dropped off at the docks in the smaller U.S. East Coast ports and as high as $320 per tonne at New York.  The inland mills which are offering an average of $275 per gross ton of shredded scrap delivered to their mills are unable or unwilling to match those offers now.

Rail freight costs to the Midwest mill average $30 per ton. Selling to those mills would leave the exporters with little or no margin.  Deals with Turkish mills at $313-315 per tonne delivered for shredded scrap, the only grade most domestic mills will buy from the exporters, minus the $40 per tonne costs for stevedoring and ocean freight, nets a profit of $20 or $30 or more per tonne.

Shredded Scrap Thermometer: Shredded scrap’s supply floor.

When the characters on HBO-TV’s hit series “Game of Thrones” tell each other that: “Winter is coming,” it’s a warning that challenging times are ahead. It’s never clearly indicated whether it’s just the colder temperatures they need to be concerned with, or whether war or other unnamed catastrophes are expected.  Scrap dealers and steel mill buyers may use different expressions, but the implication in what they are saying about winter approach is a warning they understand well.  Colder temperatures and snow or ice storms can generate unwanted supply shortfalls and production problems.  For those sitting on the steel and scrap industry’s thrones, these troubles can include:

• Freight transport is usually the biggest hurdle for both the scrap shippers and the steel mills.  The woes for truck shippers are obvious–unplowed roads and traffic jams to name just two.  What’s not so well-known are the railroad problems.  These can involve frozen switches that delay the movement of trains, or the lack of personnel to operate locomotives that pick up loaded railcars or deliver empty cars to scrap yards. And in extremely cold temperatures, equipment breaks down more frequently and it takes more time to get machinery and motors up to proper operating temperatures.

• Similar problems plague the scrap yards and their work crews.  Indeed, some yard managers won’t run heavy material handling equipment or scrap processing gear like balers and shears when temperatures drop to 10 degrees Fahrenheit and lower.  Accidents and injuries are the most serious problems.  Other challenges can be machinery breakages.  Downtime in colder weather can be even longer because of the frequency of such breakdowns at several yards and the difficulty getting replacement parts delivered and installed on a timely basis.

• The increased use of barges has spawned new worries for both scrap shippers and those trading and shipping alternate materials like imported pig iron and direct-reduced iron.  Ice halts shipments to mills and foundries in the upper Midwest and from scrap yards in that region.  And not just for a day or two, but for weeks or a month or more.  Preparing for that means stockpiling adequate reserves.

Scrap managers and buyers at steel mills have learned to cope with the potential shortfall in supplies and delayed shipments of needed raw materials.  These strategies help them cope with the difficulties.  These supply-side “wild cards” include:

• By acquiring scrap yards, particularly local feeder yards, steelmakers can tap a nearby pool of scrap when it is needed.  This has also included building captive shredders at the mills and maintaining adequate supplies of shredder feedstock.

• Another variant on the nearby supplier card has been the decisions by some dealers to install a shredder next to a specific mill.  PSC has one in Canton, OH, that delivers shredded scrap directly to the scrap bay at the nearby Timken mill in huge off-road mining trucks. MetalX LLC is building one near North Star Bluescope’s mill in Delta, OH.


The Nasdaq Midwest US shredded steel scrap index futures is expected to launch by year end. The contract will trade in 10 gross ton units with the prices settled on the 11
th day of each month. 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