Mike Marley’s Shredded Power #77

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #77

Domestic mills brace for big increases in scrap prices.

January 4, 2017

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

Ferrous scrap prices could rise by as much as $50 per gross ton this month as the scrap have-not mills, those without captive scrap yards, scramble to obtain enough melt material. Early indications of these potential shortages were seen last month in a flurry of spot market purchases. Indeed, some mills were still trying to buy more scrap in some instances at drastically higher prices as the new year began.

Spot market prices have risen sharply in some regions. Mills in northern Ohio are paying local dealers $340 per ton for busheling and shredded scrap. Or higher. One mill paid $355 per ton for truck deliveries of busheling, a sign that its inventory of industrial steel scrap has been severely depleted. Truck shipments were specified because those can be made within a day or two from local yards; whereas, shipments by rail, even from scrap yards in the same metropolitan area, can take a week or more.

That mill’s supply problems, a consequence of its chronic slow pay practices, has spawned problems for other steelmakers, both for those nearby and for those in neighboring regions. One mill has been forced to raise its prices to match the prices paid by its nearby rival. It also has offered as much as $345 per ton for shredded scrap from coastal suppliers, industry sources said. The higher offer was expected to cover the added freight cost from the New England area, as well as allowing them to outbid the offshore buyers.

Demand for steel products has rebounded for several mills in western Pennsylvania and in northern and eastern Ohio, that are oil industry suppliers. Drillers have restarted work on wells that they abandoned more than a year ago when oil and gas prices collapsed. That has created a pocket of stronger demand. Mills in the region will have bigger scrap buys this month and want to capture as much of the local scrap as they can, since it will likely be even more costly to replace it with buys from distant suppliers. One trader in that region estimated that local scrap demand could total 120,000 tons this month but that only 70,000 tons will be available from the area’s scrap yards.

Other mills that frequently buy a portion of their melt needs from northern Ohio dealers each month have chosen to steer clear of the region this month, said another Midwest trader. Instead, they plan to buy more from scrap-rich regions like Detroit and Chicago, and thus avoid the prospect of competing with the Ohio mills for local scrap.

This scrap shortage and the potential price hikes have drawn different responses from dealers. One Midwest broker said he sees a lot of “posturing” in the market now. Dealers are taking a hard stance on prices and point to the higher prices being paid in northern Ohio. Even though most do not have a rail line into that region, dealers expect to get the same hefty price increases from the mills in their home markets.

He believes scrap prices will rise by between $30 and $40 per ton. Shredded scrap will average between $320 and $330 per ton on a delivered to the mill basis, he said, with some remote deals rising to $340 per ton. Prices for busheling and bundles will average about $350 per ton, but some of these deals could soar to as much as $375 per ton.

A Midwest mill buyer said his efforts to reach a consensus on prices and tonnage were being frustrated by dealers. Some are reluctant to quote specific prices and/or define how many tons they can deliver to the mills this month. “Nobody wants to be the first seller in this market,” he said, “because they are afraid theirs will be the lowest price and others will get higher offers.”

At the same time, though, dealers in other regions, hearing about the likelihood of hefty price increases, are ready to unload all of the tons in their yards and the tons they hope to see come through their gates this month. One Chicago area broker said he has gotten calls from several small dealers and auto wreckers. Most want to know first what he is paying for scrap and shredder feedstock. If his buying prices are higher than what others are quoting, he said, they have been offering him twice as much tonnage as they had been selling in the past few months.

The flat-rolled mills are not the only steelmakers with bigger appetites for scrap.

Another price increase driver may the growing perception of a stronger steel market even though the figures on the domestic steel industry’s operating rate have yet to provide confirmation. The industry’s raw steel output totaled 1,592,000 net tons and its operating rate slipped to 67.1 % in the holiday-shortened final week of December. Dealers are expecting stronger scrap demand from a wider array of mills and not just the flat-rolled steel producers.

The spike in the oil and gas drilling rig count may be one driver, but scrap dealers are also anticipating a rise in production of rebar and structural steel products. That stems in part from the usual pre-construction season pickup in activity at those mills and President-elect Trump’s campaign promise to encourage infrastructure work.

All of this, said one veteran Midwest trader, points to the likelihood that there is stronger demand for scrap from several sectors of the steel industry and not just from the flat-rolled mills. At the same time, however, there is not a lot of imported scrap and pig iron coming in to ease the pressure on domestic supplies. Also, he and several other traders believe the pressure will be most severe on the industrial scrap supplies like bundles and busheling. The auto plants and their parts makers are cutting back output of some models that have not been selling well. That will reduce the flows of prime steel scrap into the supply stream.

There are mixed reports on the obsolete scrap flows. Though some dealers are anxious to dump every ton they have into the market and reap the price increases expected this month, several large processors complained that some suppliers are cutting back the volume of material offered.

Most suppliers are aware of the rumors that shredded prices are likely to be up by $30 per ton or more this month. As a consequence, they are holding back some of their scrap and waiting until they see another increase in the scale prices at dealers’ yards. The flows have not dried up completely, said a Philadelphia area trader, but they have declined.

The inflated price expectations and the unwillingness to specify the available tonnage has troubled some brokers and mill buyers. Buyers at one major EAF-based steelmaker have told some suppliers that they may sit out the January “buy week” and rely on inventories at their own mills and yards if price demands are too high. But some dealers believe that could be a mistake if overall demand is strong and the winter weather slows the flow and processing of scrap in dealers’ yards and shredders.

Some also believe that while the industrial scrap supply will remain tight in the near term, they expect to see an oversupply of shredded in February, especially if many of the exporters chose to sell much of their shredded scrap into the domestic market this month.

Domestic demand may persuade U.S. exporters to scuttle their offshore sales.

There have been no new overseas sales in the past week. The last was a single cargo in which the 80/20 heavy melt portion was sold at $296 per tonne delivered to a Turkish port. That would put the shredded scrap portion of the cargo at about $301 per tonne

A U.S. East Coast trader said the exporters are hesitating before accepting new offers from their offshore customers because of the strength of demand at home and the higher value of the U.S. dollar. Shredded scrap at $301 per tonne delivered to a foreign port would have a net cost of about $265 when the stevedoring expenses to load a ship (about $15 per tonne) and the ocean freight costs (about $20-21 per tonne) are factored out. Thus, offers of $340 per ton or higher from U.S. steelmakers would net out to $300 per ton. That’s a $35 per ton premium to the current overseas offers

Scrap exporters are also concerned with the uncertainty of the Turkish economy and the increasingly troubled political climate there. War is underway in two neighboring countries, Iraq and Syria, and terrorist attacks in Turkey are on the rise. The Turkish lira’s value vis-à-vis the U.S. dollar has fallen and it’s doubtful that the Turkish mills will be willing to raise their prices to buy more expensive scrap from this side of the Atlantic. Cheaper scrap probably is available from western Europe and the Baltic regions.

Also, billet would be availableat a competitive price from either the bigger Turkish mills or the Russiana and Ukrainian steekmakers. Russian billet was available at $400 per tonne F.O.B. Russia's Black Sea ports.  It cost about $90-100 per tonne to convert scrap into billet andan other $40-50 to turn billet into rebar.  Billet is the more economical choice if imported scrap prices rise by above $300 per tonne delivered to a Turkish port.

Shredded Scrap Thermometer: a short-term shredded boom.

With so little shredded scrap in their supply pipelines and the threat of less available busheling and bundles, some mills are scrambling to make sure they will have enough scrap to melt this month. There is little or nothing they can do to increase the flows of industrial steel scrap, so most must rely on the obsolete scrap reservoir to fill any shortfalls.  Normally, that means spending more for shredded scrap and buying from as many remote suppliers to avoid putting too much upward pressure on the local shredded prices.  This could produce some heated, but brief supply issues for a few mills. Other issues include:

•  One group likely to benefit from a short-term shredded buying binge are the exporters and coastal shredders. Shredded is the one obsolete grade that the exporter sells that is deemed to be acceptable by most domestic mills.  Export heavy melt is usually too thick, too thin or too long and could include undesirable nonferrous attachments.

•  One pitfall from buying too much from the docks is the likelyhood that any scrap bought from them may not be shipped as quickly as expected. The exporters don't own many railcars, and must rely on the mills or brokers buying their shredded and provide them with cars. Otherwise, they must turn the railroads to supply the empty gondola cars they need, which may or may not be immediately available.

•  Buying in winter can create a feast-or-famine shipping schedule as was the case in the winter of 2012-13. Shredded scrap bought from the East Coast by some Midwest mills didn't arrive until April or May. That created a supply imbalance and helped to depress local scrap demand and prices in the Midwest as the warmer weather arrived and the scrap output was increasing.

•  Conversely, with only one major snow storm in the Midwest thus far this winter and forecasts of milder temperatures, weather can have little or no effect on shredded scrap supplies.

•  The dollar rise in value versus the Turkish lira and the Euro has made U.S. scrap more expensive for the Turkish steelmakers. But it also makes the U.S. an attractive alternative market for European scrap exporters and eastern Canadian scrap dealers.


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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