WSEM World Steel Exchange Marketing
Mike Marley’s Shredded Power #73
Scrap dealers look for gains, but export is still missing.
November 30, 2016
Mike Marley (484) 751-5600
Peter F. Marcus (201) 503-0902
Scrap dealers are looking to cap the year with a big bang, but they are not talking about fireworks to celebrate the arrival of 2017 or the birth of a new universe. Instead, many are expecting as much as a $30 per gross ton rise in ferrous scrap prices when domestic steel mills begin buying for their December production programs. If prices rise by that amount, it will match the gains seen in several regions earlier this month and erase the September and October price declines.
Several distinct forces are driving price changes this month. First is the pace of price increases and demand for sheet steel. The domestic flat-rolled mills raised their prices by as much as $100 per ton in three separate moves this month. Arcelor Mittal announced a fourth increase this week, up by another $30 per net ton on hot-rolled coil, $41 per ton on cold-rolled and galvanized, but it is uncertain whether other domestic sheet producers will follow and whether this latest increase will stick.
Scrap dealers see these increases as a sign that steel sheet demand is strong and indeed order lead times at some mills have stretched out. It’s four to five weeks for hot-rolled coil and as much as eight weeks for cold-rolled and galvanized sheet products. Hotrolled coil prices are now averaging about $550 per net ton while cold-rolled has climbed to $770 per ton.
Second, the flat-rolled mills are expected to have bigger needs for scrap this month. And the mills in the South and Southeast may have a greater appetite than those in the Midwest, largely because of the South’s chronic shortage of industrial steel scrap and absence of alternate raw materials at cheaper prices. Imported pig iron has topped $330 per tonne delivered to U.S. Gulf Coast ports. Tack on barge freight costs and the milldelivered price rises to $375 per tonne. Busheling, by comparison, was available at $235 per gross ton delivered to mills in the Chicago and Pittsburgh regions earlier this month.
Likewise, there are little or no excess supplies of shredded scrap and bundles available from western Europe at prices competitive with the scrap available in the U.S. Only the lack of adequate domestic supplies is likely to make U.S. flat-rolled producers spend more money to buy scrap there, said one Chicago-based trader. Domestic industrial scrap shortages are likely due to the planned holiday shutdowns at auto stamping plants later this month. The US mills could have hedged against this anticipated shortage if they had bought European scrap earlier in November. Unfortunately, import demand from Turkey and Asia has recently picked up and prices have become unattractive.
Mills are trying to buy early to avoid running out of scrap next week.
Third, several mills and brokers have already been shopping for scrap for December, even ahead of the Thanksgiving Holiday. This reflects their supply concerns going into December. Some dealers did not offer as much scrap to the mills this month. Scrap intake into their yards is still poor because of the price cuts by the mills in the prior two or three months. Several dealers said that they have either finished shipping what they sold or that they expect to finish those shipments before November 30.
Consequently, some buyers are worried that any delays in settling on the prices and committing to orders could mean that scrap will not start flowing to their mills until the middle of next week at the earliest. Several mill buyers have been busy, either on their own or through brokers, trying to buy scrap with price-to-be-determined purchase orders (TBDs). These are designed to help them avoid running out of scrap before the rest of their December’s deliveries start to arrive, as well as limiting the scale of potential price gains.
But the outlook is mixed on how strong overall mill demand will be this month. Sheet mills, and a few of the oil country suppliers that have seen some modest upticks in demand for their products, are expected to be strong buyers. Other mills may be less active because of extended downtime for the holidays, planned maintenance work this month, or simply because they are minimizing purchases to avoid carrying too much inventory on the books at the end of their fiscal year.
Several dealers said they probably won’t offer the mills much more scrap in December then they did earlier this month, in part because a) intake is low; and b) some may be hoping for bigger spikes in scrap demand and prices in January. Shredded scrap supply remains tight, said a trader in the Southeast. The main suppliers – auto wreckers, demolition contractors and smaller scrap yards – are not offering the shredders more feedstock. The same is true elsewhere. A Philadelphia area dealer said he has received calls from several shredders that are looking for more material.
Others said they are not troubled about any year-end pullback in spending by the mills. A Midwest trader said that the mill buyers and brokers who are reluctant to purchase much this month, will need more in January. He also believes some dealers are content to hold some scrap off the market this month because they believe both demand and scrap prices will be stronger in January. Many dealers are in better shape financially than they were at the end of 2015 and may be able to await higher offers, he added.
Also, although there has been only a single mild snowstorm in western New York earlier this month, another storm there or elsewhere in the upper Midwest could spark supply concerns for mill buyers and brokers. Some mills now are operating with low inventories of scrap on hand. Snowfalls, even mild storms, can delay deliveries by both rail and truck for several days.
Will the export market wake from its nap or is it hibernating for the winter?
Last, there are questions whether export demand will bounce back from a brief hiatus. It has been a key driver for the domestic market this month, spurring increases of $20 to $30 per ton. The bellwether 80/20 heavy melt rose to almost $275 per tonne delivered to Turkish ports when the offshore buying binge stopped. A lone cargo was bought from a western European exporter a week ago and the price paid for heavy melt sank to about $261 per tonne. But a second sale a few days later saw the price back up above $270 per tonne.
More distressing for some U.S. East and Gulf Coast yards has been the pullback by Indian traders in the past week. They had been buying containers of shredded scrap at $260 per tonne dropped off at the docks, said an East Coast trader. Those offers have sagged to about $250 per tonne today. There have not been many sales at the lower prices, he added, because most expect the domestic prices to rise in December and the export demand to rebound as well.
Containerized and bulk cargo sales of scrap could surge again in December. Iron and coking coal prices have not retreated, and scrap is still cheaper when compared to semifinished steel billet prices. Ukrainian mills are offering billet at more than $400 per tonne F.O.B. vessels at ports on the Black Sea. Heavy melting scrap at $270 per tonne, or even as high as $300 per tonne, is seen as a bargain when taking into account scrap-to-billet conversion costs of about $90-100 per tonne.
Some U.S. bulk cargo scrap shippers have told dealers that export demand and prices have peaked, but they have not lowered their buying prices. They are still paying their largest supplier as much as $200 per gross ton for export heavy melt, said one Eastern dealer. They still have cargoes to deliver to their overseas customers, but they also may be awaiting the next buying binge by both the Turkish mills and those in Asia.
Some expect Detroit area mills to set the pace for December’s price moves.
Scrap demand and the scale of price increases in Detroit, a key regional market, could again be a harbinger for the overall domestic ferrous market in December. Some traders expect the flat-rolled mills there to have healthy appetites for scrap this month, and they expect them to pay more for what they need. In November, these mills bought early and paid an increase of only $20 per ton for shredded scrap and busheling. Mills in neighboring regions bought later and their prices rose by $30 or more per ton. Thus, several brokers and traders in the Detroit area believe the mills there must pay an additional $10 per ton this month to bring their prices closer in line with others in nearby regions or risk losing more scrap to those mills.
Thus, Detroit area mills may have to pay increases of $40 per ton or more for their scrap this month. That would raise the mill-delivered prices in the Detroit area to about $260 per ton unless the mills again begin paying a premium for busheling or shredded scrap. That could jack up the price tags even higher for some grades.
Even with a modest make-up offer of another $10 per ton, Detroit area mills probably still will pay less than mills in other regions because of their unique logistical advantages. Trucks deliver much of the busheling directly from the area’s auto stamping plants. That means no trans-loading costs at a scrap yard. In other words, the dealers don’t offload it from the roll-off container then reload it onto rail cars. That’s what they must do to ship that scrap to mills in Indiana and Illinois or to industrial scrap-deprived mills in the South and Southeast. The mills in the South now also face added competition from Big River Steel Inc. This new sheet steelmaker is in Osceola, AR, and has begun buying scrap in that region.
Yet, if demand is strong and the available supply is tight, there no assurance that dealers there and in other regions won’t demand matching or higher prices for their scrap in December. There is never any certainty that scrap price moves, either up or down, will be uniform throughout the country.
Shredded Scrap Thermometer: Shredded supply worries.
December means colder temperatures and the threat of snowstorms; and with those seasonal changes come the likelihood that shredded scrap supplies will be reduced. Shredder operators in several regions complain that intake is weak because of the low prices that mills had been paying in prior months and that now many of the key feedstock suppliers are holding back material awaiting higher offers. Other factors that could crimp the shredded supply pipeline in coming months include:
• Higher prices for coking coal and iron ore have prompted foreign steelmakers to boost the portion of scrap used in their BOFs. The goal was to lower costs, but prices of both coke and iron have not retreated as much as anticipated. Thus, while scrap export sales have slowed, there could be another surge in offshore buying. Shredded scrap may be more desirable material than heavy-melt and other metallics since it can be shipped economically from the U.S. East and Gulf Coasts and has the density that integrated mills prefer.
• Even if dealers raise prices to draw out more feedstock, it sometimes takes several weeks before their suppliers will boost their shipments to the shredders. Some may hold back material because they expect prices to rise again in a few weeks. Others may be unwilling to sell much as year-end approaches.
• Winter snowstorms not only interrupt deliveries of scrap to steel mills in the colder regions of the country, they also hamper processing of scrap in the dealers’ yards because work on ferrous scrap is usually carried on outdoors. Cranes and other material handlers require more warm-up time and break down more frequently in colder weather. Some yards usually limit outside work when outside temperatures drop to 10 degrees Fahrenheit or lower.
Even if shredded supplies are short in December and again in January, steel mills can cope with the loss or lack of adequate local supplies. These supply-side “wild cards” include:
• Some mills can buy more scrap from inland shredders, particularly those in regions where some long-products mills may be running at only half their capacity or minimizing their scrap purchases because of tighter year-end spending rules.
• Most mills have no problems raiding their neighbors’ cupboards when supplies are tight. Also, dealers are often willing to accept a higher offer for an “emergency buy” and sell to those in need what already was promised or purchased by another mill. Or, they may part with a few more thousand tons that were not to be sold this month. As one now-retired scrap executive often said: “Scrap will always be available at the right price."
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 20gross 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 email@example.com.