WSEM World Steel Exchange Marketing
Mike Marley’s Shredded Power #91
Mills are trimming their winter scrap inventory.
April 13, 2017
Mike Marley (484) 751-5600
Peter F. Marcus (201) 503-0902
Domestic steelmakers got a double dose of good fortune this month. They lowered prices on high-value obsolete grades like shredded, five-foot plate & structural scrap, and many got all the tonnage they wanted to buy. Normally, when mills cut prices on these grades by as much as $30 per gross ton as they did this month, dealers will offer fewer tons, believing that it will tighten supply and prices will rebound next month.
Lightweight offers were not the case in several regions, however. One Midwest mill buyer said he was offered too much scrap. “I was offered a lot this month,” he said, “more shredded and plate & structural than I could buy.” A broker in the region said some mills are benefitting from the scheduled maintenance outages at other nearby mills and the usual end-of-winter scrap inventory reductions. Some mills typically boost their scrap inventories by as much as 20% at the start of the winter to avoid running out during heavy snowstorms or extremely cold temperatures when both scrap processing and freight shipments are delayed.
Both dealers and brokers cited several other reasons for the scrap supply deluge. First was the seasonal factor. This is spring and obsolete scrap flows into dealers’ yards are normally on the rise, however, mills are still working through their caches of winter scrap. This comes despite telling reports from several dealers that they have seen steady flows throughout the past winter because of warmer than normal temperatures and fewer snowstorms. A Chicago area trader said the spring scrap thaw actually occurred in February and that he doesn’t anticipate a huge flow of obsolete scrap this month.
Others cited the ups and downs of demand from the export market. Dealers are unhappy not only with the erratic pace of the offshore buying, but also with the lower prices offered at the docks versus what they could get from domestic mills. Some U.S. East Coast exporters have raised their buying prices to more than $210 per ton for export heavy melt because of the modest uptick in scrap import prices in Turkey.
U.S. exporters booked new orders for 80/20 heavy melt from the Turkish mills at $280 and $285 per tonne, up about $20 per tonne from their previous sales, but some European exporters have undercut those deals in the past week. The average 80/20 heavy melt price, according to The Steel Index, rose by $7 per tonne last week to $274 per tonne delivered to a Turkish port.
Even in the face of drops of $20 and $30 per ton for shredded scrap and cut grades in the U.S., these overseas prices are below what many dealers can get from domestic steelmakers–both the nearby and remote mills. Some U.S. mills are paying as much as $275 per ton delivered to the mill for the higher quality No. 1 heavy melt and more than $300 per ton for shredded scrap.
Shredded scrap in the overseas market typically is sold at only a $5-per tonne premium over 80/20 heavy melt. Thus, the delivered overseas price is about $279 per tonne. With stevedoring and ocean freight costs of $30 to $35 per tonne, that drops the buying price at the docks to about $244 per ton. That’s hardly competitive with the now-lower domestic mill offers.
Last was the suggestion that the ferrous scrap market and prices have peaked. As a result, said one Eastern dealer, some may be selling more tons now because they fear that prices could tumble in May. “Nobody wants to be stuck with expensive scrap in a falling market,” he said.
Dealer resistance and supply concerns kept shredded prices from tumbling too far.
Despite those excess supply worries and price fears, there was plenty of dealer resistance to the lower offers, particularly for shredded scrap. Some Midwest mills started their bargaining last week by demanding drops of as much as $30 per ton for shredded and the cut grades, but had to backpedal on those offers, especially for shredded.
Local suppliers countered that they were unlikely to see as much shredded from the East Coast this month. Exporters didn’t offer as many tons to the inland mills this month, said a Pittsburgh-based trader. And two of the largest export yards have been open for longer hours last month and again this month to take in more scrap. They have orders to fill, he said, both from Turkish mills and other overseas steelmakers. Also, prices paid for shredded in containers have been inching upward during the past two months. Eastern shredders said they were getting as much as $275 per tonne for containers filled with shredded scrap and dropped off at the docks. Some Gulf Coast shredders said they were offered $280 per tonne.
Domestic shredders also argued that a drop of as much as $30 per ton in shredded prices would force them to reduce feedstock prices by as much. That could reduce intake drastically regardless of the mill buyers’ and brokers belief that the spring thaw would bring more shreddable materials into their yards.
Another Pittsburgh area trader said there are new concerns about the supply of scrap because more mills are reaching out further to buy both obsolete and industrial scrap from remote dealers. This can be a special problem for rail shipments, he said. The further scrap has to travel these days, the more likelihood that it will be delayed along that route either because the cars have to be switched to another railroad’s lines or other freight, like perishable foods, may have a priority. This has created new questions about whether these mills will get enough scrap in time.
Busheling prices fell by $10 per ton, but the spread over obsolete grades widened.
Prices for the industrial grades were off by $10 per ton in most regions despite the steady pace of flat-rolled steel sales. The modest decline only served to further widen the price spread between busheling and shredded scrap. In some regions, the delivered to the mill price for the industrial steel scrap is as high as $80 per ton over shredded. Busheling typically trades at a premium of about $20 per ton over the fragmented scrap because it is cleaner and provides higher percentages of metal recovery. In the past, however, it has been as much as $300 per ton over shredded and two years ago when domestic sheet output was being crushed by cheaper imports, busheling was selling at a discount of $30 per ton to the lower quality shredded scrap.
This month, according to an Ohio-based broker, dealers were willing to give some ground on the busheling and bundles prices, but not as much as some mills had hoped to see. One reason, he said was the notion that the busheling premium was getting too high and encouraging some mills to look elsewhere for alternate supplies. One major EAF-based steelmaker has 10 cargoes of bundles and pig iron coming from overseas suppliers later this month and in May. Another sheet producer reduced its busheling purchases this month, telling dealers that it has too much inventory on the ground and en route to its millin Arkansas.
Taking the price down by $10 per ton was not a steep loss for dealers. Most buy industrial scrap on long term contracts tied to published price indices. If the price drops by $10 per ton, they will pay the auto stampers and other manufacturers less for this scrap, but still maintain the prevailing profit margins on their sales to the mills.
Will May’s scrap prices be sideways and obsolete scrap prices rebound?
Next month could see a new set of dynamics driving both industrial and obsolete scrap prices, according to some traders. Though it’s not yet mid-month and still too early to make many firm predictions, some traders said they believe industrial scrap prices will be unchanged in May and they will be looking for higher offers for their shredded and cut grades. A Chicago area trader said he doesn’t see that the price spread between busheling and shredded can widen much further. At the same time, though obsolete flows are still steady, the intake could drop as a result of this month’s price cuts. “That could be felt in the coming weeks”, he said.
Another Midwest trader said some mills that opted to reduce inventories or were unable to buy as much as they wanted may have to raise their offers next month. Several mills, though they seemingly got all the tonnage they needed this month, are still ready to accept offers of more at the same prices they paid last week. That, he said, could be an indication that they expect steel demand to remain strong or increase.
Lastly, as the summer approaches, some of the flat-rolled mills may try to build inventory of busheling and bundles ahead of the auto industry vacation and model retooling shutdowns. Though the automakers now follow a pattern of rolling shutdowns unlike the industry-wide one or two week closures in past years, they nevertheless reduce their industrial scrap output by about 25% and with the current tight supplies of imported pig iron, there is little or material to use as a substitute of that industrial scrap.
Domestic steel production reversed course last week after declining in the prior two weeks. Raw steel output rose to 1,703,000 net tons while the capability utilization rate was 73.0%. That is up 0.7% from the previous week when production was 1,692,000 net tons and the rate of capability utilization was 71.4%.
Shredded Scrap Thermometer: Price cuts could limit supply.