Shredded scrap steel prices plummet
Steadily declining prices and more than enough inventories at domestic steel mills are dragging prices down as much as $200/gross ton. However, this may be the bottom, with renewed elevated prices this winter.
By Tom Stundza -- Purchasing, 10/16/2008 2:00:00 AM
Steel scrap prices have gone into a steep decline, with prime industrial shredded grades plunging in September by $200/gross ton, or 34%, from the average $595 in July. That's because steelmakers finally acknowledged soft second-half demand for finished steel products and reduced fourth quarter steelmaking schedules or moved up maintenance outages.
Analysts say the current round of steel scrap price weakness actually started in the Middle East a couple of months ago when steel demand plummeted on a seasonal basis—as construction, the major regional source of steel demand, was stopped when daytime temperatures rose too high. Scrap exports from the U.S. dropped sharply and world export prices set by U.S. scrap traders started to fall. About the same time, export demand for billets made from scrap in Russia and Brazil went into a summertime slump, reducing the need for imported scrap from the U.S.
Still, the downstream shock from earlier high-flying 2008 costs in the 70 million ton/year ferrous scrap market may not be over. Steel prices follow the price of scrap and prime industrial ferrous scrap was in excess of $860/gross ton this spring. Now, it's closer to $550/gross ton. However, "it will be interesting to see if the mills drop their prices as fast as they raised their prices when scrap prices soared," says analyst Chuck Bradford at Bradford Research/Soleil Securities in New York.
That's because the year-to-date average price for shredded steel scrap delivered to Midwest steel mills has increased by more than 90% since 2006 as global demand has increased and supply has been diverted to export markets. Steelmaking has expanded by an annual average of 8% worldwide over the past five years—tightening global steel scrap supplies. A weaker dollar boosted exports of North American material. So, with the North American mills still paying 65% more for shredded scrap this year, buyers have been paying more for steel mill products this year.
Dan Dienst, CEO of scrap processor and exporter Sims Metal Management in New York, tells a recent Wall Street conference call that some scrap price softness was probable because the current U.S. steel market is "in a summer lull." Then, in a report to shareholders, he says that "while the market is still liquid, recent ferrous business that has been transacted has been at significantly lower prices than at the peak." He adds that "despite continuing strong steel production, the global steel industry has significantly cut back scrap raw material procurement as a result of over-stocking. More recently, steel prices...have also declined. This, coupled with the seasonal impact of the Northern Hemisphere summer, led to a short-term shift in the supply/demand equation for ferrous scrap."
However, in both presentations, he says world steelmakers still will need an additional 40–50 million gross tons of ferrous scrap to meet demand this year, thus suggesting a renewed higher-price outlook for this autumn and winter. He tells shareholders that "normal trading conditions are expected to return once steel industry destocking of scrap has completed, especially with the Northern Hemisphere winter looming."
Price slide may be short-lived
Scrap market insiders say there are some higher-price indicators for sales this winter, such as anticipated higher scrap purchases by blast-furnace-based integrated mills after the maintenance turnarounds are completed and a return to the international market of China—which recently booked a number of ferrous scrap cargoes for delivery in the final quarter. "Chinese demand will again help drive the global market prices for scrap higher," says a report by GFMS Metals Consulting in London.
While he tells clients that steel scrap prices "have dropped sharply due to reduced demand from the mills and reduced exports," analyst Bradford, also says to "expect a seasonal recovery in the scrap price in October or November." Analyst Sal Tharani at investment house Goldman Sachs Group in New York estimates that "the current softness in steel and scrap prices is strictly for the near term, however, because longer-term fundamentals of the global steel industry remain healthy, driven by the growth in emerging markets."
One important part of the Goldman Sachs' steel industry outlook is that "scrap prices in the domestic market have fallen sharply and we are now seeing softness in steel prices in the U.S. Global prices for scrap and steel have fallen even more sharply." Dienst of Sims says global ferrous raw material prices have slipped from a recent peak in the April–June quarter as mills cut back on buying due to overstocking.
In his statement to clients, Tharani believes that scrap prices may have bottomed, and expects prices to stabilize "and eventually firm up." He also suggests that "traditional global importers of scrap should resume their purchases in the coming weeks as their current inventories deplete." Analyst Mark Parr at KeyBanc Capital Markets in Cleveland disagrees. He says that scrap prices appear poised for a more dramatic pullback in September as East Coast export markets may remain weak until the October buy. He notes that market inputs on the September scrap buy indicate further reductions of as much as $200 for both prime and obsolete grades.
According to Neil Buxton, GFMS managing director, "while demand in Europe, North America and Japan may continue to be slow, the return to large-scale low-cost scrap buying by Turkish mills is probable as they seek to maximize output—given the large volumes of steel they sold forward at high prices." He believes the Turkish purchasing, along with the Chinese scrap-buying surge, "eventually will push up scrap pricing again in most markets."
However, a contrary view, held by analyst Peter Marcus at World Steel Dynamics in Parsippany, N.Y., is that prices on the global market "will plummet" in the second half of the year as supply overtakes demand. That view comes from such "downside risks" as a further slowdown in automotive assembly, residential and non-residential construction activities, and an inability of steel middlemen to pass along their higher steel sourcing costs.
Is consolidation an issue?
Marcus is in the camp of market analysts who believe the softening in steel prices could accelerate in the fourth quarter if steel users pull their orders as they wait for steel prices to follow the scrap prices downward. This will have to be spearheaded by the mini-mill industry, though, which uses electric arc furnaces to melt scrap steel. That's because the steel companies using traditional blast furnace technology only use purchased scrap for between 10% and 15% of their needed iron units.
And analysts aren't sure where scrap supply is going since, at present, there's more than enough in the U.S. marketplace. Industry insiders suggest that the buyout of major scrap companies—David J. Joseph by Nucor and OmniSource by Steel Dynamics—as well as some smaller scrap operations were done to guarantee supply at a time when steelmakers expected the cost-push on steel prices to continue rising. At the time of the Nucor purchase in February, one analyst wrote that "with steel prices soaring, Nucor seems to think it makes more sense to own the broker than to pay its fees."
David J. Joseph of Cincinnati, Ohio, is one of the largest U.S. scrap brokerages and the purchase gave Nucor access to the broker's global sourcing of raw materials as well as its rail services and logistics capabilities. The firm got bigger this spring when it acquired Kansas City-based Galamba Metals Group (now Advantage Metals Recycling) and Metal Recycling Services in Monroe, N.C.
Steel Dynamics acquired OmniSource of Fort Wayne, Ind. in late 2007 and then in June purchased metals recycling business Recycle South in Spartanburg, S.C., and Michigan-based metals recycler Sturgis Iron & Metal. During the second quarter, the company's scrap operations supplied 654,000 tons of ferrous scrap, or 44%, of the tonnage purchased by its steel operations.
However, while the recent consolidation of scrap suppliers by major mini-mill companies may guarantee raw-material supply when steel demand is soaring, it can become a cost albatross when demand weakens. Lower prices for scrap "all sounds fantastic for the cost structure of a mini-mill, where scrap is by far their largest cost," notes analyst Bradford. "Yet, steel prices correlate highly with the price of scrap and mini-mills always make less money when scrap prices are low."
Four years ago, one of the major steelmakers put into place a system of steel pricing surcharges based upon scrap prices with the steel price calculated near the middle of each month. For example, the price of hot-rolled sheet in coils this year has been based by one mini-mill on the price of #1 busheling scrap in Chicago—which also fell by more than $300 late this summer. Although market economists doubt that the near-future hot-rolled sheet price will drop by anything even close to that much, "customers may still wait to see what happens, thus contributing to the market weakness," says Bradford.
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