Surging ferrous scrap prices support rise in rod, bar tags
Tom Stundza, Executive Editor -- Purchasing, 1/15/2004 2:00:00 AM
Abnormally high scrap steel prices are pushing prices up on such key mini-mill products as wire rod, concrete reinforcing bar (rebar), hot-rolled merchant bar and light structural shapes. So, even though buyers aren't buying many so-called long products these days, what they are purchasing is becoming more costly.
Significant scrap price increases have been caused by reduced wintertime supply, increased demand in the U.S. from capacity restarts, chaotic purchasing by steelmakers, and a surge in exports, driven by a weaker dollar and rising steel production in China and other emerging market economies.
The 2003 price average for a market basket of steel rod and bar products is 3% higher than the year earlier and the highest in five years. Now, the electric-arc furnace (EAF) steelmakers have joined their blast furnace-based brethren in pushing salestags higher in first quarter 2004. Some are even proposing scrap surcharges to offset higher iron-unit and electricity costs. Integrated mills also have seen costs rise for ore, coke, alloying minerals, metals and natural gas.
"Signs of growing demand and an improving economy have been giving electric-furnace steelmakers greater power to pass scrap cost increases on to customers as mill-product prices increase," says independent steel analyst Michelle Applebaum in Highland Park, Ill.
"The dramatic rise in the price of steel scrap over the past few months, which accounts for roughly 50-60% of mini-mills' costs, is causing significant margin pressure for the steelmakers," says analyst Michael F. Gambardella at J.P. Morgan Securities in New York. "While many U.S. mills have announced price increases for long and flat rolled products, scrap price escalation has exceeded recent price moves."
Supply was slightly in surplus during the early months of 2003, but restrained production has restored balance. Yet, market prices have stayed well below previous peaks. Some inflation is bound to occur even though buyers probably won't bite on the entire range of price hikes for long products, ($15/ton for wire rod and $20 for hot-rolled bar and rebar, for example).
Gambardella isn't the only market analyst worrying about "margin deterioration" among the mills, a situation where the surge in raw materials costs isn't covered by equal or higher rises in steel selling prices. John Anton, economist at Global Insight's Washington office agrees, noting that "since the price increases are entirely cost driven, mills will have to restrain production for the price increases to succeed in full and for the long term."
Purchasing has been muted for months
Steel product demand certainly hasn't been a price driver at either end of the scrap-to-steel chain: Wire rod purchasing is 34% off the last peak; merchant bar is 20% lower, and rebar is depressed by 12%. And it hasn't been because of reduced quantities available. While supply last year was 17% below the last peak, there still was 7.7 million tons more available to buyers than was consumed by metalworking firms. Even steel plate, which the mini-mills sell also, is 42% below the peak tonnage (6.4 million tons consumed in 2003 versus 10.7 million tons in 1988).
"Much of the recent surge in demand for scrap has been precautionary with mills looking to build inventory before the onset of winter weather," says Anton. "Fear of winter weather and shortages due to exports have caused near-panic buying, with mills trying to beat the next round of price increases, driving market prices beyond a sustainable level."
Gambardella has another view: "Scrap supply is relatively tight currently due to an exodus of domestic scrap in 2003 as well as increased demand from capacity restarts (Trico, now Nucor-Decatur in Alabama, and the former LTV Steel furnaces in Cleveland, now International Steel Group), organic capacity growth (such as the Steel Dynamics' beam mill in Whitley County, Ind.) and higher scrap-charge usage among domestic integrated producers."
Anton suggests the price of No. 1 heavy melt, which jumped almost 20% by year end from summertime pricing, and such other furnace-feed staples as shredded scrap, will drop back from the spike, but still remain high in early 2004.
Scrap market insiders aren't so sure. They point out that large volumes of U.S. iron and steel scrap metal are being sold overseas, primarily to Asia, and that China continues to consume as many scrap substitutes as it can get. The scrap market insiders add that scrap alternatives are in tight supply because, while pig iron and direct-reduced iron (DRI) pellets are available in South America, transport to North America can't be arranged. The ore carriers are steaming to China and East Asia.
Gambardella also expects that scrap demand will keep prices high well into 2004. Reasons: "Expectations of steel production levels in China in 2004 (up 10%) as well as expected increases in domestic production (current capacity utilization levels remain relatively low at 82%). Also, scrap supply remains relatively low owing to weak manufacturing activity since the second half of 2000. While recent economic data indicate increased manufacturing activity, which should boost scrap availability in the U.S., the increase won't have a material impact on the scrap market."
No demand explosion
Anton explains that the fundamentals of scrap demand are driven by steel production and scrap exports and re-strained by the availability of such substitutes as pig iron, DRI and HBI (hot briquetted iron). "The output of electric-arc furnace steel mills is particularly important for scrap consumption," Anton adds, "since it grew strongly in 2002, stabilized in 2003, and will grow again in 2004 and 2005."
But, export demand for scrap also is strong. Besides China and other Asian nations, who are increasing production based on U.S. scrap, Turkey also continues to import scrap from the East Coast. "This source of demand is permanent, and will continue to grow, unless Asia suffers an economic downturn, which we do not expect," says Anton. And, it's now uncertain whether the use of substitutes would be cost-effective for U.S. mini-mills: No. 1 heavy melt scrap skyrocketed to $145/gross ton in the Midwest in December, but substitutes cost $125-130 to produce at that time—and that did not include freight charges.
Hot-rolled merchant bar demand is driven by construction, automotive activity, and shipments of machinery, fasteners, and forgings. Almost all shipments of cold-finished bars feed into the automotive, machinery, and fasteners industries. Each of these sectors has been pretty weak. Wire rod is drawn into wire, wire rope and related products for the construction industry, which hasn't really been accelerating demand for long products, rebar, structurals and plate.
While demand for steel products from mini-mills is no longer declining, the mavens suggest improvement must wait until well into 2004. Use has suffered in recent years as the manufacturing and construction sectors have fallen into recession. Key industrial end-markets are stabilizing, but may not show significant strength until 2005.
Use of steel rod, bar, light angle and shape products was 16.1 million net tons in 2003, the fifth consecutive year of decline and 28% off the last peak of 22.5 million in 1998. Steel rod and bar demand is expected to improve 4% in 2004 to 16.8 million tons, project market analysts, but they also say purchasing growth will require several years to regain old levels.
Mavens are optimistic for a 2004 recovery in such significant steel-consuming sectors as nondefense durable goods. They also see machinery and equipment production rising strongly even though the forecast for motor vehicle production shows only a mild improvement. They see no great resurgence in construction, which consumes about 30% of all steel supplied to the U.S. market.
Nonresidential construction uses a lot of traditional mini-mill steel rebar, structural and plate products. Investments in buildings other than housing peaked in 2000, then declined 25% through the end of 2002, and rose barely 3% in 2003. Numerous economic outlooks forecast a year of 10% growth in 2004 but that won't trigger a renaissance of activity by contractors. Businesses are putting off hiring and investing, so they do not need space for workers or machinery. Also, state and local budget woes have gutted highway and infrastructure construction projects.
The only support for construction has been residential, but that consumes far less steel than nonresidential. Also, strength in this sector is ebbing since single- and multi-family housing starts are passing peak and probably will slip through 2005.
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