Scrap Weathers an Unusual Quarter
By Dan Markham, Senior Editor
Normally, changes in the price of scrap are good predictors of future steel prices. But what if the scrap market behaves erratically?
Typically, wicked winter weather makes the collection and processing of steel scrap more difficult. Snowy roads slow scrap collectors' trucks, while frigid temperatures wreak havoc on scrap yards’ balers and shredders. Thus the scrap supply usually goes down, causing the scrap price to go up. But not this year. This year the scrap market appears to be thumbing its nose at the law of supply and demand.
Despite the unusually inclement weather throughout much of the United States, the steel scrap price declined by as much as $50 per ton in the first quarter. As of mid-March, the price for Midwest shredded was down to $388 per ton, from a 12-month high of $437, reports The Steel Index. Other pricing providers offer comparable estimates.
"Usually when you have problems with supply and transportation, that drives the prices up," says Michael Marley, an analyst for MarketPrices.com. "It's been a bit of a surprise to everybody."
That includes Kurt Fowler, business development manager for The Steel Index. "It's strange. When you get cold weather, you tend to get a supply constraint that artificially lifts the price. But supply and demand don’t always work with complete accuracy when it comes to the scrap market."
Both believe the scrap price could dip a bit further in April as pent-up demand from the winter heats up activity at the scrap yards and squeezes the supply even further before it has a chance to rebound.
A few factors have worked to keep scrap prices down, Marley says. There remains a fairly healthy supply of industrial scrap in the chain, as automakers and their suppliers have stayed fairly busy. At the same time, the export market has been soft. Exports consume about a quarter of the 70-80 million tons of scrap the U.S. generates each year.
Much of that scrap ends up in Turkey, where its minimill-dominated steel industry has a voracious appetite. Of the 20 million tons exported from the U.S. each year, 5-6 million tons shipped from the East Coast go to Turkey. Demand from other large foreign buyers, such as China, has been down of late, too.
The Turks are not consistent purchasers of U.S. scrap material, but pick their spots on the world market. "Sometimes they'll come in like gangbusters and buy as much as they can. Other times they study whether it makes more sense to buy billet, a semifinished product, versus scrap. They’re fairly opportunistic with their buying patterns and there’s not a lot of predictability," Fowler says.
Turkish steelmakers have definitely slowed their purchases in recent months. At the Platts scrap seminar last month in Chicago, Philip Hoffman, vice president of U.S. scrap trading for Houston-based Medtrade, said the Turkish steel industry cut its scrap imports from all over the world by about 3 million tons in 2013. The Turks have been buying more billets and slabs from the Black Sea region as the price for those iron inputs has become more economical than the conversion costs for scrap.
This may not be a short-term occurrence, Hoffman said. With 100 million tons of global iron ore capacity coming on line in the near future, the billets and slabs may retain a cost advantage. Turkish demand for scrap may be at the start of a long-term decline, which has implications for prices in North America.
The effect is already being felt in the U.S. When Turkey cut back its scrap buys at the start of this year, scrap dealers in the eastern U.S. needed to find a home for their product. They began offering it at reduced rates to the domestic mills. That forced the Midwest dealers, the usual sources of material for U.S. producers, to lower prices to compete.
Despite these issues, Turkey will remain a major consumer of U.S. scrap, Hoffman said. "The Turks can only hold off for so long. They will need material. In the next couple of months, there will be an increased export market," he predicted.
Closer to home, one of the bigger issues facing the domestic scrap industry is shredder overcapacity, says Frank Cozzi, a partner with Cozzi Consulting Group, Burr Ridge, Ill. "There's got to be some kind of consolidation. There have been a few deals here or there, but nothing like we saw in the late 1990s."
"The scrap industry has gotten very efficient in the last 25 years," echoes Gary Fulks, president of Montrose, Colo.-based Recla Metals, which started as a scrap dealer but is also a service center. "It has become a very competitive world."
Greg Dixon, president of Smart Recycling Management, Lexington, Ky., believes better-informed customers add to the competitive environment. "There's a lot more to a shredder being competitive than just throwing out a price because you’re the only one within 100 miles. Our customers now are much more sophisticated than they were 30-40 years ago." Dixon thinks some of the overcapacity will be settled through downsizing of some scrap yards. "They may not close, but they're going to have to change. The big overhead costs are really choking them to death."
For service centers, the ultimate question is how changes in the scrap market will affect the price of steel. When the scrap price first took off a decade ago, mills instituted surcharges to cover their added cost. When the cost of scrap declines, as it did earlier this year, they don’t necessarily take the price back down. In fact, North American steelmakers pushed for price hikes in the first quarter even as the scrap market was declining.
If end-use demand is sufficient, and there's not a lot of pressure from imports, the price hikes might stick, Hoffman says. But steel consumers are very aware that the mills are paying less for scrap. "The end-users are trying to negotiate that surcharge. If the mills are going to use it on the upside, they should use it on the downside, as well."
One question hovering over the scrap industry is whether new production of direct reduced iron will be significant enough to affect the scrap market. Nucor recently opened the first of two planned DRI plants that will each have the capacity to produce 2.5 million tons of the scrap substitute. Austrian company voestalpine is constructing a similar operation with 2.0 million tons of annual capacity in Corpus Christi, Texas. By decade's end, the domestic DRI industry is expected to produce 10-18 million tons per year.
Most experts don’t expect the introduction of affordable DRI as a raw material option to affect the scrap market to a great degree. "The impact on the scrap market will be super limited," said Angelo Manenti, vice president of business development for Pittsburgh-based Tenova, during his presentation at the scrap conference. "The effect will be felt by pig iron. Plants that buy pig iron from Russia or elsewhere will substitute that with DRI, provided they have a nearby source or a way to get it from the market."
"The general availability of DRI is not there yet in terms of free market access. And a lot of what Nucor produces will be consumed internally," adds Fowler at The Steel Index.
Mills are more likely to use DRI as a substitute for prime scrap, which tends to be more expensive than obsolete scrap, but will limit their use of DRI at any cost. They are very picky about what goes into their furnaces, and some will be hesitant to shift to a new mix, said Lynn Lupori, managing consultant for Hatch Ltd., Mississauga, Ontario, at the Platts event. "They are only going to use as much DRI as they need to achieve the chemistry they're looking for, and there's a limit to how much they can use given their current set-ups. Scrap will still be the primary feedstock."