Scrap Still Recovering from Difficult 2015

The early-year price hike for steel scrap was welcome news for the industry, which was among the hardest hit by the commodities collapse of 2015.

By Dan Markham, Senior Editor

The beleaguered scrap market received its first bit of good news in more than a year in early 2016 when the price of the steelmaking material took a couple of bounces off its 2015 floor. “We’re definitely back in a little better balance when it comes to supply-demand,” says Greg Dixon, chief executive officer of Smart Recycling Management, Louisville, Ky. Enthusiasm over the early-year price hikes should be tempered, he cautions. “Two or three months of $10 price hikes is not going to save anyone. I think there’s more shakeout to come.”

While prices of most commodities have suffered in the past year, few industries were hit as hard as the scrap metal market. In the past 12 months, the U.S. Midwest price for shredded scrap has ranged from a high of $282 to a low of $166 per ton, reports The Steel Index. As of mid-March, the price was around $200, about half of historical trend levels.

Scrap yards that held onto material in 2015 in expectation of an inevitable rebound saw the scrap lose even more value as the year went on, said Joseph Ward, director of business development and trading for EMR Group, a European scrap metal company. “They ended up with product on the ground that was $30-60 dollars upside down, and they had to sell it to keep up cash flow,” Ward said during a scrap panel at the Platts Steel Markets North America conference last month in Chicago.

The result was rather calamitous, and the industry is still feeling the aftershocks. Many scrap yards closed in 2015, while shredders were being shut down at other facilities. Shredder capacity has declined 15-20 percent over the last 20 months, said Richard Brady, executive vice president, Ferrous Commercial Group, for OmniSource Corp., Fort Wayne, Ind.

Without major improvements to the market this year, more casualties are likely. Scrap yards of all types, whether mom-and-pop shops or publicly traded companies, remain in a cost-cutting mode, closing yards and shedding employees. Barring an unforeseen surge in demand from the steel mills, a meaningful price hike necessary to return the industry to health is not expected this year.

The pricing freefall in 2015 has made the number of hedging options available in scrap trading more appealing. “Speculation is becoming much less prevalent,” Brady said.

The early-2016 price increase for most steel scrap was somewhat predictable. Industrial scrap has continued to flow into yards, particularly material generated by automakers and their suppliers. But the low price has sidelined many peddlers, as those opportunistic sellers wait on the sidelines for a more substantial return on their time and effort. Couple that with the just-finished winter months, where collection tends to decline due to unfavorable weather, and the supply of obsolete scrap has cratered. “Obsolete scrap flow is strongly correlated with price, and harvesting and collecting is diminished when the price is low. If you bring me a pickup truck filled with material and I only give you $23, what’s the point?” Brady asked during the Platts panel.

A study by the Washington-based Institute of Scrap Recycling Industries concluded that a 10 percent move in the price of scrap results in a 5.9 percent change in the flow of obsolete scrap into yards. “If you’re a car flattener, the chief revenue is in the parts. They can stack the flattened auto bodies and wait for a better price,” Brady said.

It also takes a little time for the flow of obsolete scrap to resume moving into yards. “Once you choke off the peddler traffic, it takes them a long time to come back,” Dixon says. “It’s not a switch you can flip.”

With that source of scrap coming out of the market, the supply of scrap has been tightening, which may account for some of the uptick in the price early in the year. But what’s given the market a real boost is a sudden demand for scrap from Turkey.

Long a favored destination for American ferrous scrap products, Turkey’s appetite for the material has moderated in the last two years. From a high of 6.4 million tons in 2012, Turkey imported just under 4.0 million tons last year, opting instead to increase its use of Chinese billet, a more affordable option given the similar decline in the iron ore price. Turkey’s billet purchases have grown from just 9 percent of their input spend in 2011 to more than 23 percent in 2015. “Turkey is a very shrewd buyer,” Dixon says. “You’ll see them come in and make some big purchases when the market is soft.”

Turkey’s renewed interest in scrap is aided by the rather remarkable economics of global transport. Pete Meyers, vice president of ferrous sales and marketing for Cranford, N.J.-based Metalico, notes that the cost of shipping scrap 5,000 miles from Newark to Istanbul by ocean freighter is the same as it to ship material by rail from Newark to Sayreville, N.J., just 29 miles away.

Unlike Turkey, other foreign purchasers of scrap continue to import recycled metal at much lower levels. Those include China, Taiwan, Canada and South Korea. Only Mexico and India are bringing in material at the same rate as four years ago.

China’s decline in demand for U.S. scrap has been even more significant than Turkey’s, falling from 4.2 million tons in 2011 to just 700,000 tons last year. Experts believe this is a permanent trend, as China’s enormous buildup in steel consumption over the past two decades has created a pool of scrap that can be recycled domestically. “Let’s get over it,” Dixon says. “China is done. They won’t be much of a factor on the steel side of scrap moving forward.” In fact, many believe China may eventually become a net exporter of steel scrap.

While there may never be another China or Turkey—single countries that consume a massive amount of steel scrap from the U.S.—opportunities will continue to exist for scrap exports to places such as India, the Middle East and Africa, experts say.

The U.S. scrap industry faces a few other challenges outside the normal supply-demand dynamic, Brady says. He cited regulatory issues, employment and safety as three areas of concern. On the bureaucracy side, the problem isn’t how onerous the regulations, he says, but how inconsistently they are enforced. With personnel, the industry must do a better job of recruiting and retaining its employee base.

Improving the workplace is perhaps the most critical issue facing the scrap world. The industry is rated the fourth-deadliest in the country, behind only logging, commercial fishing and general aviation. “We’re trying to make the scrap industry a safer place to work,” he said.



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Saturday, October 21, 2017