April 2017

Picking Up the Pieces

The ferrous scrap market is emerging from the devastating 2015-16 industry
downturn thanks to rising steel demand, trade cases and new production facilities.

By Dan Markham, Senior Editor

With two mostly lost years behind them, scrap suppliers in North America are eager for the ongoing return to a much healthier U.S. steel industry. Whether they’re completely ready is another matter.

Steadily declining scrap prices following the February 2015 plunge took the price of steel scrap into the low $100 per ton range, forcing the closings of many collection sites and the idling of scrap yards and shredders across the country. But a resurgent steel market has driven prices upward, and the scrap industry is being taxed as it scrambles to meet the new demand level. “It’s not a faucet. When we take things out of the supply chain, it takes a while to get it back. It takes a long time to get that peddler flow back,” said Greg Dixon, CEO of Louisville, Ky.-based Smart Recycling Management, at last months’ Platts Steel Markets North America Conference in Chicago. “We’re seeing it takes repeated months to get the scrap flow back to where it needs to be, where the mills like it,” agrees Nick Tolomeo, managing editor of Raw Materials Americas for S&P Global Platts.

The scrap market has experienced price increases in four of the last five months, with just a mild decline in the single down month. Prime scrap, the kind generated by service centers and fabricators through industrial operations, has risen even higher than shredded scrap and other lower-grade material.

Some suppliers of No. 1 busheling reportedly are getting close to $400 per ton from the steel mills, whose production levels have risen since the start of the year. The gap between No. 1 busheling and shredded scrap was approximately $70 in March, a historically large spread between the two grades.

The strength in the prime scrap market is a product of the high run-rates at the minimills, which prefer the prime grades as feedstock for their electric arc furnaces. Some alternatives to prime scrap, such as pig iron and direct reduced iron, have suffered supply hiccups on the global market, adding to the demand for prime scrap. The gap between prime and other grades can’t last forever, however, say the experts.

When the margin between prime and other material gets as large as it was in March, the optimizers at North America’s minimills will begin pointing to shredded scrap as the better feedstock, and the premium will start to return to historical norms. “Over time, the grades get back into sync,” said Lee Dezzutti, vice president of business development for AMG Resources, at the Platts meeting.

Big River Steel, the new minimill located on the Mississippi River in Arkansas, has undeniably contributed to the recent surge in the scrap market. Big River’s production ramp-up is clearly affecting the scrap supply and buying patterns in its geography. “Big River has had a tremendous impact in the South-Central region,” says Scott Barrett, vice president of commercial trading for ProTrade Steel, Hudson, Ohio. “It has affected prime prices all the way from the headwaters of Minnesota to the Gulf.”

Unlike most of its minimill peers, Big River is a true independent, with no captive scrap yards of its own. “They’re definitely leading the tightening of supply in the Southeast,” says Tolomeo. “You’re seeing other mills react to them and take more proactive measures in their scrap procurement.”

Big River Steel is one of two mills joining the North American marketplace, with the restarted Acero Junction in Mingo Junction, Ohio, a little further along the developmental curve. But Barrett does not believe the Mingo Junction facility will leave the same mark on its region as Big River in the competition for scrap resources. “Mingo is up against energy sector pipe and tube and some bar mills to the south. It doesn’t have the community of flat-rollers that Big River has to contend with, such as Nucor and SDI. Mingo’s impact will be much less.”

One area of uncertainty is the export market, which has declined by about half since its high-water mark of 22 million tons in 2011. The falloff has been driven by the reduced appetites for scrap in Turkey and China. Turkey remains the primary destination for U.S. scrap, but its demand dipped by about 50 percent to 3.1 million tons in 2016. Demand for scrap in China was on the decline until a buying frenzy at the end of 2016 resulted in year-over-year gains. Some believe the Chinese may begin to accelerate their scrap buys, driven by the desire to shutter costly and dirty blast furnaces and begin more EAF production. A reinvigorated Chinese market would be welcome news for the U.S. scrap industry.

“If the Chinese really come back, I think there’s a chance the scrap price goes beyond $400 per ton,” said Nathan Fruchter, a principal for Idoru Trading, at the Platts conference in Chicago.

The immense size of the Chinese steel industry is what makes its impact so outsized, said Herb Black, CEO of American Iron & Metal Co., Montreal. If the Chinese decided to shift even an extra 1 percent of their steel production to EAF mills, it would have a huge effect on the global scrap marketplace.
The Turks, in contrast, are expected to continue moving in and out of the market at times most opportune for them, and otherwise feed their raw material needs from other sources. Barrett believes Turkey is on a decade-long trajectory toward raw material self-sufficiency.

The hope within the industry is that the loss of markets such as Turkey and China will be offset by other developing nations becoming more significant players. Mexico has grown to become the No. 2 buyer of scrap with 1.4 million tons in 2016, while the fledgling steel industries in Peru, Pakistan, Vietnam, Kuwait, Bangladesh and Greece all experienced double-digit gains last year. “I’m excited when I see these new opportunities,” said Dixon. “These emerging economies are going to have some good growth.”

The pricing plummet in 2015-16 had a significant effect on the North American scrap industry. Many small yards were closed, and the number of shredders declined from more than 300 to as few as 250 today. Operators have become more disciplined in their decision making. “The market changed how we do business. We changed our focus from market share to margin. We didn’t close our yards, but we exited certain grades and certain markets,” said Dezzutti of Pittsburgh-based AMG.

Shredder utilization has also changed. Whereas the mindset from 1995-2015 was on opening megashredders and pushing large volumes through with a focus on the ferrous product, today’s shredders are being used with a greater emphasis on nonferrous materials and reducing fluff, the waste byproduct of shredding that is bound for the landfill.

“The shredders have evolved. We’ve spent millions maximizing our recoveries of all nonferrous, as have a lot of companies,” says Barrett. “The whole thing is refining.”

Even with better practices in place, there remains an air of caution at most scrap yards, Tolomeo says. “Operators want to see that the recovery is real before these idled yards and shuttered shredders open up again. We’re quite a ways from that.”

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