Changes Afoot in Ferrous Scrap
–By Tim Triplett, Editor-in-Chief
Service centers and other steel buyers have long tracked changes in the price of ferrous scrap as a predictor of coming steel prices. Recent changes in the market may make second-half pricing a bit less predictable.
Ferrous scrap prices generally declined for much of the first half until experiencing a slight upturn beginning in late June. The Steel Index reported the Midwest price for shredded scrap at $384 per long ton in mid-July, up 4.3 percent over the prior month. The scrap price dipped from a high of $412 in March to $365 in June, before rebounding in July.
Joe Pickard, chief economist and director of commodities for the Institute of Scrap Recycling Industries in Washington, says the first half of 2013 was challenging for the scrap industry in general, and the metals sector in particular.
“We’ve seen some volatile pricing on the ferrous side as prices came under pressure, in part because domestic steel production this year is off from where it was last year,” he says. North American steel production was down 5.8 percent through the first half, compared to the same period in 2012.
Adding to the downward pressure on scrap pricing, and thus steel pricing, is a slowdown in scrap orders from overseas. Census Bureau data through May shows a 10 percent decline in ferrous scrap exports, or nearly 8 million metric tons, reflecting softer demand in Turkey, Taiwan, Korea and China.
“When you combine uneven manufacturing growth and steel demand domestically with slowing demand overseas, it is going to present challenges for the scrap industry, which is what we saw in the first half,” Pickard says.
Underlying trends in the U.S. economy offer hope for the second half, however. U.S. GDP in the second quarter grew by 1.7 percent, well ahead of consensus expectations. The economy added 195,000 jobs in June. June housing starts came in at a seasonally adjusted annual rate of 836,000, down a disappointing 9.9 percent from May, but up 10.4 percent from June a year ago. “There are positives going forward and, all things being equal, that bodes well for scrap demand,” Pickard says.
Al Cozzi, a partner in Cozzi O’Brien Recycling in Chicago and Glendale Iron and Metal near Phoenix, concurs that scrap prices edged up a bit in July, coinciding with the latest round of mill price hikes. Much of the most recent increase can be attributed to blast furnace outages that reduced supply, however, he says. Looking forward, Cozzi is uninspired by market conditions. “I just don’t see much going on. The industrial accounts we service are flat. I think you will see scrap prices hover around the same level. I don’t see a lot of action in the second half.”
Another wildcard that may influence pricing in the second half is a big decline in scrap exports. “We saw a big drop-off in exports of scrap to China of about 2 million tons in 2012. Year to date 2013, exports are down another 8 percent,” Pickard says.
Even though China continues to produce more steel, it actually has been importing less ferrous scrap from the U.S. That’s a trend that is likely to continue as the Chinese consumer class grows and the country generates more scrap domestically. “In terms of the global market, the big issue is China’s role. It is hard to ignore them when they are expected to produce 740 million tons of steel this year,” Pickard says.
An even wilder card arose in June when Nucor announced it would keep its long product pricing flat “regardless of any change in the raw material surcharge.” Others mills followed suit, raising speculation that the industry may just roll the cost of scrap into the steel price. Mills reportedly see this “decoupling” of the surcharge as a way to alleviate some of the month-to-month steel price volatility. But for service centers and other buyers, that could make scrap prices a less reliable bellwether.
"Some mills are now trying to back away from tying their prices to what’s happening with scrap prices," Cozzi says. "So the scrap price may not be the leading indicator is has been over the last couple of years."
["When you combine uneven manufacturing growth and steel demand domestically with slowing demand overseas, it is going to present challenges for the scrap industry, which is what we saw in the first half." Joe Pickard, ISRI]