WSEM World Steel Exchange Marketing Mike Marley s Shredded Power #84 Dealers expect ferrous scrap prices to soar in March. All but the fluff Commentary: Scrap dealers are expecting the ferrous market to come in roaring like a lion next month, with prices rising by as much as $60 per gross ton. Much of these expectations are built upon stronger demand and reduced supplies of busheling and bundles, a rebound in offshore demand and scrap prices in Turkey and Asia, and a steady rise in domestic steel demand in the U.S. Timing also may be playing a role. Scrap buyers from several steel mills, their brokers and several hundred dealers got together for one of the industry s annual must attend events last week the annual ISRI Mid-America Chapter consumers night dinner in St. Louis, MO. Despite ISRI officials discouraging talk about scrap price trends, it s probably safe to assume that a few talked shop, while some complained or bragged about their golf scores, and others discussed improvements in shearing technology. Put 900 scrap dealers in a room and what do you think is going to happen? asked a veteran Midwest scrap broker. He and a few other brokers said they warned some dealers to avoid getting too enthusiastic about their price expectations. The market is stronger and probably could support an increase of $30 per ton in March, he said, but there is nothing to justify demands for steeper price increases. That will only encourage steel mills to pull back from the market, he said. Indeed, said another Midwest trader, several domestic mills have continued to shop for additional scrap in the past two weeks to avoid being hammered with hefty price hikes in March. Some dealers believe these mills failed to obtain enough scrap earlier in February, but he predicted that many are buying ahead for next month. Some mills and their brokers have paid an additional $10 or $15 per ton for that scrap, he said, and feel certain that may be a bargain when March arrives. Some sheet mills vacuumed up all the industrial scrap they could find. One or two flat-rolled steelmakers underestimated the strength of demand in the ferrous scrap market this month, according to several industry sources. Their buyers were certain that prices in the Midwest would drop by at least $10 per ton as they had in Detroit, and subsequently delayed their buying decisions until the second week of February. By that February 22, 2017 Mike Marley (484) 751-5600 Peter F. Marcus (201) 503-0902
time, a Chicago area trader said, a rival mill had swooped down and bought up much of the available busheling and bundles throughout the region. Buyers and brokers for several Chicago area mills thought that they could match the $10 and $25 per ton drops that their counterparts in Detroit had obtained, said another Midwest trader, but they waited too long to make their decisions. By that time, he added, most dealers were aware that other EAF-based flat-rolled mills were paying sideways and in some regions higher F.O.B. prices for bundles and busheling. Dealers were selling much of what they had to those mills and had little excess scrap left when the Johnnycome-lately mills were ready to buy. Several other factors affected demand for prime industrial scrap in the Midwest and South. First, there is the steady pace of sheet steel demand. Most of the flat-rolled mills, both the EAFs and the BOF-based mills, are running near to capacity these days. U.S. Steel had already restarted the rolling mills at its idled Granite City, IL Works. Now, it s announced that it will restart the hot strip mill there as well. Granite City s BOF shop and coke ovens remain closed, but restarting the strip mill will allow the big steelmaker to use slabs from its other plants instead of buying hot-rolled coil from other steelmakers. Some mills, sure that prices would drop sharply this month, cancelled all their unshipped orders, but a few were selective and did not cancel undelivered shipments of busheling and bundles. Cancelling those purchases would have allowed the dealers to ship scrap to other mills who are now paying higher prices for that scrap. In other instances, said a northern Ohio trader, dealers had sold more than they had in inventory and owed several thousands of tons to some mills. Also, he added, some mills and brokers were worried that the cancellations would drastically shrink the volume of scrap in their supply pipelines. Some dealers were still shipping those old orders during the second week and third week of February to the mills that did not cancel orders, he said. Second, sheet mills are not the only domestic steelmakers running better these days. With the rise in oil prices, demand from the oil and gas drillers has rebounded. Overall, the American Iron and Steel Institute said domestic raw steel production rose to 1,766,000 net tons last week, up 1.6 percent from the 1,706,000 tons produced the previous week and its second increase in as many weeks. The industry s capability utilization rate inched up to 74.6% versus 73.4% the week earlier. Further signs that the flat-rolled mills are running well came this week when Nucor Corp. and NLMK announced increases of $30 per net ton for their sheet products. Other mills are expected to follow with matching increases later this week. If they stick, that would raise the hot-rolled coil price to about $650 per ton and the average for cold-rolled sheet to $850. One trader in the South said these new $30-per-ton steel price increases match what some brokers and mills said they expected to pay for scrap next month and not the $50, $60 or 2
higher prices that dealers are hoping to see. There were, however, unconfirmed reports that one flat-rolled mill had paid as much as $375 per ton for industrial scrap by barge from Chicago to a downriver mill. That could indicate an effort to build inventory ahead of the March buy week. Third, Big River Steel in Osceola, AK, the newest member of the flat-rolled steel fraternity, has joined the competition for industrial scrap. That has made the battle for remote scrap more competitive. A Midwest trader said the other EAF-based flat-rolled mills must face a new reality, namely that Big River Steel will be taking away some of the industrial scrap that they have been consuming for the past few years. But other traders said that s already the case. Some mills in the South paid $340 per ton F.O.B. a barge earlier this month to bring busheling and bundles down the Mississippi River from the Midwest. When demand for industrial scrap rises, there is no way to prod stampers and other metals manufacturers to generate more scrap to fill that demand. That scrap output is fixed by the volume of products they are producing and not the scrap price. Steel mills instead must outbid each other for the fixed supplies of this scrap, reach out to distant scrap yards and incur higher freight costs to bring it to their mills, or use alternative materials like pig iron or direct reduced iron (DRI). Unfortunately, even those alternatives were not working as well as expected this month. More demand for busheling could not have come at a worse time for Nucor. It announced a five-week shutdown at its Convent, LA, DRI facility to correct operational problems. Much of the DRI from that plant has been an alternative to busheling at Nucor s flat-rolled mills in the South. It probably will divert some DRI from its ironmaking plant in Trinidad, as well as becoming a more active buyer of imported scrap and pig iron. Higher offshore demand could bolster domestic prices of heavy melt and shredded. Others argue that obsolete prices also will bounce back to January levels, erasing this month s $25 to $30 per ton drops in prices of No. 1 heavy melt and shredded scrap. Much of this is based on the rebound in the export prices. Turkish steelmakers have been buying steadily from scrap suppliers in Europe and the Baltic Sea region, but only booked one deal with a U.S. exporter last week. Still, the price paid to that U.S. supplier of 80/20 heavy melt rose rose $283 per tonne delivered to a Turkish port, up about $35 per tonne from the previous sale two weeks ago. Demand and higher prices for Turkish rebar account for the rebound. Turkish rebar is at US $425 per tonne. Even with the latest spike in scrap prices, imported scrap may be cheaper than imported billet. One U.S. scrap trader said Chinese steelmakers are asking $400 per tonne for billet. Converting billet into rebar costs about between $40 and $50 per tonne and consequently would eliminate any profit the Turkish mills hope to obtain for their steel products. 3
Scrap prices and demand have been rising in Asia as well. Two weeks ago, U.S. West Coast exporters sold four bulk cargoes to steel mills in China. The benchmark 80/20 heavy melt price was $270 per tonne delivered to a Chinese port. An all shredded cargo was sold to a Thai steelmaker at $280 per tonne delivered. Prices for 80/20 heavy melt in containers also have risen to more than $250 per tonne delivered to steel mills in Taiwan, said one West Coast trader. That is up about $10 per tonne from previous sales. Shredded Scrap Thermometer: A mid-winter deluge? Shredded scrap prices endured a beat down this month dropping by an average of $30 per ton throughout the country, but by as much as $45 per ton at one U.S. East Coast mill. Some blamed the decline on the weakness of export demand, particularly from Turkey. U.S. exporters and coastal shredders who sell some of their output to the docks were instead selling more shredded to the domestic mills because they netted a higher price at their yards than they could get by going overseas. Now, for various reasons many are looking for shredded prices to bounce back to January levels. These include: Competition for the limited supplies of industrial steel scrap like busheling and bundles became more intense in February. The modest $10 per ton decline seen in a few regions during the first week of the month were not repeated in week two. Instead, some mills were outbidding each other for scrap from distant suppliers, paying in some instances as much as $350 per ton or higher for that material. With the price spreads between busheling and shredded widening to as much as $50 per ton, some mills may choose to revamp the melt mix and use more shredded. And not because shredded is much cheaper. They may not be able to get much busheling and bundles if the EAF-based flat-rolled mills are battling each other for every ton. Despite the mild weather thus far this winter, seasonal factors are still a threat, especially in the upper Midwest and New England areas. A one-foot snowfall not only slows down shipments to the mills by rail and by truck, it also impacts the processing operations in most scrap yards and the incoming deliveries from their feedstock suppliers. Though just past the mid-winter mark, the scrap dealers may not see the same rebound in shredded prices as they are likely to see for busheling and bundles. The two wild cards in the deck include: Higher prices as well as the mild weather will continue to draw out more feedstock for shredders. That might preclude the usual spring supply bounce in April and the accompanying steep price drop, but will provide adequate supplies for the mills in most regions of the country in March. 4
Despite an uptick in offshore scrap prices, particularly in Turkey, European scrap exporters have been underselling their North American rivals and getting most of those orders. Without overseas deals, the exporters and coastal shredders could again offer more of their output to the domestic steel mills. The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures mid-year 2017. The contract will trade in 20-gross ton units with the prices settled on the 11 th day of each month against the TSI Midwest US Shredded Scrap Index published by Platts. For additional information about shredded futures trading, contact John Conheeney at WSEM. His phone number is 201-503-0922 and his email is jconheeney@wsemgroup.com. Note: Each issue, Mike Marley gives his opinion on the one-month steel scrap price outlook. He explains the key reasons for his view and highlights the wild cards that might cause him to be wrong. This report includes forward-looking statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, international currency movements, technological developments, governmental actions and/or other factors. The information contained in this report is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any action is neither authorized nor warranted. WSD does not solicit, and avoids receiving, non-public material information from its clients and contacts in the course of its business. The information that we publish in our reports and communicate to our clients is not based on material non-public information. The officers, directors, employees or stockholders of World Steel Dynamics Inc. do not directly or indirectly hold securities of, or that are related to, one or more of the companies that are referred to herein. World Steel Dynamics Inc. may act as a consultant to one or more of the companies mentioned in this report. Copyright 2017 by World Steel Dynamics Inc. all rights reserved 5
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