WSEM World Steel Exchange Marketing

WSEM World Steel Exchange Marketing Mike Marley s Shredded Power #105 EAF steelmakers and scrap dealers are feeling the heat. All but the fluff Commentary: Both electric arc furnace steelmakers and scrap dealers are looking for a cure for the summertime blues these days. The higher than normal temperatures and humidity in several regions are not only taking a toll on their workers, they are also affecting steel production schedules and scrap flows. Several EAF mills in the East and Midwest had been forced to pull the plug on their furnaces during daylight hours on five or six days this month. Most power outages run for about eight hours, usually from 11 a.m. or noon to 7 or 8 p.m. Electric utilities require the shutdowns to ensure they will have enough power to meet the demand from stores and homes that are running air conditioners because of the 90-degree-plus temperatures. Other power companies impose steep surcharges on their largest users like the EAF mills to discourage electricity consumption during daylight hours. Because of the outages, the buyer at one EAF-based rebar maker said he has been forced to hold up deliveries of scrap from many of his suppliers. His mill has a limited storage space for scrap and can t park loaded gondola cars on the mill s rail siding because it is used to ship finished steel products to customers. Another mill buyer said the blackouts can occur for two or three days in a row or a single day and wreak havoc on the melt shop s production schedule. Smaller EAF mills anticipate these shutdowns at this time of the year and typically schedule a one- or two-week maintenance outage to be done during these times. A Chicago-based broker said he was aware of at least six domestic mills that had such outages this month. It may help to plan these in July, he added, but it doesn t save them from facing additional downtime later this month and in August if the heat waves resume. Steelmakers aren t the only victims. Scrap dealers, particularly those running shredders, must curb their electricity usage on the hottest and most humid days. Unlike the mills that can pick up some of the lost time at night, shredders in cities and towns can t run their machinery through the night and risk disturbing their residential neighbors. Also, torch cutting of thicker plate and structural scrap that can t be processed by shears is another problem. Workers that handle these tasks wear protective gear and welding helmets to protect them from the sparks and heat from oxy-acetylene torches. Doing that work when outdoor temperatures are in the mid-90s is difficult, said a Pittsburgh area July 20, 2017 Mike Marley (484) 751-5600 Peter F. Marcus (201) 503-0902

dealer, and these workers risk suffering a heat stroke. Consequently, many yards shift their operating hours. They will bring these workers in at 4 a.m. and their workday will be over by noon. Scrap peddlers are taking a heat respite or finding full-time jobs. Scrap supplies were reduced this month by the scheduled summer vacation and retooling outages at several automotive plants, but several dealers said they are also seeing a reduction in the flows of obsolete scrap brought to their yards by scrap peddlers. Many of the members of this part of the scrap collection chain are either unemployed or retired and do this work on a part-time basis. They usually drive half-ton pickup trucks and make the rounds of residential neighborhoods and businesses on trash collection days to scavenge metallic items from the trash. Several dealers said they are not seeing the same volume of material coming into their yards as they had been seeing earlier this summer. Some attribute that decline to a desire by the peddlers to spend more time in a cooler atmosphere beside an air conditioner or window fan. But others said they have been seeing a steady decline in the segment of the scrap trade for much of this year and attribute it to lower overall unemployment. Some peddlers, in other words, now have full-time jobs and less time to spend diving into dumpsters. The availability of railcars and trucks remains an on-going but less severe problem. A Detroit-based trader said most of his shipments are now getting to the mills on a timelier basis. Bundles and busheling supplies are still tight, he said, but that s the result of lower production scrap output from the auto plants. Many of EAF-based sheet mills had already anticipated this slowdown, he said, and built up enough inventory at their mills in the past months. Deliveries of heavy melt and shredded scrap have also improved, he said, but attributed that to separate factors. First, he said, since several smaller mills have maintenance outages this month, they reduced their scrap purchases at the start of the month. Second, he said, some mills were still owed a substantial amount of the scrap that they had bought in June. This occurred largely because of the shortages of railcars and trucks and they also cut back their buys this month. Prices of busheling and bundles were the only grades to register gains in most regions this month. They rose by $10 per gross ton while the obsolete grades were unchanged or down by $5 or $10 per ton except in the U.S. Eastern and Southeast region. There, some domestic mills hiked obsolete scrap prices, including what they paid for shredded scrap, by about $10 per ton. Higher prices paid by Turkish steelmakers earlier this month drove those increases. With many obsolete scrap price unchanged and only shredded scrap dipping by $10 in a few regions, most of the mills did not cancel late shipments. Some buyers and brokers were content to let the late arriving deliveries fill their scrap needs during the holiday 2

week. Others were worried that they would not be able to repurchase the same tonnage this month if other mills needed more scrap and paid higher prices for it. Or, said a Pittsburgh area trader, the East Coast exporters, who have seen a modest rise in demand and prices in Turkey this month, could become more competitive and reach further inland for more heavy melt and shredded scrap. One Midwest trader said the mills won t have much excess supply carrying over into August. Dealers have caught up with their unshipped orders because of the cutback in industrial scrap output by the automakers this month. The automakers shut down many of their assembly and stamping plants for two weeks or longer this month to bring inventories of unsold cars in line with lower sales. In anticipation of those shutdowns, several EAF-based flat-rolled mills began building extra inventories of busheling and bundles ahead of the scheduled outages, in some cases as early as May. Others bought foreign scrap including factory bundles from some Japanese automakers and bundles and busheling from Canadian scrap dealers. Two Canadian steel mills reduced their intake of industrial scrap this month one because of a scheduled maintenance outage; the other decided to substitute cheaper shredded scrap for busheling. Despite the utility-imposed blackouts at some EAF mills, the American Iron and Steel Institute said domestic raw steel production rose to 1,763,000 net tons last week while the industry s capability utilization rate climbed to 75.6%. That s up 1.7% from the previous week when steel output totaled 1,733,000 net tons and the operating rate was 74.3%. Even if less scrap is available next month, the big unknown from both steelmakers and their raw materials suppliers is what the U.S. Commerce Department will recommend on its Section 232 investigation. President Donald Trump and Commerce Secretary Wilbur Ross have threatened to impose both tariffs and quotas on imported steel products because they could pose a threat to national security. The Commerce report was expected in late June. It has been delayed, but could be issued this week. Trade experts and several economists have argued that stringent restrictions on steel imports could result in trade wars with some of the nation s major trading partners and retaliatory measure against U.S. exports Turkish mills are resisting exporters demands for higher prices Buying prices at the docks have risen this month. Dealers along the coast said they are now getting offers as high as $245 per ton for export heavy melt. That s up about $15 per ton from the levels seen at the end of June. There haven t been any new deals since the buying flurry that spanned the July 4 th holiday and saw U.S. exporters book orders for five bulk cargoes or about 175,000 tonnes of scrap. The Turkish mills, according to one East Coast trader, are reluctant to let the delivered price of 80/20 heavy melt rise to $300 per tonne. Instead, he added, they have been 3

buying mixed cargoes of lower quality 75/25 heavy melt and shredded scrap from European suppliers and reportedly paying an average price of between $297 and $298 per tonne for the entire cargo. Scrap demand in Turkey has rebounded because Turkish rebar sales and production have been rising in recent months, but the prices of imported billet have been rising at a faster pace. Steel billet is now at between $425 and $430 per tonne F.O.B. at Black Sea port. Turkish rebar prices are about $460 per tonne, leaving little or no margin producing rebar from imported billet. The cost to turn billet into rebar is between $40 and $50 per tonne. Margins are better using scrap so long as the average price remains at or below $300 per tonne. The conversion cost to make rebar from imported scrap is estimated at between $130 and $150 per tonne. Shredded Scrap Thermometer: Shredded quotas or tariffs? The recent spike in offshore sales of scrap to Turkish mills and steelmakers in southern Asia hasn t set off any trade alarms yet. In the past decade when steelmakers in Turkey, Taiwan and several other countries were buying much of their scrap from the U.S., domestic steelmakers were worried about the loss of resources. Scrap exports topped 24 million tonnes in 2011 and has declined steadily since then. The reasons that might arouse new concerns include: Despite all the discussions about excess steelmaking capacity and imports of steel products at below costs, prices of semi-finished steel billets have risen in recent months. This has made scrap a cheaper and more attractive alternative for mills in scrap-poor countries like Turkey and Bangladesh and driven up scrap exports and export prices recently. Domestic steel executives often complained about the scrap exports in the past decade, but they didn t seek any trade restrictions at that time, possibly because of their failure to obtain such limits in the 1960s. Most realize they would again face stiff opposition from the scrap industry. Exports account for from 15 to 30% of the U.S. industry s ferrous scrap shipments and overseas mills are the main customers for some of the industry s biggest companies. Shredded scrap is the only export grade of ferrous scrap that domestic and offshore mills are likely to clash over. Export heavy melt, the most widely traded grade of ferrous scrap in the international market, doesn t meet many U.S. mills specs. Many regard it as shredder feedstock. Shortages in shredded and other scrap supplies are often brief, in part because scrap purchases are usually the first item cut from a mill s shopping list when the steel demand falters. Other wild card factors account for the lack of any widespread effort to put limits on scrap exports. These include: 4

All the biggest domestic scrap consumers, namely the four largest mini-mills, now have their own scrap units that can supply a significant amount of the scrap needed by their parent mills each month. This includes captive shredders that serve individual mills. Much of the strength in billet export price may stem from the shutdown of many aged induction furnace mills in China which are key producers of rebar and billet for the steel export market. That could be simply a short-term phenomenon. Other Chinese mills may step in to fill that void and slash prices to recover market share. Many traders believe the bigger threat to U.S. and Japanese scrap exporters could be the emergence of China as a major scrap exporter to steel mills elsewhere in Asia by 2020. As China s consumer economy grows, more autos and other durable goods will be used and discarded at the end of their useful lives. These will be shredded and sold to the steel mills in China and neighboring countries. The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures on September 15. The contract will trade in 10 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

FOR MORE INFORMATION, VISIT BUSINESS.NASDAQ.COM/FUTURES SUBJECT TO REGULATORY FILING NFX US SHREDDED SCRAP STEEL FINANCIAL FUTURES NASDAQ FUTURES, INC. (NFX) CONTRACT SPECIFICATIONS CONTRACT NAME DESCRIPTION NFX US Shredded Scrap Steel Financial Futures* USD cash-settled NFX US Shredded Scrap Steel Financial Futures are quoted in terms of USD per Gross ton, and are based on Platts TSI s US Midwest Shredded Steel 10-day Average Price Index. CONTRACT SIZE TICKER SYMBOL CONTRACT LISTINGS TRADING HOURS TRADING PLATFORM MINIMUM PRICE INTERVAL/ DOLLAR VALUE PER TICK DAILY SETTLEMENTS PRICES LAST TRADING DAY FINAL SETTLEMENT FINAL SETTLEMENT DATE FINAL SETTLEMENT PRICE CLEARINGHOUSE 10 Gross Tons (2240 lbs.) USSQ Up to 15 Consecutive Months Sunday Friday 7:00 PM EPT 5:00 PM EPT Nasdaq Futures Inc. (NFX) Fifty cent ($0.50) $5.00 per gross ton Daily settlement prices will be determined by NFX using price data from a number of sources including, spot, forward and derivative markets for both physical and financial products. Trading shall cease at 5:00 PM EPT on the tenth calendar day of the month or the last business day prior to the 10 th calendar day of the month. Final settlement for contracts held to expiration is by cash settlement in U.S. dollars. The Final Settlement Date is the second day on which the Options Clearing Corporation is open for settlement following the Last Trading Day. The final settlement price will be based on the Platt s TSI s US Midwest Shredded Steel 10-day Average Price Index. The Options Clearing Corporation *Please consult the NFX Rulebook for complete contract specifications. MORE INFORMATION BUSINESS.NASDAQ.COM/FUTURES / FUTURES@NASDAQ.COM COPYRIGHT 2016. AOMQ-Q16