WSEM World Steel Exchange Marketing Mike Marley s Shredded Power #85 Busheling prices will rise and drag obsolete grades up, too. All but the fluff Commentary: Domestic steel mills are worried about scrap price moves this month. Most dealers expect to see prices rebound not only to the January levels, but possibly much higher. Dealers in the Midwest, which seemed to be the hot market in February, hope to see industrial scrap prices soar by as much as $60 per ton. Several mill buyers indicated that they will resist such steep demands. Key to the likely gain is how large an appetite the EAF-based flat-rolled mills have for prime industrial scrap this week. In February, the competition for busheling and bundles was intense. Two or three of the sheet producers in the South were outbidding each other and reaching out to scrap suppliers in the North for additional supplies. Prices climbed to as high as $340 F.O.B. a barge or a railcar at dealers yards in that region and $375 per ton delivered to the mill. Local busheling prices elsewhere ranged from a low of about $265 per ton on the East Coast to $340 per ton in northern Ohio. Big River Steel, the new flat-rolled mill in Osceola AR, accounted for part of the added demand, but rival Nucor Corp. was very active as well. The big steelmaker disclosed last month that it would halt production of direct-reduced iron at its DRI plant in Convent, LA, for about five weeks to make repairs at the facility. Nucor has been using DRI as a substitute for busheling at several of its sheet mills. Several U.S. traders said they believe David J. Joseph Co., Nucor s scrap buyer, has bought at least four cargoes of bundles and shredded scrap from western Europe to fill that gap. That includes one from a Swedish scrap exporter and three from the U.K. That would total about 150,000 tonnes. These are due to arrive in March, said one trader, and all are destined for the port of New Orleans, LA, and not Nucor s mills on the Southeast U.S. coast. At the core of the problem is the patchwork of raw materials supplies that domestic steelmakers now rely on. Integrated steel mills produced most of the steel in the past and owned their main raw materials coal and iron ore. That was part of the definition of being an integrated mill. Today, more mills are EAF-based. Some own scrap yards; others don t. A few have alternative metal supplies like DRI plants or purchase pig iron from offshore producers. March 1, 2017 Mike Marley (484) 751-5600 Peter F. Marcus (201) 503-0902
More important is the uncertainty that comes along with this mixed bag of suppliers. Most EAF sheet mills use between 35% and 50% busheling and bundles to make their products. That scrap comes from the stampers that make fenders and doors for cars and trucks. The automakers are selling plenty of SUVs and trucks, but overall they are selling less vehicles which means less industrial steel scrap is available. Also, other steelmakers besides the sheet mills are getting busier these days and they also use busheling and bundles. Raw steel output rose to 1,770,000 net tons last week, the American Iron and Steel Institute said, a modest 0.2% rise, but up from the 1,766,000 tons produced the previous week and the third consecutive weekly rise. The industry s capability utilization inched up to 74.7% versus 74.6% the week earlier. Steelmakers can t increase the overall volume of industrial steel scrap. That s determined by the sales of cars and trucks. If they need more busheling, all they can do is outbid each other for the limited supply or use alternatives like imported scrap, DRI or pig iron. Imported scrap may be a more readily available substitute than foreign pig iron. That imported scrap may be the best alternative. Added supplies of pig iron from northern Brazil, which some domestic melters prefer over the pig iron from southern Brazil, may not be available until late April or early May, sources said. Likewise, Ukrainian ironmakers are having problems getting their output to ports because of new conflicts with Russian-backed separatists in eastern Ukraine. Russian pig iron is available, but those suppliers, aware of the transport problems in the Ukraine, are demanding higher prices. Last week, some U.S. brokers and mills began booking orders for scrap with domestic suppliers on a TBD (price to be determined) basis. Normally, TBD purchases benefit the mills by guaranteeing them adequate supplies of scrap. These minimize overall tonnage needs and can keep prices from rising too sharply. They can, however, be a gamble, especially if the price index rises more than anticipated. Some mills may be operating with minimal inventories, but a northern Ohio trader said that he was not aware that any mill has launched an early buying binge. Most mills realize that dealers expect to see a hefty price hike in March and are holding back scrap. From the mill side, he said, most of the buyers and brokers are calling dealers and urging them to finish shipping what they have sold in February. A Chicago area dealer said he is unsure whether the mills will try to limit the increases to, say, $40 per ton for the industrial grades and $20 per ton for heavy melt and shredded scrap. Otherwise, he said, the market could become a free-for-all and get ugly. Brokers will start buying scrap in other regions and take it away from the local mills there. If they start pirating scrap, prices will become more volatile and could bounce up and down for several months. For the first time in two and a half years everyone is making money, he said, so why get crazy? 2
It is also unclear how quickly the mills will buy this week. In February, the usual early bird mills in the Detroit area were the first buyers and trimmed $10 per ton off their busheling prices and $25 off shredded and cut grades. Others in the Midwest assumed they could achieve the same reductions, but were outflanked by rivals. Indeed, some late arriving mills had to raise their offers for busheling and bundles by $10 per ton. Also, the disparity between the price moves (+/- $10 for the industrial grades, but down by $25 for heavy melt and shredded scrap) widened the busheling premium over shredded scrap. On the average, the price spread between these grades is now about $30 per ton, but in a one region it rose to as much as $55 per ton. If scrap availability is the critical issue in March, shredded scrap may be the only readily available material for some mills because higher prices can draw out feedstock to produce more shredded quickly. Yet, this is still the winter. Colder temperatures and snow can interrupt transport and work in dealers yards. And some traders said a few suppliers pulled back from the market last week and this has impacted flows. Most are waiting to see how high prices will rise in March and whether the gains in shredded and heavy melt, if any, will match the anticipated hikes for busheling and bundles. And more important for some, when will dealers raise their buying prices for shredder feedstock? A few brokers and dealers believe the market will be slow to develop this week, and that some mills may postpone purchasing decisions until next week. They believe prices will level off or decline after the initial buying is finished. Others expect a repeat of February s early buying blitz. Those who were late to the party last month will be anticipating that, said a Chicago area broker, and may react quicker this time. Turkish mills are buying more foreign scrap, but not from U.S. suppliers. Turkish steel mills are buying, said one U.S. East Coast trader, but mainly from scrap exporters in western Europe and the Baltic region. They are paying about $280 per tonne delivered to a Turkish port for 80/20 heavy melt. This is stronger than the prices offered a few weeks ago, he said, but may not be enough to match what U.S. exporters are looking for if they hope to show a profit margin on their offshore sales. At $280 per tonne, U.S. exporters would net only $245 per tonne for 80/20 heavy melt since freight and stevedoring costs are about $35 per tonne. Most East Coast export yards have raised their buying prices and are offering between $220 and $230 per gross ton for the heavy melt bought from local scrap dealers, but that is still below what some coastal mills paid in February and the increases dealers expect to get in March. Container export demand has rebounded with some foreign buyers paying as much as $270 per tonne for shredded scrap loaded in a container and delivered to the docks. But some U.S. traders believe the prices in the domestic market in March may surpass that gain. Much as they did in January, some inland mills and steelmakers in the Southeast may have no alternative other than to ratchet up their demand and the prices for shredded 3
scrap. Because of the potential shortage in industrial steel scrap supplies and their inability to obtain enough substitute materials like pig iron and DRI from offshore suppliers on a timely basis, U.S. exporters and coastal shredders could be the main beneficiaries of such a domestic buying binge. Shredded Scrap Thermometer: Finding more feedstock. Domestic steelmakers could face a potential late winter raw materials squeeze. This is not a supply shortage per se. Some may not be able to get the scrap or other melt materials that they need quickly. As the pace of domestic steel production rises and demand for higher quality industrial steel scrap increases, grades like busheling and bundles have become scarce, and mills must look for alternatives. Unfortunately, the usual substitute materials are not as easily obtainable as they once were. These include: Industrial scrap is a fixed supply. Paying higher prices does not increase the overall output of this scrap. Normally, more steel consumption by manufacturers produces more scrap. But there is usually a lag between that increase in scrap demand and higher output from manufacturing plants. EAF flat-rolled mills are not the only users of bundles and busheling. Integrated mills are also consumers of prime scrap. So are mills that make higher quality steel products like wire rod and special quality steel bars. Venezuela is no longer the reliable supplier of merchant DRI or HBI (hotbriquetted iron) that it once was. Economic chaos, the lack of maintenance of existing plants, even the failure simply to dredge the river that carries their output to the ports on the Gulf of Mexico has discouraged many U.S. mills from relying on these iron makers. Northern Brazilian iron makers are not offering much additional pig iron. Shipments from Ukraine are likely to be delayed and iron production could be disrupted by the on-going conflict. Consequently, pig iron availability is expected to be tight for several months and may encourage some producers to seek higher prices for their metal. Scrap dealers are fond of telling steel mill buyers and their brokers that there will never be a shortage of scrap so long as they are willing to pay. Nothing helps to bring out more scrap like higher prices. That includes not only scrap, but steel as well. Both can be the wild cards in any supply picture. Several years ago when offshore sales of ferrous scrap exports were at record levels, U.S. export yards posted sharp price increases when they had several boats to load. It was not unusual at such times to see trucks loaded with scrap from auto wreckers, demolition contractors and small scrap yards lined up for hours waiting to get on the scales at the docks and dump their loads. 4
Scrap prices rise when steel mills are confident they can recoup the additional funds spent on scrap through price hikes for their steel products. Otherwise, higher prices simply open the gates to more steel imports, lower domestic steel sales and a subsequent decline in both scrap prices and consumption. The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures by 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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