Mike Marley’s Shredded Power #76

U.S. steelmakers and scrap dealers are headed into the final week of the year uncertain about ferrous scrap supply and prices. Two related factors are clouding their outlook. First is the question of whether the Turkish steel mills will buy more from U.S. suppliers and possibly drain away the seasonally depleted supplies of heavy melt and shredded scrap.

WSEM World Steel Exchange Marketing

Mike Marley’s Shredded Power #76

Export demand could drive  prices higher and limit supply.

December 22, 2016

Mike Marley (484) 751-5600

Peter F. Marcus (201) 503-0902

Commentary:

U.S. steelmakers and scrap dealers are headed into the final week of the year uncertain about ferrous scrap supply and prices.  Two related factors are clouding their outlook.  First is the question of whether the Turkish steel mills will buy more from U.S. suppliers and possibly drain away the seasonally depleted supplies of heavy melt and shredded scrap.  And second, what impact would such an offshore buying binge have on scrap prices in the U.S. in January.

After several weeks of avoiding the U.S market, a Turkish steelmaker bought a single mixed cargo of scrap from a U.S. exporter earlier this week.  The bellwether 80/20 heavy melt price rose to $296 per tonne delivered to a Turkish port.  This is the first cargo a Turkish mill has bought from a U.S. exporter in about a month, and the price is higher by about $20 per tonne from the previous deal.  The eastern Mediterranean steelmakers have been relying mainly on western European and Baltic scrap suppliers in the interim.

Turkish mills had not bought a pound of ferrous scrap on this side of the Atlantic  because they were displeased with the prices sought by U.S. exporters.  One trader said U.S. exporters have been asking for $300 per tonne for 80/20 heavy melt since the end of November.  Also, the Turkish lira has depreciated about 16% against the US dollar since early October, making U.S. scrap more expensive for the Turkish mills.

But in the U.S. exporters' view, even at $300 per tonne, their scrap is still a bargain for the Turks when compared to imported billet.  Russian traders are asking for $405 per tonne F.O.B. their ports for billets.  After adding another $10-15 per tonne for shipping costs across the Black Sea, the all-in cost rises to $415 to $420 per tonne.  The scrap to billet conversion cost is about $100 per tonne.  Hence, imported scrap at $300 per tonne is about $20 cheaper than billet.  There is no cheap Chinese billet these days, and the Turkish mills may have exhausted the lower cost scrap from European and Baltic exporters.  Last week one mill had to pay a European exporter $295 per tonne for shredded scrap, an indication perhaps, that the U.S. exporters may be calling this one right.

Is it a one-cargo sale or a buying binge?

In the past, Turkish mills have bought as many as 10 cargoes within a few days of each other.  This would include purchases from several European and Baltic exporters as well as those on this side of the Atlantic.  Major exporters, anticipating such buying binges, would amass enough scrap, say 100,000 tonnes, to fill two or three ships.  These days, however, few scrap companies have the financial wherewithal to do that.

Also, the Turkish mills may be hoping to obtain tonnage commitments from the U.S. exporters before the start of the January “buy week” in the U.S.  Several U.S. mills and their brokers are already conceding that ferrous scrap prices will be up by $20 per ton in January, possibly more.  Waiting until after the U.S. buy week to do their own buying, could prove to be more costly.

If such a Turkish buying binge occurs as some expect, it will be coming at the worst time for some U.S. mills.  Several failed to cover their scrap needs this month. They were still shopping for more material at mid-month and even as late as this week.  Indeed, one Ohio steelmaker paid as much as $290 per ton or more for shredded scrap from a New England exporter.  A leaked word about that sale could spur the Turkish mills to buy now and not risk losing more to other U.S. mills.

Inventory shortages may be driving some of this spot market buying, but some U.S. mills are also trying to buy ahead of the January market.  Both mill buyers and dealers expect to see prices rise by about $20 per ton, but some dealers argue that those predictions may underestimate the potential increase if export demand and prices rise.

Another question is what impact would such a Turkish buying binge have on the U.S. obsolete scrap supplies at this time of the year.  The winter weather limits both scrap collection and processing.  Below 10 degrees F, nobody wants to work outdoors cutting up scrap and equipment breaks down more frequently when it's that cold.

Dealers boosted buying prices, but the impact on flow has been mixed.

Some dealers have raised scale prices this month because of the higher prices paid by the mills and to draw out more material, but the results have been mixed and vary from region to region.  A Chicago area trader said he has been able to obtain enough feedstock for his shredders and said several yards have been offering him more scrap than he expected to see.  Some had been holding back material, he said.  They may believe the scrap prices will peak in January after three consecutive months of price increases.

On the East Coast, however, a dealer said intake has not improved despite an increase in his scale prices.  The colder weather and upcoming holidays are having an impact on both scrap flows and on the availability of rail cars.  He won’t finish shipping all he sold by month’s end and will still be delivering scrap at December prices next month.  Some mills and brokers, calling about the delayed shipments, have also asked if he had more scrap to sell.  He doesn’t, he said.

Because of the widespread expectation that prices will be higher next month, dealers have been working to ensure that they will finish shipping their orders by the end of the month.  Many now are also unwilling to sell any more scrap, either at December prices or with an increase of $10 or $20 per ton, said a Pittsburgh area broker.  Many are anticipating a larger increase and may be holding scrap off the market to take advantage of that, he said.

An Eastern steel mill raised its heavy melt price this week by $30, to $250 per gross ton delivered to its mill, an indication of how tight supply is in this region and possible concern that the export yards may begin to buy more scrap ahead of the mills.  If the export yards raise their prices and begin buying more to fulfill new or potential orders, that could siphon off a larger share of the winter-depleted supplies of obsolete scrap not only in coastal areas but also in neighboring regions.  Instead of up $20 per ton in January, shredded prices could climb even higher if the domestic mills find themselves bidding against the exporters.

As well, expect to see prices of busheling and bundles move up “in sympathy”.  Besides the efforts of the flat-rolled mills to discourage the long products mills from competing for available feedstock, supplies for industrial scrap will be much lower than normal during the Christmas week through the first week in January due to planned auto plant shut downs.  At the same time, EAF-based sheet producers, the major users of that scrap, will remain in operation.

That said, the EAF mills are generally more insulated against shortages of busheling and bundles than they are to shortages of shredded. First, the flat-rolled mills don’t face the same competition for industrial scrap as they and long product steelmakers do for shredded.  Many have their own scrap yards as well as direct purchasing contracts with the automakers and the independent stampers, the main producers of these products. Second, they usually do not fear competition from the exporters when home market demand is strong and the busheling is trading more than $5 per tonne over shredded.  Busheling is rarely exported out of the U.S.

If the export buying boom is a bust, however, that could help the domestic mills fill their scrap needs, possibly without a price increase in January.  Faced with higher price demands from local suppliers, domestic mills could reach out to the exporters and other coastal scrap suppliers and buy much of their shredded scrap.  Even with higher freight costs, they could limit intake from local dealers and turn down offers that they believe are too high.  When overseas demand collapsed in prior years, exporters sold much of their shredded to domestic mills and undercut prices in inland scrap markets.

Some mills may have adequate supplies of scrap and others have none.

A more critical issue for mills may be the supply disparity between the scrap haves and the scrap have-nots.  The have-nots are those steelmakers with only one or two mills and no company owned and operated scrap yards or shredders to fill their needs.

A Midwest trader said some of the have-nots came up short on the buy side this month and may be eating into their scrap inventory now and in January.  These include some of the pipe and tubing makers.  The oil and gas industry suppliers have seen a spurt in their orders recently, as drillers resumed work on many of the partially drilled new wells which they had abandoned last year when oil prices collapsed.

Steel mills with captive scrap yards may have fewer problems obtaining enough scrap, but the have-nots may not be so fortunate, particularly those that rely more on heavy melt and shredded scrap, the obsolete grades most sought-after by exporters.  One consequence of a spike in export sales could see these mills battling for the winterconstrained supplies of shredded.  That could have more impact on the price than the open market scrap purchases by some of the large EAF mills with their own scrap yards.

One bizarre twist could see the brokers for one or more of the big EAF mills diverting some scrap supplies away from the corporate parent’s mills to the have-not mills.  Their goals may be two-fold: to limit the upward pressure their buying would have on market prices and the published prices that serve as the basis for their own scrap yard’s scale and contract prices.

Shredded Scrap Thermometer:  A shredded export wall?

There may be a steel executive or mill buyer harboring a reverse version of President-elect Trump’s wall along the Mexican border.  They may want to build a wall to block some of our major deep-water ports—not to keep immigrants out but to keep shredded and other grades of ferrous scrap from being shipped to scrap-poor nations in the developing world.  The anxiety over scrap exports was higher several years ago when the country was sending close to 24 million tonnes of ferrous scrap overseas annually. That left domestic mills with a smaller obsolete scrap reservoir and higher prices to pay if they hoped to keep some of that scrap at home.  Some of the conflicts which arose at that time included:

• Relationships between dealers and exporters became less convivial, especially during the periods when overseas demand faltered.  The docks chose to sell more of their shredded scrap to the domestic steelmakers at prices competitive with the local scrap yards.

• Exporters grew equally testy with smaller dealers and traders on the U.S. West Coast after they (the dealers and traders) learned how to load heavy melt and shredded scrap into containers, negotiate cheap backhaul ocean freight rates with the shipping companies, and to sell their scrap directly to smaller mills in Asia.

• Steelmakers along the coasts and a few inland mills stopped using a fixed single price to buy scrap at the beginning of each month.  Some now reset their offers more frequently in response to reports that the exporters were raising prices.

International trade is not a one-way street.  Some domestic steelmakers learned that they could sit at the same table, be a player in the foreign trade game and pick up a few wild cards that enable them to compete better with some of their local scrap suppliers. These included:

• Nucor Corp and one or two other EAF-based mills have become buyers of bulk cargoes of shredded scrap and No. 1 bundles from scrap exporters in the UK, The Netherlands, Sweden and Germany.  Their previous forays into foreign trade usually involved buying a few railcars of shredded scrap from Canada.

• In addition to providing them with added industrial scrap to offset the limited volumes available in the U.S., the rise in the value of the U.S. dollar has made some of these offshore purchases cheaper than the local supplies.  They also have the added bonus of enjoying lower freight costs.  Shipping scrap by boat from the UK to a southern U.S. mill can be cheaper than bringing it in by railcar from a Detroit.

EDITOR’S NOTE: There will be no Marley’s Shredded Power next week.  The next issue will be published in the first week of January.

The Nasdaq Futures Exchange (NFX) expects to start trading in the Midwest US shredded scrap index futures in early 2017.  The contract will trade in 20-gross ton units with the prices settled on the 11th 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.


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