Domestic steelmakers need to realize that the scrap export market is here to stay and that offshore steel mills in distant lands like Turkey, China and Vietnam are everyday players in the international ferrous scrap game.
The words aren't mine. They belong to a veteran scrap trader on a mission to wake-up the American scrap industry to an irrefutable new reality.
Of course, it wasn't always that way.
The weakness of the U.S. dollar vs. other major currencies is a major driver, but other forces also have been at work, producing what economists like to call structural (or long-term) changes to the market.
In the past, No. 1 heavy melt and shredded scrap were the main feedstock for rebar mills and other electric furnace operators. Integrated mills preferred the denser, higher-quality material like factory bundles as long as the price was attractive or if they needed to boost production slightly.
What the mills didn't want was then piled up in dealers' yards or was sold to export yards, often at a discount to U.S. market prices.
Exporters used to think that if they shipped 10 million tonnes it was a good year. A decade ago, they ran into new competition and barely squeaked out 6 million tonnes to overseas buyers. The new competition was a host of freewheeling eastern European scrap traders. Following the breakdown of the Soviet Union in the 1990s, the Black Sea ports became scrap export hubs. Scrap was easily accessible inside the region and could be barged down rivers to ports like Odessa and shipped across the Black Sea to Turkey.
But almost as quickly as the eastern European scrap bonanza began, it ended. Russian and Ukrainian steel mills moaned loudly about the loss of raw materials; export taxes and quotas were imposed by obliging lawmakers; and steelmakers in Turkey and southern Asia no longer had a cheap and nearby source of scrap to make their steel products.
At the same time, China was expanding its steelmaking capacity. While much of the additional capacity was integrated steelmaking that used less scrap, there were still enough older mills and enough demand for steel products in Asia to make the older mills more active buyers in the world ferrous market. That has continued to this day close to 1.2 million tons of ferrous scrap left U.S. ports for China in March, a fair portion of it from East Coast and Gulf Coast ports as well as those on the West Coast.
Scrap is steadily moving to the docks not just for bulk cargoes but also in containers. For the shipping companies carrying finished goods from China to U.S. ports, it provides an opportunity to get those containers back to the Far East where they were needed and not carry them across the ocean empty. Not too many years ago, the notion of shipping something as big and clunky as iron and steel scrap in a container was unthinkable. It would ruin the inside of a container. They took their lumps and scarred floors, but more ocean carriers have come around to the idea of carrying ferrous scrap back across the Pacific.
Using containers for ferrous scrap also opened up new offshore markets, especially for those yards that hadn't been in the export business. Now they can load containers, truck them to the docks and hoist them onto a container ship bound for small emerging Asian economies like Vietnam and Bangladesh.
In the first three months of this year, U.S. exports of ferrous scrap totaled almost 5 million tons, up nearly 13 percent from the same period last year, according to U.S. Commerce Department statistics. While it's still too early to say what this year's pace will be, it's worth noting that U.S. scrapyards exported close to 21.5 million tons of ferrous scrap last year—more than double what they used to consider a good year.
If the current pace continues, exporters will ship more than they did last year—when steelmakers in the United States and abroad were running almost full out. If anything, one would expect shipments to be down sharply because of the worldwide recession.
Scrap metal, whether ferrous or nonferrous, is one of those products that benefits from a weak dollar. Why not step up and pay those prices, overseas mills seem to be saying; it's cheap enough, and most ferrous scrap is priced in dollars.
Obsolete U.S. scrap has become more attractive to overseas steelmakers and foundries compared with the prices sought for scrap in other regions, as well as for alternative raw materials like pig iron and hot-briquetted iron (HBI). Besides, as one alternative materials trader learned some years ago, some melters are more comfortable using scrap and see little or no reason to pay any premiums for pig iron or HBI.
Traders and brokers typically talk about the export market in terms of buying flurries by steelmakers in one or more foreign countries. The Turkish mills were the market leaders for much of the past year, but others have stepped in to fill whatever void their reduced buying has created.
The simple fact that the United States is a scrap-rich nation has made us the envy of some offshore steelmakers. Someday, perhaps, when their economies have generated enough vehicles and appliances and they are discarding as much as we do, that demand might ease. That has been the case for Japan; once a major U.S. ferrous scrap importer, it is now a ferrous scrap exporter.
Not too many years in the future South Korea and China might become members of the scrap exporters club. Until then, it's a pretty safe bet that they will be looking to the West to fill their furnaces, and as long as the U.S. steel industry isn't buying much scrap, as is the case these days, scrap dealers will be looking abroad for new customers.