AMM.com Copying and distributing are prohibited without permission of the publisher
Email a friend
  • To include more than one recipient, please separate each email address with a semi-colon ';', to a maximum of 5


It’s no joke, but bundles surge may leave some laughing

Keywords:


It's no joke, but bundles surge may leave some laughing

While we like to think that much of the news reported in AMM makes readers sit up and take notice, only occasionally does a news story send shockwaves through the industry.

Such was the case April 1, when bundles from four Chrysler and one Mitsubishi Motors North America stamping plants sold for a record $555 a long ton, a stunning $155 increase compared with the previous sale a month earlier.

We've become used to major increases in commodity prices in recent years. Still, a sudden 38.8-percent surge in the price of a key steelmaking raw material like factory bundles is breathtaking. It's only a year ago, after all, since the price of flat-rolled steel itself was under $555 a ton, which shows just how much and how quickly things can change.

A buyer even called AMM to ask if it was an April Fool's joke. One could certainly understand the sentiment.

Immediately, and predictably, steel producers responded with whopping increases to their scrap surcharges, which simply served to underline the disconnect currently occurring in the steel sector.

Steel prices are at record levels despite a struggling automotive market and a wobbling U.S. construction sector. Raw material prices, including those for iron ore, coal and coke as well as for scrap, are driving prices higher, although most agree that such a move is unsustainable without a pick-up in demand for steel products.

Once upon a time, one end of the North American supply chain was linked with the other. If automotive build rates were down, reducing the supply of desirable scrap like bundles, it's likely that demand for steel—and therefore for ferrous scrap—would be down too. There would always be a time lag, but sooner or later the two ends would meet.

The globalization of the steel and scrap markets means that this is no longer the case. Strong demand for raw materials—scrap included—has little to do with the domestic market. The massive appetite of Asian buyers, coupled with the weak dollar, has seen scrap exports boom at a time when, due to slow automotive build rates and the strike at American Axle & Manufacturing Holdings, supplies of certain scrap grades are down.

That leaves steel mills having to pay record levels for scrap. For now, at least, they're passing these through to consumers. But analysts note that, at some point, the disconnect between demand and prices has to come to an end.

If the mills are forced to reduce product prices before scrap and other raw material prices retreat, margins will come under severe pressure.

Perhaps more worryingly, there's even some evidence that securing scrap at whatever price is becoming a problem for some buyers. If the market forces the price of steel down in the domestic market, then the ability of U.S. buyers to secure adequate sources of scrap in a global bidding war could be severely compromised. At that point, having a secure source of scrap will become invaluable and so vertical integration will be a major advantage.

In a world where one plus one no longer necessarily equals two, controlling as many parts of the equation as possible lends some much-needed security. With every new swing in scrap prices, the recent moves by Steel Dynamics Inc. and Nucor Corp. to acquire scrap suppliers are looking even smarter. The question now may be which mini-mill will be next to extend its presence in the raw material market?

DAVID BROOKS

SENIOR VICE PRESIDENT


Have your say
  • All comments are subject to editorial review.
    All fields are compulsory.



Latest Pricing Trends

Poll

Is severe weather affecting your business?

Yes
No


View previous results