It's no joke, but bundles surge may leave
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
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
A buyer even called AMM to ask
if it was an April Fool's joke. One could certainly understand
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
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
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