Scrap dealers and many of the companies that supply them
with steel clips from their stamping presses re-learned an old
lesson a month or two back. Simply stated, the ferrous scrap
market has a downside as well as an upside, that prices can
plunge as well as soar.
And often, the decreases come at a much quicker pace than
the increases. The prices of No. 1 busheling and No. 1 bundles
climbed by $160 a long ton in April and another $140 in May,
but they gave all that back in a single month September.
Industrial steel scrap grades plummeted by $300 a ton or more
Such drops were no surprise for many veteran traders and
scrap processors. They have ridden the steel scrap price roller
coaster many times in the past and know its peaks and valleys,
but few-if any-ever expected to see No. 1 busheling and bundles
at $900 a long ton. Many were astonished when industrial steel
scrap prices soared to $450 a ton in fall 2004. Who knew that
less than four years later it would be double that?
The same could almost be said about obsolete grades like No.
1 heavy melt and shredded scrap, which soared to about $350 a
ton and $500 a ton, respectively. Almost-but not
quite. The heavy melt and shredded prices never caught up with
the price gains achieved by prime steel scrap. There are a
couple of explanations for that. One is the weakness of the
U.S. dollar, which served to draw obsolete scrap overseas. The
weak dollar also discouraged foreign steelmakers from shipping
much of their finished steel products here. The domestic steel
producers became pretty much the sole suppliers to the U.S.
service centers and other flat-rolled steel users.
Another explanation is the possible disincentive of steel
scrap surcharges, particularly for flat-rolled steel products.
For many of the mills that produce flat-rolled, surcharges
often are based on a regional busheling or bundles price or
some combination of the grades from two or three cities. In
some ways, it has helped steelmakers, especially mini-mills,
deal with the often unpredictable ups and down of prices in the
ferrous scrap market. But some steel users complain that it has
made mills less willing to stand up to the price demands of
scrap dealers. Why haggle over the price of scrap when it can
be added to steel prices?
But the strength of a market can sow the seeds of its own
destruction. The sharp and steeper rises in the prices of
industrial steel scrap opened up a huge disparity between the
primary grades, like bundles and busheling, and the prepared
obsolete melt materials, like shredded and heavy melt-a price
disparity that became too big to ignore this year, even with
steel base price increases and the scrap surcharges.
Four years ago, when bundles and busheling spiraled up to
that $450-a-ton level, shredded could be bought for $300 a ton.
That may not seem like much of a disparity now. At that time,
though, it was a huge price gap between what some regarded as
competitive and interchangeable raw materials. Traditionally,
prices for mill grade No. 1 busheling ranged from $10 to $20 a
ton over shredded prices. When the export market was active,
shredded might even surpass the price of busheling by $10 or
more a ton. This year, the pricing disparity grew even greater.
Busheling prices rose to $900 a ton and higher while shredded
peaked at about $600 a ton in most of the domestic markets-a
differential of $300 a ton.
If freight costs are discounted, shredded was about the same
price here as it was overseas. Steelmakers in eastern
Mediterranean countries, like Turkey and Egypt, paid about $725
a tonne delivered at the market's peak. Bulk freight costs
soared to $100 a tonne or more in some months, about triple or
quadruple the transportation cost that a U.S. scrap dealer
would pay to ship shredded to a nearby steel mill, which made
the f.o.b. price at a dealer's yard or the docks about the
As is often the case, huge price differentials in competing
raw materials force a re-thinking by consumers. We don't yet
have a practical alternative to gasoline, but the steep
increases in oil prices have made the once-popular sport
utility vehicle a paria unless it's a fuel-sipping hybrid.
It's not that much different in the steel market, where many
purchasers and melters have reformulated their raw material
mixes. Integrated steelmakers, for example, use less densified
scrap like No. 1 bundles and 5-foot plate and structural scrap
and instead rely more on iron from their own blast furnaces.
When they do buy scrap to use as a coolant, it includes a more
diversified mix of heavy scrap like rail crops.
Several mini-mills have modified their appetites as well.
Some have shifted their formulas to use more of the so-called
gamma-ray shredded, the fragmented scrap that been scanned by
X-rays and subjected to additional picking to ensure a lower
copper content. (Most of the flat-rolled mills require less
than 0.2-percent copper in their scrap.) Cleaner shredded along
with the use of imported pig iron has helped to dilute the
proportion of copper and other unwanted tramp elements.
Fortunately for steel mills, scrap dealers and even the
steel users paying those scrap surcharges, scrap has a very
elastic price. Bundles and busheling that sold for $450 a ton
in 2004 were down to $150 a ton nine months later. Will they
drop that low again? Or even lower?