While volatility seemingly goes hand in hand with ferrous scrap pricing, movement in the near future, at least, looks likely to be in a narrow range. The calming of ferrous scrap's waters is expected to hold for much of the remainder of the year as demand mirrors that in the steel business.
Early predictions that steel prices could rise to record levels by midyear sent service centers scurrying into the market to scoop up all the steel they could buy. Unfortunately, with neither automakers, nor homebuilders, nor appliance makers in much of a buying mood, that created an oversupply at service centers and brought buying to a virtual standstill. By the second quarter it was pretty clear that the flat-rolled steel business, the biggest segment of the domestic steel market, was tanking, executives at several domestic steel mills said.
"The softness is more centered on the flat-rolled business; bar products remain pretty firm," a purchasing executive at one Midwest mill said. And so goes ferrous scrap.
He's not alone in his view among steel executives who see little or no change in the ferrous scrap market during the second half.
William B. Larson, senior vice president and chief financial officer of Commercial Metals Co. (CMC), said the big Dallas-based steelmaker and scrap processor sees the ferrous scrap market "drifting," with little or no sense of direction. "As far as the next few months are concerned, we think it will just drift. There have not been any catalysts that will propel it up or down."
The first five months of 2007 were very volatile, said Robert J. Melendi, CMC's vice president of ferrous scrap sales. Early in the year, prices rose sharply but then the market corrected itself. By June and July, the ferrous scrap market was stable and August was expected to be as well.
The market is now looking for what will be the factor or factors that will drive the next move, Melendi said. Some believe it might be overseas demand, specifically Turkey; others think it could be exports of finished steel products by domestic steelmakers, both flat rolled and some long products, if the dollar continues to weaken. "As for the domestic market, the only one that is rocking and rolling is the beam market because the non-residential—not homebuilding—market is quite firm," he said.
Melendi said the company saw some tightness in scrap supplies in the first quarter that was demand-driven. If global demand for scrap revives, there is the potential for more "spiky moves" again. But the ferrous markets demonstrated once again that price draws out scrap. "Once prices hit those February-March peaks, we saw unprecedented degrees of inbound. In March, the flow (into our yards) became overwhelming. The market reversed. It did its job. I would expect that you will see that again."
CMC is uniquely positioned in the ferrous market because it has enough scrapyards spanning the Sunbelt to keep its four mini-mills and a new micro-mill planned for Arizona well stocked with scrap. But Larson said the scrap actually goes to the highest bidder. "But all things being equal, if there are equal bids obviously we will give it to our sister companies," he added.
John J. Ferriola, executive vice president of Charlotte, N.C.,-based Nucor Corp., said he believes supply and demand both on the steel side and the scrap side are going to be down. "We don't think it is going to be down big, but I do think it is going to be down some," he said, adding that he doesn't see demand changing a lot during the balance of the year.
Nucor's executives see the second half of the year continuing much like the first half. The automotive market has been terrible and other manufacturing industries haven't done well either, Ferriola said, noting that appliance shipments were supposed to be up 6 percent.
As far as scrap supplies are concerned, conditions are going to be pretty much the same for the rest of the year, the way they were in the second quarter—a balance between supply and demand, Ferriola said. "With good weather and no issues arising, I see the supply pretty steady. And frankly, I just don't see the demand side changing." All of Nucor's mills are "pretty flush" with scrap, he added, with scrap-inventory levels pretty secure.
A scrap buyer at one integrated mill said he also sees plenty of scrap available through the second half of the year. The steel industry went through a normal summer hiatus with manufacturing plant outages and industrial steel scrap generation lower, and no one blew their brains out for scrap.
Nor does he see any tightness or excess in the scrap market. The flow of industrial material like No. 1 busheling is always determined by original equipment manufacturers' production levels, while obsolete supplies are driven by the weather and whether prices are high enough to make it worthwhile for peddlers to start up their pickup trucks. At present, he said, "there is lots of scrap available at the right price."
When there is a surplus or deficit of scrap in the marketplace, it gets magnified because people have more leverage today, the Midwest mill executive said. If it's going down, mills might have the leverage to push it a little bit further; conversely, when it is going up a handful of processors might push it up a little harder.
And despite the increasing global pressure on ferrous scrap, the executive said he doesn't anticipate any tightness or excess in scrap supply even with stronger offshore demand. In the first half of the year, exports totaled 2 million tonnes more than normal, he said. But if there was underlying U.S. demand or an appetite for that material, it would have stayed here, he said. Much of that scrap had to pass domestic steel mills to make its way to a boat. If they wanted it, they would have paid the price to get it.
Also, the U.S. economy still generates more obsolete scrap than its mills consume. "We still have a net surplus of scrap. So in that sense, the scrap would stay here before you had a real tightness issue, and I don't see that happening," the Midwest mill executive said.