Steelmakers can expect to see a rebound in
demand for flat-rolled products by the fourth quarter, but with
that recovery they also can expect to be paying more for
ferrous scrap, according to two industry analysts.
"We expect some uptick in the fourth quarter.
Our projection of steel production is higher and demand is
going to increase and drive scrap prices up a bit," said Sal
Tharani, steel analyst at Goldman Sachs & Co., New
Demand for long products, like beams and
bars, has been good for much of 2007, he said, noting that the
weakness generally has been in the flat-rolled markets.
"We are very optimistic on steel in the
fourth quarter. We are seeing the pickup in automotive. It shut
down in July and August. It is going to come back when it
starts with the new model buildup," he said. "Appliances may
not improve much because housing is still weak."
Charles Bradford, veteran industry analyst at
Bradford Research/Soleil Securities Inc., New York, agreed that
the flat-rolled market will pick up in September, and when it
does so will ferrous scrap prices. "Once you get beyond the
summer doldrums, steel shipments will rise. That will trigger
service center orders from the mills. If the service centers
order more from the mills, the mills will buy more scrap and
we're off to the races," he said.
Tharani said that Goldman Sachs has been very
bullish on the ferrous scrap export market. Global demand for
scrap has risen and scrap availability from Black Sea ports has
decreased, which is going to continue to put pressure on U.S.
ferrous scrap exports. At the same time, the U.S. steel
industry is adding another 5 million tons of electric
furnace-based mini-mill capacity, he said, citing the new
SeverCorr LLC mill in Columbus, Miss., Commercial Metals Co.'s
planned micro-mill in Arizona and the second furnace that Steel
Dynamics Inc. has added at its Columbia City, Ind., mill.
"The other largest exporter of scrap in the
world has been Russia and they are holding back more and more
scrap. They were exporting 15 million tonnes in 2000. They came
down to 10 million tonnes in 2006 and right now they are
shipping at about an 8-million-tonne annual rate. The Russian
guys are saying it could be as low as 2 million tonnes in the
next two years," Tharani said.
As a consequence, he is concerned that U.S.
steelmakers could face a "perfect storm" scenario in scrap by
2009. "Steel demand is coming mostly from the emerging markets
and it is mostly infrastructure. And that is mostly long
products, and the big chunk of long products are made in
mini-mills. Scrap is a limited, finite quantity," he said.
Bradford also believes domestic steelmakers
face a stormy future, but he blames it on their scrap surcharge
systems. The U.S. market has had three inventory-cycle swings
in the past four years because of the surcharges, which also
have driven up imports of steel products, he said.
"Let's say you are bidding on a beam system
for a building you're putting up over the next six months. You
can't get a guaranteed price unless you buy foreign steel; and
it's the mills own fault. They want to reduce their risk on
scrap, so they want to give it back to the customer. But the
customer is screwed because he can't tell what he is going to
pay. He can't even tell what he is going to pay in the next
month. So what do you do? You want a fixed price? You buy
foreign steel. They (the domestic mills) are their own worst
enemy," he said.