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 York.
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.