Secondary steel is in its own ballgame that, for the most part, runs counter to the prime market, at least where buyers are concerned.
Steel buyers who do most of their business in the prime steel market are used to the economic laws of supply and demand and how they impact steel pricing and availability—when supplies get tight, prices head north, and vice versa.
But those in the market to purchase secondary or excess prime coils have to play a slightly different game. Thus, in periods like the first half of 2010, when steel prices shot higher as raw material prices increased and steel demand improved, secondary material became less and less available and put a squeeze on buyers seeking bargains from the market.
"In a stronger market, you don't see much secondary or excess prime material out there," according to Steve Bergman, president of Premier Steel Inc., Englewood, N.J. "When the availability of secondary and excess prime starts to gain, that generally is a leading indicator that the market has topped. We haven't seen that yet."
Bergman made those comments shortly after North American steel mills announced another carbon steel sheet price increase—their fifth of 2010—of about $40 per ton on the back of increasing prices for scrap and iron ore as well as continued improving demand, much of it from customers in the automotive industry. The increase put hot-rolled sheet prices at about $740 per ton by late April.
But factors beyond demand and higher prices also are serving to tighten the market for secondary and excess prime steel. Global mill consolidation and resulting closures of outdated capacity have been a factor, as have technological improvements in the steelmaking process, which have helped mills make better product and thus reduce the number of rejects from customers.
"There is not a lot of secondary in the market," said an East Coast market source who buys and sells secondary material. "When the mills are operating at lower levels, like they were during most of the first half of this year, that makes less secondary available. When you consider that (the United States) was once a 100-million-ton market in terms of production, you would expect something like 6 to 7 percent of that to be secondary material—so you'd have 6 million or 7 million tons," he added. "But when we become a 60-million-ton market, that essentially cuts the amount of secondary that is available almost in half."
On top of that, the technological improvements in new mills, such as the Severstal Columbus plant in Columbus, Miss., serve to further tighten the market, in a manner of speaking.
"You'd like to say there was no secondary because that would mean there were no mistakes," the East Coast source said. "But of course that's not going to happen. I imagine that when you get a new mill like Severstal has in Mississippi, if they had 1 or 2 percent rejects that would be considered a ridiculously high number. Most mills are going to be at 5 to 7 percent. So when you get the improvements in technology, like you have with the newer mills, you wind up with less rejected material."
Paul Gedeon, president and chief executive officer of Lane Steel Co. Inc., a service center in Pittsburgh involved in both the prime and secondary markets, has seen his business change over the years due to what he calls the "shrinking" availability of secondary steel. Lane Steel originally dealt almost exclusively in secondary products but has shifted its focus over the years to the point where the prime market now makes up a larger percentage of its business.
"That market (for secondary products) has been eroding," he said. "The mills just can't afford to make bad steel. In 25 years in the business, we've cut the amount of secondary business we do way down. Another thing is that with mill consolidation, there are fewer buyers out there for secondary. It's a shrinking market."
Most buyers get into the secondary and excess prime markets because the steel is less expensive. Smart buyers can purchase a coil with, for example, damaged edges and still get a good percentage yield out of them by trimming the edges and re-marketing the steel as prime.
"You might have a 38-inch-wide coil with damaged edges," the East Coast source said. "If you have a customer that needs 36-(inch) wide, you trim off those edges—clean them up, sell the coils to him and make a nice profit. The customer will never know the difference."
Except that as prices ran up the ladder, customers for secondary products were finding less and less steel available. A market downturn would serve to increase availability of the material they seek, but few want to see the market turn down.
Keith Busse, chairman and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind., believes steel prices will be able to resist a drop-off even if prices for input costs, such as scrap, soften.
Bergman disagrees. "Steel demand is improving, but not at the pace of the price increases. Keith believes steel prices will hold up if scrap comes down. He's a friend of mine, but I think that's wishful thinking on his part. What he is essentially saying is that if scrap comes down, transaction prices will be increased to offset that," he said. "I don't think that will happen. Demand is not strong enough (for prices to remain at higher levels if scrap softens). We're not in the position we were two years ago, when we had the rapid price run-ups (that sent hot-rolled sheet to $1,100 per ton) and then a sharp drop-off (back below $400 per ton by fall 2009). Things won't be as bad as that, but prices will come down. When they do, you'll see the availability of secondary and excess prime improve. Like I said, that's one of the leading indicators we watch, and we haven't seen that yet. But I think it will come." SCOTT ROBERTSON