Secondary steel is in its own ballgame that, for the most
part, runs counter to the prime market, at least where buyers
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Global mill consolidation and resulting closures of outdated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
"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
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."