With the first three quarters of 2011 in the books, prices for scrap today are at their highest levels in history when measured against annual averages.
The composite price for No. 1 heavy melt, No. 1 dealer bundles and shredded scrap averaged $449.75 per ton in the first nine months of this year, about 6.5 percent ahead of 2008, when the three grades averaged $422.45 for the entire 12-month period. If prices remain anywhere near current levels, 2011 will set a record for scrap value.
It has been a banner year for many in the scrap industry, with demand for scrap and its accompanying profit margins maintaining strong levels. The big question is whether those prices and margins will hold up through the rest of the year.
"It wouldnt surprise me if when the year is over were still within about $20 either way of where prices are now," a Chicago scrap dealer said this summer. "All the factors in the market point to continued strong pricing."
The average prices for secondary grades are actually higher than they were at this point in 2008 (prime grades are slightly below where they were at this point three years ago). But in September 2008 prices were on their way down in the midst of a long and deep collapse. No one anticipates such a decline this year.
A number of factors have come together to produce this potentially record-setting year for scrap sales:
Finished steel prices this year are the highest theyve been since October 2008and are much higher than they were in November 2010, the low point for all of last year. With mills charging more for their products, it has been difficult for scrap buyers to demand significantly lower prices throughout this year. As long as the ratio between steel and scrap prices is maintained, many sellers say, scrap prices should remain high. And mills are showing few signs of a willingness to lower their prices.
Overall, monthly mill capacity utilization rates have averaged around 70 percent for well over a year after spending all but six months under 70 percent between November 2008 and December 2010. However, it has been three yearssince September 2008since the rate has topped 80 percent. Is the capacity utilization rate on an upward trajectory that will finally see it surpass the psychologically important 80-percent level, or will mill productivity continue along its relative plateau and move up and down only slightly for an extended period?
In the last two months of 2010, the spread between prime and obsolete grades of scrap was at one of its lowest points in recent years. Only about $16 separated shredded scrap from the prime grades and around $45 separated heavy melt from primes. But this fall, that gap has returned to something closer to historical norms: about $40 separates shredded from prime grades and $75 separates heavy melt from the primes. Historically, strong pricing years favor prime grades more dramatically than the obsolete grades. The record-setting boom year of 2008 saw the gap reach an all-time-high annual average of about $118 per ton. And going back further, to the boom year of 2004, the spread between prime grades and obsolete material averaged $83 for the year.
One of the major factors that has helped drive prices up so far this year has been U.S. exports of scrap, particularly No. 1 heavy melt. In fact, monthly exports of this grade reached a record 879,812 tonnes in May, according to the U.S. Commerce Department. Although there was a drop in the summer, overall exports of No. 1 heavy melt are running about 57 percent higher than in 2010 and are on track to top 7.7 million tonnes this year. So far in 2011 monthly shipments have averaged 644,068 tonnes, far above 470,833 tonnes in 2010, 486,667 tonnes in 2009 and 436,667 tonnes in 2008.
At one time, scrap markets would drop in July as mills reduced their buys in preparation for the annual automotive shutdown. Like clockwork, the Big Three automotive assembly plants would go on a two-week shutdown in late July. Then mills would bid the price up in August because the flow of scrap from slitters and stampers would fall precipitously. No more. This year, automotive assembly plants have tended to stagger their shutdowns. "Some automotive plants are going down," said one Detroit-area broker, "and some are working right through the summer. Everybody has a different scenario today. Its not the old days, where everybody followed right along in lockstep." As a result, summer markets have been somewhat stronger than in past years.
In recent years, price changes in the fall have dictated where the ferrous scrap market finishes the year. In 2009 and 2010, the market finished about $100 per ton higher than it had in each of the preceding years. If those trends hold true for 2011, scrap could gain another $50 or so to finish out the year. For example, in 2009 the No. 1 heavy melt market gradually recovered from its 2008 lows, finishing the year around $255 per ton, and continued to recover last year and in early 2011. Prices have been around the $415 level since June, and a 10- to 15-percent boost would put No. 1 heavy melt close to $470 by the end of the year.
Scrap prices between February and September have changed little. After hitting a year-to-date high in January, scrap has decreased in value in three monthsFebruary, May and Augustand increased in the other five. May and Augusts decreases were slight. And of those five months of increases, four of themMarch, April, July and Septemberhave essentially been sideways markets with slight gains on isolated grades. More remarkable still is that the biggest monthly change since January was a $22 drop in February.