ggressive consolidation by domestic steelmakers to
lock up scrap supplies has resulted in producers capturing a
large portion of the overall pie, so it is something of a
mystery as to why mills are still subject to volatility in the
When the asset buying spree really built up
momentum in 2008, some industry players suspected that steel
producers would be able to manipulate the ferrous scrap market
because they had their hand too deep in the cookie jar. Time
has proven this premise wrong as the fickle scrap market
clearly continues to do whatever is pleases. Scrap prices
illustrate the point. No. 1 heavy melting steel scrap averaged
$417 per ton last year compared with $357 per ton in 2008,
according to Brad Macaulay, a Metal Bulletin Research
Before 2008, producers like Nucor Corp. and Steel
Dynamics Inc. (SDI) decided to take the next step and actually
married their long-time scrap suppliers in megadeals that came
with upward of 10-digit price tags. Ferrous scrap costs are the
largest input cost by far for electric furnace (EF)
steelmakers, and producers were quick to snatch up assets as a
strategy to better manage supply.
In addition to Charlotte, N.C.-based Nucors
buy of David J. Joseph Co. and SDIs acquisition of
OmniSource Corp., the producers have continued their sweep of
scrap asset buys and add to their arsenal.
The U.S. scrap market reached 81.5 million tons in
2010, according to the Institute of Scrap Recycling Industries,
Washington, and regulatory filings reveal that producers were
brokering or processing 19.6 million tons.
No single scrap recycler holds a significant
domestic market share, but as a collective group its buying
power cant be denied. The price to feed the mills seems
to have less to do with mill ownership and more with a plethora
of other factors. In other words, there are greater factors
that the U.S. producers cant decouple from despite a
Mill utilization rates, export demand, service
center buying patterns and the strength or weakness of the U.S.
dollar seem to overshadow the producers stronghold on
According to 2010 annual reports (the most recent
available as of press time) filed with the U.S. Securities and
Exchange Commission (SEC), Nucors annual scrap processing
capability approached 5 million tons and it consumed 17 million
tons; Fort Wayne, Ind.-based SDI processed or brokered 5.2
million tons and consumed nearly 4.8 million tons; Commercial
Metals Co., Irving, Texas, shipped 2.1 million tons; and
Schnitzer Steel Industries Inc., Portland, Ore., processed or
brokered 5.3 million tons. And Gerdau Long Steel North America,
part of Gerdau SA, has 17 scrap recycling facilities that
collect, sort and process some 2 million tons each year,
according to its website.
So the question remains: With so much scrap under
producers control, why is the market more volatile than
it has ever been?
The scrap market will always be impacted by mill
utilization rates and any downturn in demand is driven by the
state of the economy2009, which is an anomaly because of
the anemic demand that drove operating rates to 50-plus-year
lows, illustrated that pricing and mill operating rates go hand
in hand. Mill rates averaged 51 percent in 2009, when the
average No. 1 heavy melting steel scrap price was $217 per ton.
As the recessionary environment subsided and manufacturing
improved last year, the amount of prompt industrial scrap
generated rebounded, putting downward pressure on prices in the
first two months of 2012.
Another factor out of anyones control is that
scrap is a global commodity enormously influenced by worldwide
demand. The size of the U.S. scrap export market is on par with
that of the domestic mills assets, and offshore
customers demand impacts the price.
The United States is the worlds largest
exporter of ferrous scrap, shipping more than 24 million tonnes
to nearly 90 countries last year, up from 20.5 million tonnes
in 2010. When offers from Turkey, a large customer, go cold and
shipping opportunities dry up, export scrap moves inland and
begins to oversaturate the domestic market.
It is common knowledge that export-grade scrap is a
lesser-quality material. There is an adage among scrap players
that if it sinks and sticks to a magnet, it is good enough to
ship. U.S. producers are far more selective about the
metallurgical quality of scrap bought, although they are known
to buy material that was initially earmarked for export when
the price is right.
The volatility is so rapid and unpredictable that
it has thrown all the old rules out of the window.
Historically, scrap prices eased in the spring months and
stayed steady until at least November as mills laid down
material to prepare for the onslaught of ice and snow. This
forecasting mechanism, which had been trusted and dependable
for a century, is no longer true, with recent movements showing
that the market does as the market chooses.
Aside from mill operating rates and global demand,
the U.S. dollar is another factor that meddles in the scrap
market. When the dollar gains steam, it works against the scrap
A strong U.S. dollar would make our products
more expensive for non-U.S. customers, which could negatively
impact export sales, Schnitzers fiscal 2011 annual
report said. Compounding this, a strong dollar also makes
imports less expensive and results in an increase in imports of
scrap metal and its substitutes, which can pressure domestic
This was readily apparent in 2008, when the weak
dollar and strong global demand sent scrap selling prices to
The timing and magnitude of the cycles in the
industries in which we operate are difficult to predict and are
influenced by different economic conditions in domestic (where
we typically acquire our raw materials) and foreign (where we
typically sell a significant portion of our products)
markets, Schnitzers annual report said.
Service centers also contribute to scrap price
trends. Lean inventories are now embraced and the optimal
three-month supply on hand is no longer the benchmark. Even
when mills are running full out, distributors choose to be
conservative with the volume of finished material in their
warehouses. This leads to a perpetual but muted demand.
Mills are opting to keep lower inventories at their
melting facilities as well. Whereas it was once common to have
30 days of feedstock at the mill, during slow periods a 10-day
supply is considered the norm.
EF producers in particular have a strong motivation
to try to keep scrap prices in check, since they rely more
heavily on the material than integrated mills. Most integrated
mills have secured raw material positions in metallurgical coal
and iron. When scrap prices overheat, the integrateds can
become lower-cost steel producers.
Not only do steelmakers own scrap assets, they have
taken a keen interest in purchasing sizeable volumes of the
largest source of obsolete scrap, auto salvagers, which are a
major provider of vehicles to shredders. It seems when prices
get too low, mills could order their salvage operations to stop
sending cars to the shredder in order to tighten up supply and
bolster prices. Mills could indirectly control the flow,
although in reality this doesnt occur.
They (mills) have become very powerful
because they hold the cars that become feed for the mill,
one scrap dealer said.
The auto dismantling business is still highly
fragmented and mills dont own enough of these to control
the (used auto parts retail sales operations), one broker
Industry players and observers differ in their
assessment. I have felt there is a high level of conflict
of interest with the mills owning scrap assets. But they still
havent realized that when they bring down the price of
scrap they have to lower the price of steel, an industry
A second broker noted that mill ownership of scrap
assets hasnt been the magic bullet to stem volatility.
This type of control was supposed to give less volatility
in the market and I dont think it has worked, he
said. We thought it was game over in 2008, and 2011 ended
up being the highest-price year.
Another broker disagreed, noting that the mills use
their brokerage houses and ability to buy in quantity to dampen
the prime scrap market.
The merged scrap and steel companies are
having an effect on the market, the first broker said.
After the integration, they began to take advantage of
dips in the market and buy pig iron when the market is at
bottom to keep a lid on prime scrap prices.
The mills give the pig iron to brokers to
sell to competitors and control the flow of scrap, the
second broker added.
Mills continue their quest to increase their market
share of scrap assets through acquisitions and organic growth.
But while vertically integrated mills can be assured of a
captive scrap supply, there are no signs on the horizon that it
can impact scrap prices.