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Predicting the ferrous scrap market’s next move

Keywords: Tags  ferrous scrap market, ferrous scrap market outlook, ferrous scrap prices,

The ferrous scrap market’s significance to the steel industry is deeply rooted, and its direction is keenly watched as a result. But trying to predict its next move can be much like betting on horse races—sometimes you pick the winner, sometimes you don’t.

Obsolete and discarded metallic objects play in big role in everyone’s pocketbook. Scrapyards keep an eye on the dynamics to maximize their profits, electric-arc furnace (EF)-based steelmakers scrutinize the market because scrap is their largest input cost, and finished steel buyers watch scrap prices as a harbinger to buy or move to the sidelines to wait for a better deal.

Yet despite the next-to-impossible task of accurately predicting where the market will head, there are a host of indicators that can make it easier to turn the odds in your favor. Understanding factors that drive the scrap market and paying close attention to numerous cues—ranging from the London Metal Exchange billet contract to imports and exports to end-of-month cancellation rights being exercised—are essential for all prognosticator wannabes trying to decide if it is a buyer’s or seller’s market.

The monthly ritual to determine where prices are headed is colloquially known as “The Dance” and the tempo that emerges is a clear sign for near-term scrap prices. Whichever party seems to be dragging their feet typically has the edge.

When mill buyers make offers and scrap dealers procrastinate, there is an expectation that prices are headed upward. Mills will test the market and offer sideways, while dealers—sensing higher prices—will hold off for a better offer. But when mill buyers are slow to enter the market, it usually means their suppliers will be offered less money; an unaggressive mill buyer might be out of the market because the mill is oversupplied or scheduling routine maintenance, but relaxed buying by mills is generally because prices are falling.

Mill buyers for producers with scrap assets are afforded an inside view on the state of the market as they can gauge demand and supply dynamics. “Mill buyers who have access to company-owned scrap assets can telegraph the pace as to what mills need or don’t need inventory,” a Southwest scrap dealer said.

Scrap dealers don’t take the lead role, with mills instead putting out offers at which they are willing to purchase scrap rather than dealers pricing their own material. Most scrap dealers would rather wait it out and allow a competitor to be a guinea pig on prices. Then other scrapyards jump in and attempt to trump the deal by getting a few more dollars. “If the market is on an upswing, the first mill buyer will get the best price,” a North Carolina recycler said.

A Midwest mill buyer said a slow entry isn’t always a sign of bullishness. “When I am slow to make my move it may just mean I don’t know where the market is,” he said. “Historically, the bellwether was the General Motors bundle auction, and everyone said what a stupid number that was. Well, it went away and there is nothing now to set the market. I am forced to go on what I hear these days to get a trend. The only thing I have is what I hear talking to different brokers and reading the trades.”

Cancellation rights

The mills have worked out a sweetheart deal that allows them to cancel any scrap order that isn’t received by the last day of a month. Whenever they sense the market is headed in a downward direction, they exercise this right, which is a sure-fire indication that prices are softening. The move sends scrap suppliers into overdrive as they attempt to meet the delivery deadline. The cancellation right allows the same mill to enter the new month and buy the same scrap for less money in a down market. 

“I make sure that I steadily ship all month long so I don’t get caught up in this,” one New York scrapyard owner said. “Sometimes the mill will only give you a few days, and if you have been dragging your feet you might lose the deal because you don’t have the material or railroad cars lined up.”

On the other hand, if the market appears to be headed upward, the mills don’t exercise their cancellation rights and allow orders to arrive late. If mills allow late shipments to arrive the following month, this suggests that prices aren’t retreating.

Scrapyards usually adjust the price at their scales monthly in response to what they are able to sell their material for. A simple telephone call every two weeks to an auto shredder is a bona fide way to learn the direction the market is taking. Shredder plants get calls all day long with inquiries about what they are paying at the scale; some even post their current prices on the Internet. Keeping track of these buying prices is one method to judge where the market is headed.

Monitoring scale prices won’t work with prime scrap, which is bought under contract. Dealers are obligated to take the prime material that is sold on a formula basis. “When I sense a down market I lower the scale price, but most contracts are on a monthly basis and so most (scrap) guys adjust them monthly,” the New York recycler said. “If I start getting customers with tonnage that is usually sold to exporters, I become aware that (the) export (market) is dropping and lower my scale price.”

Mills offer to buy at a “to be determined” (TBD) price when they need scrap but the market hasn’t settled. This is a sign that the market could be headed in either direction, but the threat of volatility isn’t prevalent. “You only do a TBD with someone you have dealt with before and you trust, but this means prices will move conservatively either way,” a Pennsylvania scrap source said. “If I sensed it was going to be a super swing in either direction I wouldn’t sell TBD because I want to maximize what I am going to get and don’t want to pen myself in.”

LME billet contract

Market observers are now watching LME steel billet futures. Some see a rise in the billet futures price as a signal of increased demand by Turkey—the largest overseas buyer of scrap metal from the United States, much of it consumed by rebar mills—which in turn indicates a looming improvement in scrap prices in the United States. “I try to trade on intuition, but a fundamental like this works as well,” the New York recycler said.

Metal Bulletin Research (MBR) has found a strong relationship between Turkish billet export prices and U.S. East Coast No. 1 heavy melting steel scrap prices and Chicago shredded scrap prices. “The correlation coefficients indicate that the movements of both are directly related. While correlation does not imply causation, we suspect that U.S. scrap prices lead billet export prices with a slight market lag of a few weeks,” MBR analyst Bradley MacAulay said.

If demand in Turkey is improving, the billet price increases and Turkish mills could be headed to the United States for feedstock. A falling price on the LME can serve as a warning sign that scrap prices are heading downward.

The scrap export market plays a role in domestic pricing that can’t be ignored. When exporters are forced to go inland to secure their needs and pay higher prices, domestic mills are forced to pay more for scrap. “When exporters go inland because they don’t have enough material to fill their orders, this is a sure sign a price uptick is around the bend,” a Pennsylvania recycler said. “Sometimes exporters will wait until domestics have finished their buys so as not to inflate prices by creating a false sense of demand. Going inland is tipping their hand and showing renewed demand. This will impact near-term dynamics.”

 “When I call an exporter and they don’t get back to me, I am dumping my material as fast as I can,” the New York recycler said. “If I receive calls from numerous exporters in the same week, the market is going up.”

Some steelmakers import busheling and pig iron to keep domestic prime scrap prices from spiraling out of control or to capitalize on a favorable currency exchange rate. The use of imported pig iron and No. 1 busheling allows melt shops to buy cheaper scrap, which works to keep a lid on prime grades. When primes are inflating and the euro provides a favorable currency exchange rate, domestic steelmakers have no qualms about shopping offshore.

When the price spread between prime and obsolete scrap narrows, mills will increase their buys of domestic prime scrap. While the prime grades might still have a higher price tag, the higher metallic units in the better grade pay off because they yield more tons per melt. Pig iron has the same effect because it allows mills to make their typical melt using less busheling.

“When I hear the euro is out of whack, I know a down market is upon us,” the North Carolina recycler said. “The only downside is nine out of 10 times scrap dealers have no idea what is floating here when they should be paying better attention.”

Scrap some of the old rules

Some of the traditional rules for calling the scrap market no longer apply in today’s world, yet observers still hang on to them. Weather is one.

At one time, scrap prices increased in the winter as snow and freezing temperatures sent scrap peddlers into hibernation and slowed work in the scrapyards. Prices would then inch down in the spring when pent-up supply made its way to the market. But with modern equipment, inclement weather is no longer such a big factor as scrapyards keep churning out material and loading for delivery. The recently ended mild winter is a clear testament. “Weather can still be a factor if you have blizzards, but winter does not slow down the industry like it once did,” the Pennsylvania recycler said.

One rule that remains true is that the industry can expect higher prices in January. “This happens because mills clear out their inventories in December to end the year on the most positive note possible while scrap dealers hold off on sales to roll the profits into the next calendar year,” the Pennsylvania recycler said.

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