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US prime scrap market bracing for steep drop

Keywords: Tags  scrap prices, No. 1 busheling, bundles, prime scrap, Lisa Gordon

PITTSBURGH — A multi-month slide in prime scrap prices looks poised to continue, with market participants expecting premium grades to take the biggest hit in June.

"The $20 a ton we were talking down on prime last week has gone way past that number at this point. There is an oversupply that will remain for at least 60 days," a Midwest mill buyer said Friday.

Players in the market are now projecting that prices could fall by as much as $35 per ton in some regions when mill buyers return to the market Monday to begin their June business.

"I have been steadily offered primes at lower numbers starting a week ago Wednesday," an eastern broker said. "Offers came in at $435 a gross ton, then $425 and now $420, which would be down $35. Dealers are very willing to lock in orders at to-be-determined prices."

While shredders are feeling margin compression for obsolete grades, the prime players are facing their own challenges: Busheling and bundles generally are purchased on contract, so many recyclers are obligated to make monthly purchases regardless of demand, sources said.

The oversupply situation was heightened in the fourth quarter, when a major mill began to import prime scrap from Europe (AMM, Jan. 9). "Our domestic (market) never really recovered from the oversupply of prime," an Ohio broker said.

In the difficult market environment, the eastern broker said that nervous sellers are only too eager to cut a deal. "This type of market is scary," he said. "We haven’t seen the likes of it since late 2008 and early 2009."

An analyst agreed that the market looks set for another drop. "On average, contacts expect June scrap prices to decline $26 to $35 a gross ton. Prime grades are expected to decline the greatest due to unwavering oversupply of prime/substitutes in conjunction with softening demand from flat-rolled steel producers," Luke Folta, Jefferies & Co. Inc. equity analyst, wrote in a June 1 note.

If prime grades do fall again in June, it will be the fifth consecutive month of declines. No. 1 busheling scrap in Chicago, for example, peaked this year at $517 per gross ton in January before falling steadily to $445 in May.

Each month, scrapyards’ contracted prime purchases have been worth less when they hit a market that is increasingly short of takers.

Smaller yards, which may handle only one or two industrial accounts, are said to be having the most trouble placing their prime scrap tonnage. "Yards that had a couple of hundred tons they couldn’t place now have 1,000 tons stacked up," the Midwest mill buyer said.

But larger yards aren’t immune either. A large southeastern player said he is planning to adjust his prime contracts to stop the losses. "I am renegotiating with my suppliers and I am not worried about competitors taking these contracts away from me because no one is going to take on these accounts in this environment," he said.

Sources said many automakers’ plans to take shorter downtimes in the summer to retool their plants also is working against the prime market.

"The steady flow of prime will continue. Prompt industrial scrap is aplenty and that will not cease in the near term," the second broker said. "The prime scrap market is not in good shape and demand for this grade looks to be one of the main stresses going forward."

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