MUNICH Weak demand from U.S. steel mills is not likely to offer any major support to shredded scrap prices despite reports of supply tightness, according to market participants.
Strong flows of prime scrap, particularly No. 1 busheling, throughout the year have allowed many mills to increase their intake of busheling during the past few months, sources said. Increased busheling in each melt will continue as long as busheling and shredded scrap prices remain on par within $5 to $10 per gross ton of each other, they added.
Buyers at some mills confirmed the trend, but many said not every steel mill is structured to take advantage of such anomalies.
"Some mills have the ability and do change their melt practice to optimize on grades that have higher yields and are lower-priced. Its always about value in use. Ive actually increased the percentage of busheling in our charge the past three months because its been a good value," said a buyer at one mill. "Depending on the type of busheling, the density may not be as good as shred, however."
"Prime can be substituted for shred," a buyer for a second mill said. "You give up some density, but chemistry-wise and yield-wise, prime is better. The benefit that shred provides vs. prime is better density. When prime (prices) compress against shred, mills can and do adjust their mixes to a point. There will still be demand for shred, but it will be lower as long as prime is trading at or below shred levels."
A few sources said that while a change in mix toward No. 1 busheling is a more logical approach in the current price environment, some mills will not take advantage of it due to traditional melt-shop practices.
"My sense is that only the most stubborn steel shop managers will want to hold their scrap mixes. Shredded will need to adjust or fade as a percentage of the scrap buy. Given the seasonality, we are likely to see some of the feeder network pull back supply, at least marginally," a third source said. "Integrateds will buy more bundles and electric-arc furnace shops more busheling. Theyd be crazy not to do so."
"Mills will startweve startedto look at using more prime scrap," said a source at a fourth mill. "But every melt shop guy has his recipe. If youre making rebar, its a different story than if youre making flat-rolled products. Rebar guys should start using more prime because its better for them. It has low residuals. Id run all the busheling I could." He said his mill had cut back its purchases of shredded scrap by 20 percent since July in order to take in more No. 1 busheling.
"The mills or melt shop superintendents prefer their normal shred mix in spite of the price/residual ramifications of cheaper prime scrap," a fifth source said. "There will be mills that will tweak their melt and consume some percentage increase in prime vs. shred."
He said that softening demand "will offset the reported tightness of shred supply feedstock, allowing mills to buy cheaper in October without much problem."
Others agreed. "Im not certain that I have a strong view on how this phenomenon may impact prime and shred prices. (It is) likely the abundance of prime will not permit shred prices to rise even if shred supply is actually tight," the first source said.
"Some mills have the ability to shift melt practices and use more prime, but some dont have as much flexibility or still prefer to use frag (shred) over prime for efficiency issues," a sixth source said. "I think there will be some shift to prime, but not enough to keep prime prices from falling more than shred prices this month."
A few sources, however, said that while some mills could switch to taking in more busheling scrap, it will not necessarily affect prime scrap prices because the trend is not universal.
Several market participants in the Midwest have speculated that prices for both prime and obsolete grades of scrap are set to shed between $30 and $50 per gross ton for October (amm.com, Sept. 27).