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Ferrous scrap’s wild ride poised to continue

Keywords: Tags  Institute of Scrap Recycling Industries, Commodities Roundtable Forum, No. 1 heavy melt, No. 1 dealer bundles, shredded scrap, Michelle Applebaum, John Keyes, Steel Market Intelligence Fred Hauptstueck

The uncertain state of global economies continues to keep various scrap market factors in play, a number of analysts and players said at the Institute of Scrap Recycling Industries’ Commodities Roundtable Forum in Chicago.

From ferrous to aluminum to stainless, scrap markets are expected to see fluctuations in demand, price and availability, a somewhat surprising development following a relatively stable 2011--a year that seemed to point toward a more even and smooth economic recovery, several forum moderators and panelists said during the September forum.

For example, average ferrous scrap prices--a composite of No. 1 heavy melt, No. 1 dealer bundles and shredded delivered to consumers in Chicago, Philadelphia and PittsburghÑstood at about $462 per gross ton in January 2011, the highest level since just before the financial crisis and one of the highest levels in history. Since then, scrap prices have fallen 30 percent to around $323 in October.

Many spoke at the ferrous roundtable of a changing environment in scrap markets. Michelle Applebaum, managing partner of Chicago-based Steel Market Intelligence, said that “volatility is here to stay” in scrap pricing, reflecting an overall imbalance in nearly all aspects of the steel industry. Others voiced concerns about scrap’s wild ride.

Although prices barely fluctuated during 2011--they averaged $468 per ton in January 2012, up $6 from the start of 2011--that has not been the case this year, falling nearly $140 in a volatile market. September and October were strong examples of the volatility, with what were expected to be sideways markets evolving quickly into downward movement.

Applebaum said the volatility seen so far in 2012 could last for the next five to seven years as mill capacity utilization rates remain relatively flat or historically weak.

Furthermore, pinning hopes on recovering scrap prices on the basis of “competition for raw materials” might not be the best way to forecast where ferrous scrap values could be heading, said Fred Hauptstueck, manager of ferrous sourcing at Fort Wayne, Ind.-based Steel Dynamics Inc. (SDI) and subsidiary OmniSource Corp. “Yes, there is concern on the part of mills that they can get the materials they need, and on the part of shredder operators that they can get feedstock, but the answer to the question of whether the scrap is out right now is ‘Yes.’”

John Keyes, district trading vice president with Tube City IMS, Glassport, Pa., agreed with that evaluation, adding that ongoing demolition of mills, factories and rail material will provide a number of sources for scrap. “It’s a resilient market,” he said. “When the scrap price makes it affordable, demolition follows.”

One attempt to soften the expected volatility in the market is the CME Group’s scrap futures contract, launched Sept. 10, which is tied to AMM’s Midwest Ferrous Scrap Index for No. 1 busheling. Yong-jin Chang, director of metals research and product development for Chicago-based CME, said the futures contract offers market participants a more reliable way to control the risk in raw materials.

In another roundtable session, attendees were told that aluminum scrap consumers are increasingly using secondary grades of feedstock, which has put a floor on secondary scrap prices and diminished overall scrap quality.

Many consumers of mill-grade scrap have been “making headway trying new secondary grades,” according to Garey Rittenhouse, vice president of southern nonferrous trading at Mayfield Heights, Ohio-based PSC Metals Inc. “Competition between the mill and secondary consumer tiers seems to be growing month to month. Previously, those large consumers were very rigid in their interest level in change, but that’s becoming more fluid.”

Rittenhouse said the trend has been driven largely by technological developments that have opened up new ways of processing scrap, as well as a greater willingness to “invest capital in order to access a new sector of the supply chain.”

This increased flexibility from large consumers and steady export demand is placing a “put” on secondary scrap prices, he said. “There’s always a fallback (for sellers). (Consumers) will not get it any cheaper if that ‘put’ is in place.”

Rittenhouse said that such flexibility also has led to a decline in the overall quality of aluminum scrap packages, with dealers now less likely to spend money on sortation. “It is now harder to discern what is a secondary sheet package and what is a mill grade,” he said. “Sometimes you can’t tell the value of the material until you process the whole thing.”

He said the trend, combined with an avoidance of traditional consumer deductions, such as the “iron deduct,” also has pushed more grades of aluminum scrap into the export and shredder supply chains. “Zorba yield per gross ton has declined notably, forcing most shredders to pursue nontraditional feedstock,” he said. “For example, if I don’t like the price of cast today, I’ll throw it into zorba.”

Rittenhouse said there has been an increasingly strong correlation between the ferrous and nonferrous scrap markets since 2006. “It’s been uncommon for the ferrous and nonferrous scrap markets to have a similar period of weakness at the same time, but this summer we saw both markets decline and experience lower availability,” he said. The total availability of scrap, excluding new production material, has been “lower overall” this year.

Nick Adams, vice president of business information and member services at the Aluminum Association, agreed. “I’m hearing from our members that there’s not enough scrap to go around,” he said.

Many attendees at the ISRI forum told AMM that they believe scrap availability also has been hampered by low London Metal Exchange prices, which have prompted many sellers to hold material and wait for an increase.

Richmond, Va.-based Davenport & Co. LLC offered a bullish outlook on aluminum prices. Davenport analyst Tim Hayes said the LME aluminum cash price, which is expected to average 93 cents per pound this year, will average $1.08 in 2013, $1.20 in 2014 and $1.27 in 2015, and the likelihood of low interest rates through 2014 will continue to make LME warehouse stock financing profitable for the next two years. “Stock financing is here for a while. It may even increase,” he said. “One day it will end ... not abruptly, but gradually. We expect the metal will come to the market over a two-year span. It will drip into the market, not flood.”

Adams said that domestic aluminum consumption this year is likely to be up 7 percent from 2011 levels, although he cautioned that it might drop off before the end of the year. “There’s always a dip in the fourth quarter, and there’s always a recovery in the second and third (quarters),” he said.

Consumption has yet to return to its pre-downturn peak of 10.5 million tonnes in 2006, Adams said, and overall growth is slowing despite improving consumption in such key markets as transportation. He said that auto production in the first seven months of 2012 was up 23 percent from the same period last year, while housing starts were up 25 percent in the same comparison and construction spending rose 9.3 percent to $464.4 billion.

Stainless steel scrap, which also has been lagging behind pre-recession levels, could see a turnaround coming. Panelists at a stainless roundtable said that increased domestic demand could lead to higher, more stable prices in 2013 and beyond. However, diminished export demand from China is currently a worry for those seeking a wider market for the material, panelists said.

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