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Dull metals: the sideways scrap market

Keywords: Tags  U.S. ferrous scrap, ferrous scrap prices, Rob Bakotich, Ferrous Processing & Trading Co., John Anton, IHS Global Insight Inc., Marlene Owen, Steel Dynamics Inc. OmniSource Corp.

The usually volatile U.S. ferrous scrap market seems fairly steady, and is likely to continue to bump along in a protracted generally sideways market.

“(Domestic ferrous scrap demand) has been fairly consistent,” said Rob Bakotich, executive vice president of sales and marketing at Detroit-based Ferrous Processing & Trading Co., in contrast to the wild swings that often mark the scrap market. John Anton, director of steel services at IHS Global Insight Inc., said the market is in a holding pattern. Others call it “stagnant” or “boring.”

Marlene Owen, director of investor relations at Fort Wayne, Ind.-based Steel Dynamics Inc., which owns recycler OmniSource Corp., said that domestic scrap demand could look weaker than it actually is because of the current softness in international demand, resulting in more scrap metal that would normally be exported instead remaining in the United States.

Joseph C. Pickard, chief economist and director of commodities at the Washington-based Institute of Scrap Recycling Industries, noted that trade figures from the U.S. Census Bureau and the U.S. International Trade Commission indicate that domestic ferrous scrap exports (excluding stainless and alloy steel scrap) of 1.3 million tonnes in June were down 36.5 percent from the previous month, and the first-half total of 9.3 million tonnes was 13 percent below a year earlier.

As for domestic demand, it could just be that the market is still stuck in a summertime lull, said Kimberly Leppold, senior steel analyst for Metal Bulletin Research. “Usually there is a ramp up of steel production in the fourth quarter,” she noted, and with recently increased steel demand--especially for hot-rolled coil--this is a distinct possibility. Others doubt that any such bump will happen until early next year.

Anton said that while electric furnace steelmakers (especially flat-roll producers) are making more money, certain supply disruptions have slowed production and reduced scrap needs. He said that integrated steelmakers are actually doing the best, partly on the back of the strong automotive market, and they use more iron ore than scrap.

“I don’t see any dramatic pickup in steel long products (which tend to be more construction related),” Bakotich said, which is one of the factors keeping the ferrous scrap market so “blasŽ.”

One problem is that the industrial production and manufacturing sectors are showing little growth, if any, keeping steel production and demand down. Pickard noted that U.S. industrial production showed no growth in July after rising 0.2 percent in June. According to the American Iron and Steel Institute, U.S. raw steel production of 64.7 million net tons through the end of August was 4.3 percent below 67.7 million tons in the first eight months of last year.

Worldwide economic uncertainty has had an inhibiting effect on spending. Owen said this can be seen in the continually thinning stocks on hand at U.S. steel service centers, which totaled just 2.2 months’ supply at the end of August, according to the latest Metals Service Center Institute tally.

“Without question the actions of federal, state and local governments--especially the federal government--have resulted in policies contributing to the uncertainty in the market and have made it difficult for the manufacturing sector to expand,” Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., said.

But despite sequestration, the pending debt ceiling debate and everything else the government is--or isn’t--doing, consumers have been surprisingly resilient, Pickard said. “The economy is still growing, just not at as fast of a rate as we would like.”

One reason, Leppold said, is because consumers are tired of governmental deadlines. “There has been fatigue relating to the government’s sky-is-falling mentality. Congress always seems to be able to find a Band-Aid at the last minute.” If anything, she said, this is affecting the construction-related steel long products side of the market, which isn’t improving that much.

While there has been noticeable growth in both the single- and multi-family housing market, improvement remains slow in both the commercial and institutional construction sectors, said Lynn Lupori-Gray, senior consultant at Hatch Management Consulting. “Even the growth in the residential construction market could slow if interest rates go up. There is just so much that the government can pump into the economy.”

The automotive sector is strong, with expectations by IHS Automotive that North American build rates will reach 16.2 million vehicles this year and 18 million by 2020, which should have a very positive impact on flat and long steel products alike, an East Coast-based scrap trader said.

Increases in auto sales also could have a more direct impact on the ferrous scrap market, Leppold said. Increased auto output results in the generation of additional prompt or industrial scrap, and when someone buys a new car they generally sell or trade in their old one--and many of the older cars are scrapped.

In general, scrap flows are OK, although they aren’t blowing the doors off, said Mitchell Padnos, executive vice president of Louis Padnos Iron & Metal Co., Holland, Mich. Any imbalance between supply and demand is currently in favor of demand. “There is almost no grade of scrap that can’t be moved, from the low side, such as turnings, through prime scrap,” Padnos said, although prime scrap in particular is seeing a fast turnaround.

That should continue as long as demand remains strong at sheet steel mills, he said, noting that recent steel supply disruptions had helped in that regard. “Generally there is always someone out of the market,” Padnos said, but with a number of furnace outages now resolved, and a settlement announced between U.S. Steel Corp. and union workers at its Lake Erie Works in Ontario, there could soon be too much material in the market, especially with all the shredder and other scrap processing capacity. “We are our own worst enemy,” he said.

Pickard noted that there are more than 300 shredders operating in the United States, including a number of mega shredders, while 40 years ago there were 160 to 170. Meanwhile, recycling companies continue adding shredders even though a combination of increased processing capacity and lower prices have severely compressed profit margins.

Plummer said that a 15-month decline in steel prices before their recent recovery, along with weak export demand, also had put downward pricing pressure on scrap prices.

U.S. exports of ferrous scrap tend to be choppy, with wild swings as foreign buyers enter and exit the market, and that remains the case. Turkey, the largest importer of U.S. ferrous scrap, is notorious for swooping in once every couple of months and buying all it can before staying out of the market for a while.

But Owen said it appears that the Middle East, including Turkey, as well as southeast Asia and China have all recently shown some resurgence in demand. The question, however, is how much scrap will be purchased from the United States and how much will be purchased from Europe.

Leppold said that in August a significant portion of Turkey’s imports were of European origin. That is not surprising, Plummer said, not just because of Turkey’s proximity to Europe but because with the economic problems there, Europe has a lot more scrap available for export. In fact, this year exports from the 27 European Union countries have surpassed those of the United States.

China also is key in determining the direction of the scrap industry, even though the great majority of its steel is produced in blast furnaces and not electric furnaces, Pickard said. The question, he said, is how much steel its mills will be producing going forward and if new economic stimulus measures are introduced there. That is a distinct possibility as its new president, Xi Jinping, has stated that he doesn’t want China’s gross domestic product growth to fall below 7 percent.

Anton said that Chinese steel mills currently are running at a big loss. “I don’t think they can keep this up,” he said. But the question is whether they will cut their output radically, which would be positive for the market, or make more moderate cuts and continue to rely on exporting what isn’t consumed domestically.

But, as with Turkey, it is unknown how much of its scrap needs will be met by the United States. While China has some new initiatives to bring in cleaner scrap, Lupori-Gray said mills there are looking to eventually develop a domestic scrap market and import less material. And Plummer pointed out that Japan is willing and able to export scrap to Asia.

All told, the rest of this year will be pretty flat unless there are any shocks to the system, an eastern ferrous scrap trader said. Lupori-Gray agreed. “Everything is stagnant right now,” she said. “There is nothing on the horizon that points to a significant move in either direction.”

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