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2014 Outlook: Ferrous Scrap

Keywords: Tags  Metal recycling, scrap, steel, ferrous, manufacturing, PMI, Pittsburgh, No. 1 busheling Nucor Corp.

Metal recyclers are still battling pressured margins and intense competition but should enjoy a decent year, with steel demand improving and supply potentially tighter than it has been in a long time.

The United States has largely dug itself out from the crippling economic meltdown that hit in September 2008, and while order books for steelmakers haven’t returned to pre-recession levels, they have grown substantially. Raw steel utilization rates have crept up from an average of 51.5 percent in 2009, during the tail end of the Great Recession, to 70.2 percent in 2010, 70.4 percent in 2011, 75.2 percent in 2012 and 76.9 percent last year.

“The economy is improving at a slow but steady pace, so demand continues to slowly improve,” one Midwest scrap broker said.

Historically, the first quarter is strong for recyclers, and this year should prove no different. Short-term, it will be a seller’s market. “Mill demand will be steady to slightly stronger and pricing in the first quarter will be impacted by weather issues and already anemic flows into the yards,” one southeastern scrap broker said. “Supply is most concerning and will affect pricing because volumes into the yard are so low. It should be a good quarter for all scrap dealers that can acquire a volume of material to sell.”

All harbingers on the horizon suggest that steel mill demand shows no sign of retreating. The strong energy sector should bode well for scrap-consuming steelmakers on two levels: Cheap natural gas increases the competitiveness of electric furnace producers who consume the highest percentage of scrap; and the energy sector requires a lot of finished steel to meet its drilling and transportation needs. “Fracking is a bright spot because it requires a lot of finished steel like pipe and plate, and this industry is only going to grow,” said the chief executive officer of a large chain of service centers.

Manufacturing, which not only consumes finished steel but also produces prime industrial scrap as a byproduct, continues to show improvement. The Institute for Supply Management’s purchasing managers index (PMI) was put at 57 in December, indicating manufacturing growth for the seventh consecutive month. “I follow the PMI closely and use it as a six-month bellwether for where the economy is headed,” the service center source said.

And the lackluster performance of the construction sector, a huge consumer of finished steel, could be set to change. The American Institute of Architects’ construction forecast indicated that spending rose 2.3 percent in 2013 and projects a 7.6-percent increase this year.

“When nonresidential construction kicks back in, the demand for steel will increase and there could be a real shortage of scrap,” one Pittsburgh scrap source said. New housing construction starts were a bright spot in 2013 and are expected to remain on an upward course.

Aside from the positive economic outlooks, it appears that cut and shredded grades of scrap will continue to outshine the more expensive prime grades. The narrowing price trend is due to a combination of tight supplies of shredded and cut grades coupled with a relatively healthy manufacturing sector, which is increasing the amount of prime scrap in the market.

The margin between the two grades began to erode quickly in December and shredded scrap could sell on par or at a premium to No. 1 busheling by March. The tight supply of shredded and cut scrap is expected to remain a common theme throughout the year.

The impact of Charlotte, N.C.-based Nucor Corp.’s new 2.5-million-ton-per-year direct-reduced iron (DRI) facility, which made its first commercial shipment Dec. 29,  has been much debated but is still unknown. Some industry players suggest the new source of iron inputs will put a lid on prime scrap prices, while others expect it to merely put the brakes on imports of pig iron.

Another common theme that will carry over from 2013 is the enormous margin compression that has been pinching recyclers’ wallets for a couple of years. With an overabundance of shredders, it is becoming increasingly difficult for these machines to be profitable.

“Competition on the buy side, especially for shredder feed, is tremendous, making it difficult for shredders to have any significant inventories to run their shredders at capacity,” the Midwest scrap broker said.

Shredders have been idled by a number of recyclers—including Commercial Metals Co., Irving, Texas; David J. Joseph Co., Cincinnati; Gerdau Long Steel North America, Tampa, Fla.; OmniSource Corp., Fort Wayne, Ind.; PSC Metals Inc., Mayfield Heights, Ohio; and Sims Metal Management Ltd., New York—and more are expected throughout the year.

Exports account for nearly 25 percent of U.S. scrap metal sales. Exports at the start of the year have been lackluster because high domestic prices have made scrap too pricey for exporters, and export prices are expected to be flat to up $15 per ton in the first quarter on the East Coast and Gulf of Mexico

At least one exporter sees prices capable of improving in the second quarter, however. “Prices could be up $25 to $40 per ton in the summer, corresponding with the (Nucor) DRI plant reaching full capacity, which will dampen prices in the Gulf region,” he said. “Prices for finished product are checked at this time due to poor conditions in the Middle East and North Africa, but Europe is looking a bit brighter so that could increase demand for finished product, translating into higher scrap prices. So there is perhaps a limited downside for scrap to Turkey in the spring-to-summer time frame if European (gross domestic product) picks up.”

The West Coast scrap export scenario looks to be more stable and ripe for higher prices, with an expectation that demand from China will be low, Taiwan stable and South Korea up $15 to $25 per ton in the first quarter.

“China is still pricing finished product cheaply into Asia but Japan’s (gross domestic product) and stimulus after the (March 2011 earthquake and) tsunami is increasing demand internally for finished steel and thus demand for scrap internally. As a result, South Korea needs to come to the United States for scrap and is doing so now,” the exporter said.

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