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Rebuilding America. . . a ton at a time

Mar 31, 2017 | 08:00 PM | Mei Ling Toh

What does President Trump’s $1-trillion infrastructure rebuild plan mean to the US scrap sector? High spirits abound but so far details to justify the enthusiasm have yet to emerge

President Donald J. Trump’s bullish plan to bankroll and “make America great again” in part by undertaking a trillion-dollars worth of infrastructure projects over the coming decade has lifted spirits and generated a sense of euphoria in the metals industry including ferrous scrap market participants.

But with electric-furnace based mills now accounting for over 70 percent of U.S. raw steel production and ‘Buy America’ an essential
plank of the Trump campaign platform, is there enough material in the U.S. scrap pipeline and reservoir to support a potential boom in infrastructure project-related steel demand?

To date, details of the new administration’s steel-intensive infrastructure plan have not been announced. If and when Congress passes the promised plan, however, the legislation is expected to lay the foundation for a large-scale rebuilding of America, a nationwide initiative that will increase U.S. ferrous scrap demand exponentially.

Experts acknowledge that the exact depth of the U.S. scrap reservoir remains an unknown. The Institute of Scrap Recycling Industries
(ISRI) estimates roughly 65-million tonnes of iron and steel scrap was generated in the U.S. last year. That figure is down 3 percent from 67-million tonnes in 2015.

“Domestic consumption has been pretty flat at 56-million tonnes per year in 2015 and 2016,” Joseph Pickard, ISRI’s chief economist
and director of commodities, said. “The real downward decline (in volumes) is on the export front,” he noted. “Lower export volumes have had an impact on pricing and supply that can be seen through the first half of 2016.”

The twelve months of 2015 marked one of the darkest periods endured by the domestic steel and scrap industry in many years.
Finished steel and scrap prices hit rock bottom, restricting material flows into scrapyards with volumes down almost 50 percent.

The impact of 2015’s dramatic price and volume declines continue to be felt across the scrap sector with market participants indicating that intakes still have not fully recovered despite improved prices.

Unfair trade, sagging energy and construction markets, low operating rates and finished steel prices and thin margins took a toll.

In 2015, U.S. mills produced 88.4-million tons of steel at an average capacity utilization rate of 70.1 percent according to American Iron and Steel Institute (AISI) data. Although AISI statistics show the operating rate for the industry as a whole improved marginally to 70.8 percent in 2016, steel output slipped to 87.9-million tons.

Over that 2015 time period, the global steel industry faced its own mix of economic and political challenges with the glut of cheap Chinese steel flooding the international market topping a list of contentious issues.

While Trump’s much-vaunted infrastructure plan remains short on detail, there is no shortage of enthusiasm among steel and scrap
circles for the initiative given its anticipated impact on both sectors. “Infrastructure spending is good for steel demand and the health of steel is very closely connected to the health of scrap,” ISRI’s Pickard noted. “So, we certainly encourage more infrastructure spending which will be good for the industry as a whole.”

Without a more definitive plan and accompanying detail from Washington, it is difficult to gauge how much steel will be needed to rebuild America’s ailing infrastructure as well as the impact of the promised initiative on domestic steel demand.

That same lack of detail makes it equally--if not more--challenging when it comes to determining whether the reservoir of U.S. scrap is
deep enough to support the construction of a trillion-dollars’ worth of infrastructure?

Asleep in the deep?

The monthly settlement of ferrous scrap prices has always been subject to the influence of sporadic gluts and shortages. Historically, however, the supply-demand imbalance is temporary in nature with the market working its way toward balance through the dynamics of classic laissez-faire capitalism.

Over time, a perception has taken root among mills and yards that the scrap reservoir is, in fact, bottomless. Because scrap lacks inherent value, its price is a function of and dictated solely by demand.

If prices are high enough, subscribers to this rationale claim, obsolete scrap will literally come out of the woodwork and make its
way—with the help of peddlers--into the supply stream and on to the market.

Scrap supply is determined by two main factors– steel production volume and pricing, John Harris, chief executive officer of Canada-based consultancy Aaristic Services Inc., says. Harris, who is currently retired, previously served as a raw materials internal consultant to ArcelorMittal SA.

“Scrap is not a raw material to be mined,” he notes. “It is about a collection system that is driven by the dollar.”

Galdino Caro, chief executive officer for Sims Metal said during a recent earnings call that a study conducted by the company of price
vs. scrap flow, found that every $50-per-tonne change in scrap price triggers an 8-percent change in global volume. He noted, however, that the impact of price on material flow tapers off the higher the prices rise.

While this market dynamic may hold true for obsolete grades, prime behaves a little differently and is tied closer to the fortunes of the
steel sector.

“Prime scrap is less price sensitive than obsolete,” Pickard commented. “But it is all interconnected in the sense that as manufacturing picks up, there will be better steel demand and hence, better scrap demand,” he explained.

“Scrap supply tends to improve as prices improve but I think there is actually a finite amount of scrap,” Pickard went on to note.
“When we exported 22-million tonnes of scrap a year, there was certainly pressure on the supply of obsolete grades. Now we have excess scrap because domestic mills are consuming less and international mill demand is also lower.”

Since export volumes have halved from their 2011 peak, there is more than sufficient scrap supply to meet domestic mill demand in the U.S., Pickard believes. “It is certainly a global market place where it is not scrap prices alone that determine demand but also the price of scrap in relation to other raw materials.”

It’s a big world after all

Due to the global nature of both the steel and ferrous scrap industry, focusing solely on the U.S. scrap reservoir fails to take into account volume changes in the global supply. Harris, for one, believes that unlike the modest declines in scrap generation volumes seen domestically year-on-year, the size of the world’s scrap pool has, in fact, grown over the past decade along with higher steel production volumes.

Harris explained that once steel is used in our society, it is considered a part of the scrap reservoir. “Of course (the scrap reservoir) has grown in the U.S. as well because we buy approximately 40-million tonnes of steel a year (under Nafta) which is added to Nafta production of 110-million mt and we don’t consume it all,” he noted. “We can only produce somewhere around 110-million tonnes and our demand for steel under Nafta runs around 145-million tonnes, so we buy the rest. Also, we don’t export that much compared to before.”

Harris estimated that the global reservoir of ferrous scrap totaled 20.17-billion metric tonnes in 2005, taking into account the fact that some 13.51-billion metric tonnes of steel were produced in the twenty years between 1985 and 2005.

Based on global steel production figures compiled by the Brussels-based World Steel Association, global steel production totaled
24.3-billion metric tonnes from 1995 to 2015. Applying the same rationale, it follows that the global scrap supply would have to have
grown substantially to support the increased steel volumes.

“What does a trillion-dollar infrastructure plan equate to in tonnes of steel?” Harris asks rhetorically. “When you figure that out, it’ll tell
you that supporting such an increase in demand is not a problem. “If we have to buy more steel, the Chinese will be more than willing to sell it to us,” Harris said.

That is, of course, unless President Trump holds the line on his “Buy America” pledge and requires that all steel used in the massive
rebuild initiative be made by and sourced from American mills.

If that is indeed the case, is there enough material in the U.S. scrap pipeline and reservoir to support such an extensive undertaking or
would domestic mills need to import scrap to supplement home-grown material?

The way Harris sees it, trade limitations--whether for steel or scrap--are not a good idea. “They (the mills) can talk subsidies all they
want but the bottom line is that all the steel (produced in the U.S.) has to go somewhere and it has to be at the right price. They can’t be competitive if the same product is available globally at a much lower price,” he argued. “Isolationism just doesn’t work.”

With firm details regarding the proposed infrastructure plan yet to emerge, it is too early to tell what the initiative portends for the U.S.
ferrous scrap market.

Common sense dictates that the ramp-up in steel demand will lead to higher scrap consumption levels. Whether the domestic scrap supply is sufficient to satisfy that demand remains to be seen.


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