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US steel scrap challenges


It is no secret that scrap prices have increased by at least 78% since Donald Trump was elected as US president. In March, No. 1 busheling was selling for $365 a gross ton and shredded scrap was selling for $360 a ton in Chicago, compared with $205 a ton and $198 a ton, respectively, in early November 2016. 

Nevertheless, the unexpected collapses in price in 2008 and 2015 still haunt sellers and views are mixed as to whether another hard tumble is possible. In February 2015, scrap prices unexpectedly nosedived by more than $100 a ton on some grades in reaction to slumping oil prices.
In the wake of the global financial crisis in 2008, no one could estimate how bad things would be until the dust settled. Chicago busheling was $850 a ton and shredded scrap was $546 a ton in August 2008. Fast forward to November 2008 and both grades had collapsed to $125
a ton in the wake of the global meltdown.

Recyclers are confident that neither the 2008 collapse nor its peak are possible. “Will we hit prices levels of 2008? No. Nucor built a $2.2 billion insurance policy against inflated scrap prices in Louisiana by building the DRI (direct-reduced iron) plant. This investment coupled with world-wide growth of DRI production puts a real lid on the higher end of scrap,” said an Illinois recycler. 

“We are currently in a much different global financial environment [than in 2008], even with the current [US] Administration’s more relaxed attitude towards regulation. Even under the most optimistic views of corporate and consumer behavior, it will take more time than just this year for resultant growth to reach 2008 levels,” a Houston area scrap dealer said.

The Illinois recycler added that the global economy is healthier. “China was the big problem in 2008, they slowed ordering supposedly because of the Beijing Olympics, after the Olympics was over it was apparent that China had run out of orders and money. The 2007 US housing market was built on sand and banks were like bad drunks giving everyone money. This economy is much more based on world-wide prosperity,” the Illinois recycler added. 

A Carolinas processor agreed with this viewpoint. “We would need the emergence of another scrap consumer similar to China in the 2000s to recapture the pricing peaks of May 2008. Nothing on this scale is on anyone’s radar,” he said.

A Texas scrapyard owner feels that there is much more room for growth before ‘bubble talk’ enters the picture. “Recent years’ strength is backed by global and domestic macroeconomic and scrap industry specific fundamentals. Even taking into account recent months’ tax-cut-related and more recent tariff-related [price] surges, we are still not even at late 2014 levels,” he pointed out.

But a West Coast processor feels there is always a danger that a price bubble could be brewing: “Prices can’t go up this fast without some collateral damage. Consumers ultimately pay the bill and they may begin to get pressured by [the higher prices] later this year,” the source cautioned. 

Numerous sources expect the price of finished steel to continue a recent trend of outpacing the price of scrap. “I don’t think that the economy is in danger of a bubble such as the 2007-08 situation. But I am worried about being left holding the bag with far too much inventory. I think that we could be very close to 2008 price levels on the steel side. Since they are tariff-driven, I don’t think that we even come close on the scrap side,” an Indiana recycler said.

A busheling supplier agreed. “There will not be a 1:1 linear run-up of scrap to steel pricing. Section 232 is creating an arbitrary pricing push for US mills, which is going to be terrible for other segments of the metals industry. As sheet mills are running near 100%, there isn’t any more ‘demand’ for scrap, so steel pricing will increase, while leaving scrap behind. Scrap actually has the potential to fall, all while steel pricing nears $1,000 ton. There could be a $400, $500, or $600 ton between hot band and scrap,” the supplier said.

Section 232 impacts
The average crude steelmaking rate in the US has increased from the low-70% to high-70% range, with expectations that it will move higher as the year unfolds. A large part of the increased production has resulted from the US government decision to slap a 25% tariff on most imported finished steel products. While the rule took effect on March 23, the looming threat of the Section 232 decision has been staving off imported steel and increasing domestic steelmakers’ demand for months. 

Flat-rolled product mills have been running strongly for nearly a year, so it is the long-product mills – which rely heavily on obsolete scrap – that are seeing a marked increase in their order books.

The Carolinas processor believes the market’s invisible hand will reign supreme at the end of the day: “Global oversupply of finished steel and availability of scrap will eventually offset price momentum directly and indirectly related to 232. This may happen in the next few months or not until 2019,” the recycler said.

Scrap shortage looms?
“Scrap is short now. If we hit 80% [operating rates], it will be a buying war,” a Chicago broker said. The national broker expects new players to enter the market, which will also increase competition for material. That could erode some profitability. “Margins will continue to be under tremendous pressure, as dealers want to control inbounds – especially obsolete grades in a hot market – and will over-pay to control units and keep their shredding operations running at higher volumes,” a national broker said. 

The Illinois recycler said that higher operating rates will create challenges to buyers and sellers: “I can see mills getting solidly in the 87 to 88% operating-rate zone. It will be incumbent on everyone to work closely together to manage shipments. Ordering will need to be done earlier to keep pipelines full of material,” he said.

The Houston area scrap dealer is expecting rising operating rates to tip the scales of demand and supply. “Tariffs, to whatever extent they have an impact, won’t be increasing [scrap] supply... I believe that 80% capacity is close to a realistic ceiling. In short, scrap demand will exceed supply,” he said.

A Carolinas scrapyard owner feels differently, believing that flows will probably grow in tandem with demand: “So far stronger flows have kept up with stronger demand – unless export really catches fire then I think there will be enough scrap domestically. Material will remain tight but no shortage.”

Exporters, who have heavily relied on selling to Turkey, are expected to begin selling more into the US market because the prices are favorable. One East Coast exporter said the fundamental shift may flounder through an awkward 90-day period as exporters line up enough rail cars as well as process the material to meet specifications that are more stringent at US melt shops. 

The West Coast processor agreed that exporters will redirect more tonnage to local mills if operating rates continue to push upwards. “I don’t see a shortage of scrap [as a result of higher operating rates]. More material will stay in the US instead of being exported,” the source said.
The Chicago broker is worried that a trade war will be sparked, which will inhibit exporters’ ability to sell offshore. “The only thing that could cap prices is if trade wars start and heat up. Other countries may say ‘If you don’t buy our (finished) steel, we won’t buy your scrap,’” he said.
A New England scrapyard owner echoed the Chicago broker’s worry. “What concerns me most is the Turkish finished steel market. Will Turkish mills still buy American scrap? My business has been thriving in the last year given that I’ve had a thriving domestic and export market to sell to,” the owner said.

By Mei Ling Toh
Lisa Gordon, Pittsburgh, contributed to this article.

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