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US steel scrap sector prepares for recovery

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This has turned out to be a much more challenging year for the US ferrous scrap market than many had expected. Not only has the Covid-19 pandemic taken a toll on steel demand, and therefore production, but the supply of both prime and obsolete material has also been hit because of the lower levels of scrap generation and collection. While recent moves to reopen the businesses that had been on lockdown will likely help, it is widely believed that the recovery will be slow and gradual.

Processors have been faced with the same types of pandemic-related business restrictions as other companies. Joseph Pickard, chief economist and director of commodities for the Institute of Scrap Recycling Industries (ISRI), pointed out that while the industry is classified as essential, until mid-May many scrapyards were not accepting peddler traffic at their retail operations.

“While it is currently very tepid, ferrous scrap demand was actually quite strong during the beginning of the year,” said Tyler Kenyon, vice president and metals and mining analyst for Cowen & Co. At that time it was widely anticipated that 2020 would be a better year for the US scrap market than 2019 had been, especially with some of the steel destocking trend that occurred last year starting to ease.

Even though, starting in the second half of last year, some US integrated steel producers began to idle some of their blast furnace capacity, the EAF, or mini-mill, steelmakers, which tend to consume more scrap, were not just holding up but increasing their steel output, with plans to increase their production capacity over the next few years. Meanwhile all of the major steel end-use markets remained at least relatively strong early this year.

As a result, according to the American Iron and Steel Institute (AISI), through most of the first quarter US steelmakers’ operating rates remained quite high – between 80 and nearly 83% of rated capacity. They peaked at the end of February, with the decline clearly starting to escalate in late March and continuing to do so through early May, falling to about 51% for the week ending May 2, before inching up slightly to about 53% by mid-May.

Pickard said that this decline in US steel mill capacity utilization rates this year has made a huge difference in domestic ferrous scrap demand. Christopher Plummer, managing director of Metal Strategies Inc., agreed, observing that as of May 9 domestic mill use of US-generated purchased scrap was down 27.1% year on year and 9.1% year to date, with domestic mills accounting for about 82% of the ferrous scrap generated and sold by US scrap processors. He said that total use of purchased US scrap was down by 27.7% year on year and 5.3% year to date, with exports falling 29.3% year on year but rising 11.7% year to date.

This comes even though much of the decline in US steel output has been by integrated steelmakers. Will May, senior economist, raw materials for IHS Markit’s pricing and purchasing service, said that about 18 million tons of the 26 million tons of North American steelmaking capacity that has recently been idled or reduced was blast furnace capacity. But EAF steelmakers have also cut back their production rates.

Plummer estimates that basic oxygen furnaces (BOFs) only need about 10% purchased scrap and about 20% scrap overall for their charge, while on average EAF steelmakers use about 95% purchased scrap in their hot metal mix.

Demand falls

The decline in domestic demand is not surprising, Greg Dixon, chief executive officer of Smart Recycling Management, said, given that the market was hit by “a double whammy” – the combination of the impact of the Covid-19 pandemic upon many steel end-use markets, including those in the manufacturing and construction sectors, and a catastrophic decline in oil prices.

“The timing of the weakness in the energy sector, which came at the worst time, caught everyone by surprise,” Don Martin, senior vice president for ferrous marketing and trading at Alter Trading, said, adding, “Normally even during a recession there is still pretty good oil and natural gas demand.” It is possible that demand from the energy sector could be starting to turn around, given that West Texas Intermediate (WTI) crude oil prices moved back up to $34 per barrel in late May.

US manufacturers cut 1.3 million jobs in April alone, which was also when the Institute for Supply Management’s (ISM) manufacturing purchasing managers index (PMI) experienced its largest one-month decline since October 2008, falling from 49.1% in March to 41.5% – the lowest it had been since April 2009, in the throes of the global financial crisis.

“But with the lockdowns across the country beginning to ease in May, hopefully the worst is over,” Plummer said, particularly for the automotive sector which, with the two-month closure of virtually all US auto plants, was the hardest hit. March North American light vehicle production was down 28.1% year on year due to the March 18 lockdown. He also noted that US April auto sales were down 49.6% year on year.

Since the construction sector, which accounts for about 40% of US steel demand, has been more resilient, Frank Goulding, southeast region ferrous marketing manager for SA Recycling, said that long products producers really have not slowed down their scrap purchases that much, but it is a different situation for sheet and plate producers, especially those servicing the automotive and energy markets, who cut their scrap purchases in May to about 20-25% of normal buys.

Market rebalancing

The decline in US manufacturing activity has also helped to rebalance the scrap market a little bit, Pickard said, given that pandemic-related lockdowns, particularly by automakers, took a big chunk out of the generation, and therefore the supply, of prime scrap.
With moves to ease restrictions and to open the economy, Goulding said that he is optimistic that US steel mills will start ramping up their production again, “And once they do so, they will need more scrap.” However, Plummer said that he believes it will be a fairly slow, shallow recovery, taking at least a year to recover anywhere near back to where it was before the pandemic.

Pickard pointed out that US ferrous scrap exports during the first quarter were encouraging. He said that, albeit from a low base, US exports were up by 25.5% year on year during the first quarter, to over 4 million metric tons, helped by a 22.2% year on year rise in US exports to Turkey during the quarter, to more than 1 million metric tons, on the back of a 10% year-on-year rise in Turkish steel production.

Kenyon said that was partly connected with the spread of the Covid-19 virus, which kept China out of the steel export market for some time, enabling Turkish steelmakers to take some market share from regions that China had been servicing with rebar and other finished steel. Consequently, Turkey’s domestic scrap demand remained resilient.

Pickard noted that US exports also made gains elsewhere. For example, exports to Malaysia had a surprisingly large, 199.2% year on year increase in the first quarter, to about 628,000 metric tons, and those to several South Asian countries were also up. On the other hand, US ferrous scrap exports to China were down 33.5% year on year during the first quarter. Pickard also said it is possible that US exports could decline in the second quarter and continue to move downward into the third quarter, just because of continued expectations for a global economic downturn.

Tight supply

Meanwhile, even as US mills continue to produce and consume scrap, May said there has been virtually no scrap generation and supply to the scrapyards. “No one is scrapping vehicles. No one is demolishing buildings. There isn’t any busheling being produced from manufacturing processes,” he said. “The only thing that is preventing scrap prices from going to the moon is that there has just been gentle demand from the mills.” He explained that is why US scrap prices moved up in May.

Goulding estimated that overall ferrous scrap intakes at US scrapyards were off by about 50% with about an 80% decline in prime scrap flows.

Kenyon said in a May 25 note that, given continued tight supply more than offsetting the still challenged but improving demand, he expects prime scrap grades to settle up by $30 per long ton, and obsolete grades to settle up by $10 to $20 per ton, month on month in June. Earlier in May, industry observers varied widely in their predictions for June pricing, which ranged from no change to an $80 per ton jump.

It is not surprising that prime scrap is in tight supply, Plummer said, given that there was virtually no busheling or No. 1 bundles being generated from March 18, when US automotive plants went into lockdown. Goulding said that while automakers reopened almost all their plants in May, their supply chains, including stamping operations, still need to follow for prime scrap to be generated. He said they are gradually doing so, estimating that prime scrap supply could return to near pre-pandemic levels by the end of June before briefly slowing down again in August and/or September due to automakers’ model year changeovers.

Supply of obsolete scrap has also been seriously constrained, Plummer said, although for different reasons than prime. He said one big factor has been that scale prices for such grades as heavy melt and shredded scrap fell so low that it was seen as not being worth it for certain grassroots collectors.

Dixon said that, due to Covid-19 pandemic-related restrictions, several scrapyards have not been buying peddler scrap. While a number of states have eased such rules, albeit with certain limitations, he said it remains uncertain how many processors will be able to meet the new guidelines and how many peddlers will be willing to sell obsolete scrap such as heavy melt, plate, structural and cut grades.

“With the looser controls, with manufacturing and construction companies being urged to return to work, scrap generation will begin to increase,” May said, although it will likely be more of a gradual trickling back, as opposed to a quick step up.

As of mid-May, scrap flows had only improved by about 5% , Martin said, adding, “What happens going forward will depend upon if there will be any big Covid hits that result in renewed shutdowns.” He said that while he doubts that scrap supply will continue to be this tight, a lot depends upon the pace of the US and global economic recoveries and the success of reopening efforts, both of which remains uncertain.

“In the meantime, scrap processors are just trying to be nimble and to react each month based on what we are seeing,” Martin said.

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