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Strength in scrap demand returns


While they have been on something of a rollercoaster ride, the US scrap metals markets have seen a dramatic turnaround in 2021, as both the US and global economies started to recover from last year’s lows. “It has been much like the stock market – very volatile, yet up – with prices for both ferrous and non-ferrous scrap rising substantially year over year,” Greg Dixon, chief executive officer of Smart Recycling Management, said.

According to Joseph Pickard, chief economist and director of commodities for the Institute of Scrap Recycling Industries (ISRI), many US metals recyclers believe that the current market conditions are stronger than they have been in several years with recent improvement in manufacturing activity.
There are also indications that manufacturing activity will continue to grow. For example, the Institute for Supply Management (ISM) US purchasing managers index registered 60.8% in February – its highest reading since February 2018, including a 3.7% month on month increase in the new orders component of that index to 64.8%, which indicates that new US manufacturing orders have now been growing for nine consecutive months.

Pickard said that this has resulted in a very metals-intensive economic recovery from last year, which was marked by dramatic manufacturing plant shutdowns that had occurred as the US looked to control the Covid-19 pandemic. Partly because of last year’s supply chain issues, and with mills working down their raw materials inventories, there is now a significant amount of pent-up demand for scrap metals.
That is not to say that there are not challenges. “There continues to be supply chain issues that still need to be worked out,” including the shortage of semiconductor chips, which is, at least temporarily, impacting automotive production, Pickard acknowledged. “Also, there are a number of logistics issues, which have been a real problem across the board,” he said, noting that not only has the container market been particularly challenging, but there are also trucking and rail issues, all of which have resulted in extremely high freight costs for recyclers.

Margins, not prices

“While no one knows for sure given all the uncertainty in the metals market, I think that scrap prices will be good – or at least better than they were last year,” Rose Mock, president of Allied Scrap Processors, said. “But it really isn’t about the prices. It is about the margins. And even with prices higher than they had been, our margins haven’t improved because scrap recyclers are all fighting with each other for material,” she added.
That has especially been the case for ferrous scrap, given the global shortage of iron units at the same time as US mill capacity utilization rates have been rising and new domestic production capacity, particularly electric arc furnace (EAF) capacity, is starting to come online.

“There has been a real scramble for steel mills to get the volumes that they need,” Alexander Kershaw, a research analyst for Fastmarkets MB, declared, especially with demand for ferrous scrap seemingly being very close to returning to pre-Covid levels.
John Tumazos, president and metals analyst of John Tumazos Very Independent Research, said that ferrous scrap availability is severely tight – and much tighter than for other types of scrap metals. Overall US steel mill capacity utilization rates have been steadily improving since the middle of last year, Tumazos pointed out, albeit still remaining about 8% lower than they had been prior to the pandemic. According to the American Iron and Steel Institute, average domestic mill operating rates had already moved back to over 77% by mid-March from a May 2020 low of about 53%.

Currently – and throughout the pandemic – much of that fluctuation was due to the idling of blast furnaces by the integrated steelmakers, for which, Don Martin, vice president for ferrous marketing and trading at Alter Trading Corp., noted, scrap only accounts for about 20-30% of their charge, compared with scrap being the lion’s share of feedstock for EAF steelmakers, and particularly electric steelmakers making long products.
Even though many EAF-based flat-rolled steelmakers in their quest to make inroads into higher quality end-use markets, including automotive and appliances, have tried over the years to use a variety of other iron units to substitute for scrap – especially prime scrap – including direct reduced iron (DRI), hot briquetted iron (HBI) and pig iron, Dixon said that there is a limit to how much they can use in their melt, even for high quality steels, and the supply of such alternative iron units has been uneven.

Tumazos said that the global shortage of those iron units in general, but particularly iron ore, has had a big impact upon the ferrous scrap market. Reduced iron ore production by major suppliers Vale and Rio Tinto has come at the same time as Chinese steel demand has been increasing. “Chinese companies are currently trying to outbid EAF steelmakers for pig iron and scrap because they can’t get enough iron ore,” he explained, adding, “It would be a rational decision for Chinese companies to cut their steel production if they don’t have enough iron units, but that isn’t what they want to do.”

Demand grows

Kershaw pointed out that new EAF steelmaking capacity expected to come online over the next several years will demand even greater ferrous scrap consumption.
Phil Gibbs, equity research analyst for KeyBanc Capital Markets, said that over the next few years about 7.6 million short tons of steelmaking capacity is expected to be added, including the 1.6 million ton expansion that Big River Steel completed in November and is ramping up very quickly. He said that just Steel Dynamics’ 3 million ton per year greenfield mill in Sinton, Texas, and the 1.5 million ton per year EAF that Nucor is putting into its Gallatin, Kentucky, facility – both of which are expected to come online by the end of this year – will require an additional 3 million long tons of prime scrap and high-grade iron units. That calculation does not include the EAF that JSW restarted at its Mingo Junction, Ohio, facility in early March and the steelmaking capacity slated to come online in 2022 and 2023, all of which, he said, will add to the current upside pressure on prime scrap.

ISRI’s Pickard pointed out that while demand has been healthy for both obsolete and prime scrap, recently there has been a widening of the spreads between the two, with the tight supply of prime scrap that resulted from a lack of generation last year when there were widespread manufacturing shutdowns coupled with the recent increase in demand coming at the same time as inventories have been depleted.
Kershaw observed that in mid-March the differential between busheling and heavy melt steel (HMS), at $125 per long ton, is the widest it has been since 2010. But given how much US hot rolled coil (HRC) prices have been increasing in recent months, he also noted that the spread between HRC and busheling has also been widening dramatically to over $700 per ton in early March, from $170 per ton in early August.

He said that with auto output rebounding earlier this year, increasing generation of prime scrap, domestic mills are scrambling to get as much prime scrap as they can to take advantage of the HRC-busheling spread. That is even though the shortage of semiconductor chips has caused some automakers to temporarily close some of their plants, given that expectations are that North American auto output will be up 5% quarter on quarter, which will increase demand for prime scrap. One concern, however, is whether prime scrap prices have risen to the point where it is not competitive with pig iron and if that will result in buyers near the Gulf of Mexico to turn to imported pig iron for the next month or two.

Construction picks up

The dynamic could change. Will May, IHS Markit’s senior economist for steel raw materials, said that both prime and obsolete scrap prices climbed so high in March, when prime scrap increased $70 per long ton and obsolete scrap increased $40-$50 per ton, that they could be approaching their peak. He said that one reason why obsolete scrap prices picked up in March was the frigid weather conditions throughout much of the US in February. But now with the weather improving, construction activity, including demolition activity, should also pick up, which means that obsolete scrap generation should also increase.
While it varies by sector, Pickard said that overall US construction spending is expected to increase this year, with concerns about commercial construction somewhat countered by pent-up housing demand and with the American Institute of Architects’ Architecture Billings Index going positive at 53.3 points in February after a remaining below 50 points each month over the past year. If a comprehensive US infrastructure spending bill is passed, it would support demand for steel and other metals. The same is seen to be true for the recently passed $1.9 trillion pandemic-related stimulus bill.

“It is, however, probably somewhat of a misnomer to say that obsolete scrap is tight,” Gibbs said, noting that it mainly looks that way given mills’ preference to use scrap with iron ore prices so high. “There is always post-consumer supply of scrap. It is just a question of having a price that is high enough to incentivize people to take it off their hands,” he explained.

Scrap exports

Dixon observed that US ferrous scrap exports have been relatively strong, bolstered by the fact that the world economy, and therefore global steel production, is waking up from last year’s pandemic-related dormant period. In fact, according to the World Steel Association, overall global crude steel output was up 4.8% year on year in February, including a 3.4% year on year increase for Turkey, which, Pickard pointed out, is the United States’ major ferrous scrap export market.
While US ferrous scrap exports were down by 27.6% year on year in January, including a 22.8% decline to Turkey, Pickard said that is not a good indication of what will occur for 2021 as a whole, given that it is just one month and data and is compared with prior to the pandemic. He said that he believes that US scrap exports to Turkey will likely be positive this year.

There is also speculation that, as part of their recently easing scrap metal import restrictions, China could start importing more ferrous scrap again, Pickard said, noting that US ferrous scrap exports to China had fallen to just 38,252 tonnes in 2020 from 416,350 tonnes in 2018, prior to the restrictions going into place. While Alter Trading’s Martin said he has not heard of any buys yet, recent trade data indicates that US ferrous scrap exports to China were up 53.7% year on year in January.
“It could be more of a 2022 story,” Kershaw said, noting that at this point China has been mainly importing ferrous scrap from Japan, with traders still uncertain how quickly it will be comfortable to buy from the US. IHS Markit’s May said one barrier has been the high seaborne prices, stating that once Chicago HMS prices, which were $425 per long ton, fall back to $350-$400 per ton, Chinese buyers might start to be attracted to the seaborne market.

While overall the ferrous scrap market came in like a lion, Gibbs said he is expecting it to go out not quite as strong, although not quite like a lamb. May agreed, stating that while he believes that ferrous scrap prices will come down slightly from current levels, that is just because they have got so high. “I think that 2021 will continue to be a red-hot year for both steel and ferrous scrap,” he said.

Non-ferrous scrap trends

While the story is similar for US non-ferrous scrap markets, Dixon pointed out that they are much more driven by global demand than is the case for ferrous scrap. This has clearly been supported by the recent dramatic, albeit volatile, price increases for such base metals as copper, aluminium, zinc and tin, Pickard pointed out, observing that with primary copper prices moving up by about 15% year to date through mid-March, and primary aluminium prices moving up about 10% over the same timeframe, that also bodes well for non-ferrous scrap.
“It has, however, been remarkable how volatile non-ferrous prices have been,” Pickard said. For example, due to a combination of market fundamentals and investment fund activity, copper has been trading at its highest price since 2011 at about $9,100 per tonne.

Non-ferrous metal prices have been supported by improvements in global manufacturing activity – particularly in China, but also in the US and elsewhere in the world. Stephen Moss, vice president of Stanton A. Moss, emphasized the importance of China, noting that there has been a big pick-up in industrial demand in China with the country’s economy back in full swing.
John Mothersole, director of IHS Markit’s pricing and purchasing service, said that perhaps the biggest thing to watch is what happens with US non-ferrous scrap exports, particularly copper and aluminium scrap exports, into China, now that since late last year the country is no longer classifying metal scrap as metallic waste. He said that Chinese officials are initially likely to be extremely conservative about what they let in, especially for copper scrap.

ISRI’s Pickard observed that total US copper scrap exports were down 10.9% last year, to 776,289 tonnes, despite a 33% increase to China, to 117,258 tonnes. That, he said, was largely due to a 20% decline to Malaysia (176,734 tonnes in 2020), an 11% decline to South Korea (63,845 tonnes) and a 26% decline to India (44,462 tonnes), although he said he expects that will improve this year as those countries’ economies ramp back up.
ISRI reports that total US aluminium scrap exports were only down 0.7% in 2020, to 1,846,224 tonnes, even with exports to China falling by 51% (to 154,379 tonnes). That is partly because US aluminium scrap exports to Malaysia, India and South Korea were significantly higher in 2020 than the previous year.

Freight issues

Non-ferrous scrap has been especially negatively impacted by logistics issues, particularly container availability. Pickard said that with the difference of container rates for freight coming from Asia and for those containers to get returned, shipping lines are trying to get their containers back to Asia as quickly as possible. He said that has not only made it difficult for companies to book containers, but they are also not guaranteed that they will have access to the containers they have already booked.
Non-ferrous scrap supply is so tight that recyclers must compete with each other to get enough material to meet their customers’ needs, with scrap flows not being as steady as many would like. Moss said that is partly because of the impact of the tough winter scrap prices upon peddler traffic. But also because of lower than desired generation of certain scrap, including aluminium scrap, by some manufacturers, particularly airframe manufacturers, which continue to be impacted by the pandemic. Also, he said that even though the automotive market has been fairly strong this year, it would be stronger without the semiconductor chip shortage, which could also temporarily affect scrap generation.

There have also been numerous logistics issues affecting the movement of non-ferrous scrap both domestically and internationally, Mothersole point out. He said that also, somewhat surprisingly, even though the copper market has been so hot, copper scrap discounts are the widest that they have been in three to four years. He, expects them to narrow sometime before the end of the year, however, given expectations that primary copper prices are likely to correct more that copper scrap prices. Meanwhile, aluminium discounts have been flat to down slightly on the back of tight aluminium scrap supply.

“Overall, it should be a reasonably good year for both ferrous and non-ferrous scrap,” Dixon said, although there could be more volatility for non-ferrous scrap than for ferrous.

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