Minimills rely heavily on consistency in steel scrap prices

January 2012 - As steel markets remain relatively consistent regarding prices of ferrous scrap, it’s clear manufacturing is a strong component in the steadily recovering economy. Global crude steel production reached 1.412 billion metric tons in 2010, according to the Brussels-based Bureau of International Recycling’s report “World Steel Recycling in Figures 2006-2010.” The report also led its authors to believe the huge world trade in steel scrap in 2010 “further underlines the need for a free raw materials market.”

According to Joseph Pickard, chief economist and director of commodities at the Institute of Scrap Recycling Industries Inc., Washington, D.C., ferrous scrap prices have been consistent for most of 2011. “That was the case until about a month ago when prices first fell off a bit,” Pickard says. “Demand has been good from the scrap industry’s perspective, and while prices tapered off in November, that’s not unusual for this time of year. From the U.S. perspective, there’s been support both in terms of domestic demand and good overseas demand.”

Pickard says both domestic and overseas demand have supported prices. “That consistency, relatively unusual consistency, has indicated that supply and demand have been relatively well-balanced,” he says.

The European and Greek debt crises have impacted steel and scrap markets, notes Adam Weitsman, owner of Upstate Shredding, Owego, N.Y. “Prices are starting to go up for December overall,” Weitsman says. “Domestic is stronger than export.”

Josh Spoores, chief analyst at Steel Reality, writes in his report “2012 Flat Rolled Steel Forecast,” there is less extreme volatility than 2011 as steel prices are more range bound because of slower global economic growth, weaker raw material prices for iron ore, coking coal and scrap as well as plentiful domestic and international supply.

In Steel Reality’s Dec. 6, 2011 report, “This Week in Steel,” Spoores points out market prices continue to move higher as hot-rolled coil increased by $10 to $662 per ton and shredded scrap prices “picked up $5 with expectations for more gains.” In the same report, Spoores wrote scrap prices in December were expected to increase by a minimum of $20 per gross ton. “These increases will continue to support prices as it pushes the fair value of hot-rolled coil higher,” Spoores writes.

On the move
Minimills rely entirely on scrap as their raw material. “They’re even more affected by changes in pricing and supply of scrap than integrated producers just because they’re so reliant on scrap,” Pickard says. “For the scrap industry, it’s price volatility that can really cause trouble.” When considering trends, Pickard indicates prices have tended to increase from the second week of November to the second week of January during the last five years.

Countries making strides for scrap production and usage include China. In the BIR’s report, it received information from China’s Association of Metalscrap Utilization, which reported the country’s crude steel production over a five-year period. Between January and September 2010, Chinese steel mills consumed, on average, 140 kilograms of scrap in making a metric ton of steel compared to 146 kilograms for the whole of 2009. BIR believes China’s steel industry as a whole should be attempting to increase scrap consumption per metric ton of steel produced to 227 kilograms during the country’s five-year plan, running between 2011 to 2015.

Turkey is also a major player, “because they have significant EAF production,” Pickard says. “They’re really reliant on scrap and are a supplier of steel not just domestically but throughout the Middle East. They were the largest U.S. export market for ferrous scrap last year—even more so than China.” Southeast Asia also has been playing a larger role, including Vietnam, Malaysia and other countries within that region, he says.

China’s role affects the global market, “a lot—much more on nonferrous than ferrous [metals],” Weitsman says, agreeing Turkey is currently the “biggest player in ferrous.”

In a recent presentation on developments in the U.S. and global ferrous scrap markets, Pickard reports in the United States alone, 74 million metric tons of ferrous scrap were processed by the scrap-recycling industry in 2010, which was valued at $26.4 billion. He reports both obsolete and prompt scrap are processed by the scrap-recycling industry into commodity-grade material that is used to produce more than 60 percent of total raw steel produced in the United States, most often at electric arc furnaces. The United States also exports ferrous scrap to approximately 90 countries worldwide. Data from the United Nations indicates the United States is the largest exporter of ferrous scrap in the world, representing nearly 20 percent of global ferrous scrap loadings last year.

“Scrap dealers are indicating the prices,” Weitsman says. “All businesses are cautious due to the uncertain economy and countries in debt.”

According to Spoores’ “Leading Steel Indicators” report published Dec. 8, 2011, increased mill order rates increased the demand for scrap at a time when winter scrap collection may soon slow. Increased scrap prices are set to act as a second wind and support steel prices going forward, according to the report.

China’s significance
Still a rapidly expanding economy, ranging from 9 percent to 10 percent annual growth, China is the largest producer of steel in the world. China produces more than 600 million tons every year but consumes “a relatively small proportion of scrap as compared to Western economies,” Pickard adds. “While in Western economies scrap consumption can account for over half of steel output, in China that figure was less than 15 percent last year.”

Most of the scrap China consumes is generated domestically. “While it’s already a very important overseas market,” Pickard says, “The potential for growth is quite large. As the lower costs and environmental benefits associated with scrap consumption become more important, their scrap intake as a percentage of total production will likely increase.”

Global steel production fell by 2.4 percent from October to September 2011 as year-to-date gains started to slow, according to Spoores’ “Leading Steel Indicators.” China, in particular, experienced slower production, which fell 6.7 percent to an annualized rate of 644 million metric tons from 690 million metric tons in September 2011 and 729 million metric tons in June. According to the report, slower economic growth in China is apparent when reviewing the country’s steel production figures.

Going forward
In the short-term, Pickard believes Southeast Asia will be more dynamic. In the long-term, Pickard looks toward other developing regions including South America, “which isn’t currently a big scrap consumer. Even though a lot of manufacturing bases have shifted to Asia from the West, the developed economies are still huge consumers of scrap, and I wouldn’t discount the potential for demand growth in the U.S. and Europe,” he says.

Weitsman believes government regulation, fuel pricing and environmental regulations, including a stronger shopping season, are potential challenges ahead. The year-end shopping season is stronger, which may indicate consumer sentiment may be growing stronger, a positive factor from an economic perspective, Weitsman says.

The domestic manufacturing industry has been and continues to recover from the recession and “keeping markets open overseas remains key to that recovery,” Pickard says. “We at ISRI stress the importance of free and fair trade and are strongly opposed to export restrictions.” MM

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