Steelmakers brace for price plummet in scrap

February 2015 - Producer executives are warning shareholders and customers that oversupply of scrap—a result of lower export volume and lower domestic production rates—means scrap tags are falling during first quarter. For the vast majority of steel production in North America, ferrous scrap is the dominant feedstock.

“U.S. scrap is significantly overpriced versus iron ore and global scrap markets. Based on increased imported steel penetration, slack international demand for U.S. scrap, the strength of the U.S. dollar and moderating U.S. demand for [steel], we expect scrap prices to fall dramatically in early 2015,” Nucor Corp. Chairman, President and CEO John Ferriola said during the Charlotte, North Carolina, company’s Jan. 27 conference call.

“Scrap imports are bound to start coming in [amid] decreased demand for scrap as a result of decreased production of steel,” he continued. 

“So we have higher priced scrap inventoried at our mills because there's usually a four- to six-week lag time in our use of the inventories. Scrap pricing is going to come down dramatically and I want to stress that it’s following steel pricing now,” rather than steel pricing following scrap pricing direction.

Nucor’s selling prices have already fallen $50 to $100 per ton, said Ferriola, but he didn’t identify whether this was on flat-rolled or long products or both.

“We see steel pricing under pressure because of the imports produced with iron ore, giving [foreign mills] a cost advantage,” compared with steel produced from scrap. Nucor also owns David J. Joseph, a chain of scrapyards.

The environment for metals recycling is challenging, said executives at Fort Wayne, Indiana-based Steel Dynamics Inc., which owns the scrap business Omnisource.

“In fourth quarter, both ferrous and nonferrous shipments decreased as both export demand and domestic steel demand declined. Ferrous metal spread contracted due to the oversupplied market environment,” Executive Vice President and CFO Theresa E. Wagler told investors during SDI’s Jan. 29 conference call.

“The continued significant overcapacity of shredders, particularly in the Southeast, continues to constrain margin as processes are all competing for the same material,” President and CEO Mark D. Millett said. “The reduced export pressure, additional imports, ample scrap flow and the recent softening of mill utilization is causing a substantial supply overhang, with the likely result that the scrap market will hit a reset button in February and March and will bring scrap closer to its historical relationship to iron ore.”

According to Russell B. Rinn, Omnisource president and COO, “The scrap industry has lost the ability to competitively export because of the strong dollar.”

For TimkenSteel Corp., Canton, Ohio, “It is likely that scrap prices will be a headwind for us,” Chairman, President and CEO Tim Timken said during a Jan. 30 conference call. “The rising dollar, coupled with low demand out of Europe, is compressing prices. Therefore our raw material spread will likely be less favorable than in 2014, negatively impacting margins.” MM