A bit of good cheer

After a difficult 2015 and a rough start to 2016, an early April price boost brought some good cheer to ferrous scrap recyclers just as they gathered in Las Vegas for the Institute of Scrap Recycling Industries (ISRI) 2016 Convention & Exposition.

As recyclers gathered in Las Vegas, American Metal Market early April price surveys were indicating ferrous scrap’s major grades would gain some $50 in value for the month. Panelists at the convention’s “Ferrous Spotlight” session, however, indicated problems still are afflicting the steel and ferrous scrap sectors.

Namik Ekenci of the Turkish Steel Exporters Association, Istanbul, said the scrap market paid the price for the falling price of iron ore in 2015, as steelmakers in Turkey and elsewhere scaled back their melt shop activities and instead bought low-priced steel billet to send directly to rolling mills.

Scrap prices that remained above iron ore prices “put electric arc furnace (EAF) mills in a very difficult position,” he said, adding that many mills responded by importing billets and slabs produced with cheaper iron ore in China, Russia and the Ukraine.

Ekenci said Turkish EAF mills are not subsidized and “operate on small profit margins” and will continue to turn to imported billets and slabs if scrap prices are considered too lofty.

Although low prices have caused ferrous scrap flows to subside considerably, Dave Keeling of the Steel Recycling Institute (SRI), Pittsburgh, said automobiles likely will be recycled near the 95 percent rate seen in 2014, while appliances may remain near the 88 percent rate posted that year.

“2015 was a wake-up call kind of year. The industry can borrow a lot of the same concepts and knowledge it uses on the nonferrous side for ferrous hedging.” – Spencer Johnson, INTL FC Stone

Domestic steelmakers had difficulty competing with imported steel throughout much of 2014 and 2015, but Keeling said the numbers show efficiency in the U.S. is not the problem. The American Iron and Steel Institute (AISI), parent organization of the SRI, has calculated that American steelmakers now use 1.9 labor hours per ton of steel produced compared with 10.1 labor hours in the 1980s.

“2015 was a wake-up call kind of year,” said Spencer Johnson, a New York-based risk management consultant with INTL FC Stone, about the ferrous scrap market in the United States. He added, “A [rapid] $100 per ton drop can cause a real sea change.”

He urged ferrous scrap recyclers to consider the new hedging opportunities available in the market, saying, “Risk management is an underappreciated aspect of the ferrous scrap business.”

Johnson said the London Metal Exchange steel scrap contract is ideal for recyclers in the eastern U.S. who ship scrap to Turkey or who otherwise compete in the same market. Recyclers farther west, on the other hand, may be better served by hedging against the Nasdaq’s U.S. shredded scrap contract.

The ongoing integration of the ferrous and nonferrous scrap industries may well be the critical factor in allowing one or both of the contracts to catch on with recyclers—unlike many similar contracts introduced in earlier decades. “The industry can borrow a lot of the same concepts and knowledge it uses on the nonferrous side for ferrous hedging,” he said.

A key factor, Johnson added, is for the industry to find a benchmark price that grows to be as trusted similar to the COMEX copper price. He said The Steel Index (TSI) U.S.-to-Turkey price was one candidate.

Johnson said domestic steel prices have been rising in the spring of 2016, possibly in response to tariffs that have slowed down the flow of imported steel. “We’d rather see a more demand-driven rally,” he commented.

Several weeks earlier, steel industry managers and executives gathered in Chicago for the 2016 Platts Steel Markets North America Conference. After what was a miserable 2015 for many steel producers, attendees might have been glad to hear one industry analyst predict 2016 will be “a Goldilocks year” for the industry—not too hot and not too cold.

Timna Tanners, a metals and mining equity researcher for Bank of America Merrill Lynch, said the world still has “capacity that needs to exit” in the steel industry, but “the U.S. sheet market seems fairly balanced.”

Tanners commented that “pricing power tends to kick in” at an above 80 percent mill utilization level, and increased demand for steel could help the industry get there in 2016.

However, it is unclear where that increased demand might come from, with the automotive sector already operating at the peak of its sales range. “How long can auto sales stay at 17.5 million vehicles per year?” she asked.

Regarding China’s recent steel production overcapacity, Terrance Ko of the Hatch Associates office in Beijing said it arose from China’s aggressive stimulus plan created in response to the 2008-2009 global financial crisis.

Several years later, Chinese mills are operating at less than 70 percent capacity but churning out 820 million metric tons of steel annually.

Additional RMDAS (Raw Material Data Aggregation Service) pricing from Pittsburgh-based Management Science Associates (MSA) is available on the Recycling Today website at www.RecyclingToday.com/RMDAS.

The American Metal Market (AMM) Midwest Ferrous Scrap Index is calculated based on transaction data received that are then tonnage-weighted and normalized to produce a final index value. The AMM Scrap Index includes material that will be delivered within 30 days to the mill. Spot business included after the 10th of the month will not be included. The AMM Ferrous Scrap Export Indices are calculated based on transaction data received that are then tonnage-weighted and normalized to produce a final index value. The detailed methodology is available at www.amm.com/pricing/methodology. *FOB New York, in metric tons; **FOB Los Angeles, in metric tons.