A divergent view

The U.S. ferrous industry is lacking substantial signs of a market revival for 2023, though, in lieu of a rally, many sellers are hopeful prices have or will bottom out in the near term and that values will inevitably stabilize, if not increase, in the first quarter.

Steelmakers have faced headwinds that began in the second quarter of 2022 and extended through the end of the year that were intensified by the Russia-Ukraine war. Eroded profits, abridged production, reduced shipments and growing inventories surfaced, representing a subdued end to the year.

Moreover, the likelihood of a recession, federal interest rate hikes and midterm election results that lacked signs of industry support were leading indicators of a falling economy in 2023. The outcome of the midterm elections gave rise to market participants’ concerns that the next two years could be marked by chaotic partisanship.

Steelmakers virtually were in unison, posting profit and shipment decay by the third quarter of 2022 and providing muted outlooks for 2023. Still, many steel producers and major recycling operations are hopeful on moderate market advances amid expected automotive industry and consumer spending improvements.

The industry is unclear how long this softness will plague the market and the pace of ferrous price changes. However, price movements are slated to be less volatile when compared with last year’s downtrends illustrated in the accompanying charts.

Uncertainty on the horizon

The ferrous scrap price bottom is expected to be reached or maintained during the first quarter of this year. However, by the end of the first quarter and beyond, the market’s strength is anticipated to return gradually. Improvement could arise during the year, but leading indicators of a repeat price rally, similar to the one witnessed through 2021 and the first half of 2022, are missing.

Key market drivers for further possible downtrends include the looming recession that could hit during the second half of 2023, U.S. Federal Reserve interest rate hikes and plunging finished steel prices. The hot-rolled coil (HRC) steel pricing outlook is bleak, while order lead times are shortening.

The faltering housing market, high mortgage rates, layoffs and declining consumer spending have impaired market sentiment. Interest rates that have kept new car buying low also negatively affect steel demand. The automotive sector continues to struggle as issues with semiconductor chips have not been completely resolved.

Moreover, service centers have hesitated to make purchases as companies hold off until the price bottom is clear. In the meantime, only necessary purchases have led to minimal inventories being upheld by steel-producing companies.

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The automotive factor

The automotive industry has hampered the steel industry greatly since the summer of 2021. Auto sales historically stood at roughly 17 million units per year at the beginning of 2021, then dipped to about 14 million units per year after the semiconductor chip crisis began.

The shortfall intensified economic decay and greatly affected inflation. Supply chain issues derived from the semiconductor shortage hit the global economy while negatively affecting finished steel demand.

Carmakers also are grappling with continued challenges amid slowed production, though improvements are on the horizon for the first half of 2023. Growth is on a gradual rise as output and inventory are normalizing, which will foster economic growth and improve inflationary impacts.

Several major steelmakers noted positive indicators in earnings calls during the fourth quarter of 2022, such as the easing of automotive supply chain constraints, additional production of new light vehicles and rising steel consumption on growing auto customer activity in 2023.

Low dealer inventories should begin to improve, advancing pent-up auto demand along with business cash flows, according to spokespeople at Steel Dynamics Inc. (SDI), Cleveland-Cliffs, U.S. Steel Corp. and Nucor Inc.

Positive signs for reaching a bottom

Ferrous scrap demand is set to improve in 2023, preventing any further sizable price drops.

By early to mid-2023, Nucor is adding 250,000 net tons of capacity into the market at its Gallatin sheet facility in Kentucky, and the blast and prime line at the company’s plate mill in Brandenburg, Kentucky, will come online soon, adding 120,000 net tons of capacity.

The rising focus on decarbonization is slated to increase recycled metal demand amid the U.S. government’s infrastructure funding and federal Buy Clean plans that are designed to produce manufacturing gains.

Following 2022’s volatile markets and short-term ups and downs, 2023 could foster medium- to long-term growth arising from steelmakers’ reduction of CO2 emissions that will drive electric arc furnaces and boost scrap recycling. 

Material flow

The generation of prime ferrous grades, such as No. 1 busheling, slowed at year-end and will remain lessened in early 2023, reducing the overhang of this grade in the market.

Basic pig iron (BPI) prices have diverged and fluctuated, though BPI’s premium over No. 1 busheling remains higher than normal. Feasibly, scrap consumers will opt to buy more No. 1 busheling in this case, and, with the grade tight, its value will strengthen.

Scrap flows are not necessarily tight per se; however, collection is declining amid falling prices, which will lead to diminished flows of ferrous scrap grades. Reduced demolition work driven by the slumping housing market also is translating to less steel returning to the ferrous scrap supply.

Seasonality and winter conditions through the first quarter of the year also will reduce ferrous scrap flows into yards, causing further supply tightening.

Shredder feedstock has or soon will reach a bottom because auto wreckers tend to stockpile material in response to continued price reductions, contributing further to slower material flows.

Export influence

The strength of the U.S. dollar did not help the waning export markets, but the dollar was depreciating as 2022 came to a close, which will assist in normalizing export prices.

In the United States, anticipated funding associated with the Infrastructure Investment and Jobs Act and the Inflation Reduction Act also potentially will support positive trends for recycled metal, according to market participants that supply bulk exporters.

Exports of benchmark grades to major destinations have been a main influence in the lack of domestic price support. Turkish import demand from the U.S. has been low since the third quarter of 2022 amid struggling sales and demand for finished steel products.

In the second half of 2022, the Davis Index for U.S. HMS 1&2 (80:20) reached a high point of $410.75 per metric ton, cost and freight (cfr), Turkey consumer July 7. Prices ebbed and flowed thereafter, generally on the decline, to hit a low of $338.75 per metric ton cfr Turkey consumer Nov. 11, 2022, representing a loss of roughly $72 per metric ton.

The rise and fall in 2022

U.S. domestic ferrous scrap prices were predicted to grow during 2022 in light of expanding steel capacities coming online and an increased demand for scrap. This expected growth was not accomplished, however, and the lift might have been delayed until 2024, market participants say.

Steel producers in the U.S., including Nucor, Cleveland-Cliffs, NorthStar Bluescope and more, acquired scrap companies recently in a bid to handle extra mill capacity that was slated to limit supply and boost recycled ferrous demand in 2022.

SDI’s Sinton, Texas, mill; NorthStar Bluescope and other steelmakers were projected to procure scrap more aggressively as production needs ramped up. Prime grade scrap demand was set to rise as U.S. mills were adding more than 8 million net tons of new yearly melt capacity in 2022.

Anticipated growth was achieved during the first quarter of 2022 when ferrous scrap prices surged to record highs during March. However, the bull run was short-lived, with April and the ensuing months bringing pricing levels downward.

A buyer-seller impasse arose and was prevalent during the fourth quarter of last year. A scrap shortage arose on rising inflation and geopolitical factors created by the Ukraine-Russia war and subsequent higher prices for steelmaking raw materials.

But companies kept up with volatility by making organizational changes to streamline business and continued with strategic acquisitions, as seen with Sims Metal’s purchase of Atlantic Recycling Group, Maryland, in late-2021 and Schnitzer Steel’s purchase of Encore Recycling LLC in the Atlanta area in the spring of 2022.

Tara Loftin is markets manager at Davis Index and can be reached at tara.loftin@davisindex.com.