Ferrous

More than a few forecasters last year and earlier this year predicted that China’s over-heated economy (and its hunger for basic materials) could decline sharply after the Beijing Olympics building boom came to an end.

To what extent the correlation is valid is open to scrutiny, but the timing has proven to be right on target. (One indicator of a correlation is a World Steel Association figure that shows China produced 9.1 percent less steel in September 2008 compared to September of 2007.)

The slide in pricing that began in August has continued for ferrous scrap, with the October buying period revealing dramatic drops for all grades in all regions.

Transaction pricing compiled by Management Science Associates Inc. (MSA) for its Raw Material Data Aggregation Service (RMDAS) shows buyers of prompt grades in October paid less than half of what they paid per ton in September.

Nationally, the average spot buyer of prompt ferrous scrap (consisting of No. 1 busheling, No. 1 bundles and No. 1 factory bundles) paid $261 per ton, down from the $564 per ton paid in the September buying period.

The sharpest drop for this grade came in the RMDAS North Central/East region, where the average ton on the spot market sold for $306 less in October. The drop in the South was not far behind, with the average ton losing $297 in value.

Shredded scrap also fell in value, with the average ton on the spot market dropping from $378 in value in September to $230 in the early October buying period. Similarly, No. 1 heavy melting scrap (HMS) lost more than $100 per ton in value, dropping from $306 per ton in September to $205 in October.

As dramatic as the drop-off is in the RMDAS numbers, the monthly average price is most likely higher than transaction levels as of Oct. 20.

A number of recyclers are reporting that mills continue to make very few offers for scrap, and the offers made are lower yet. Sims Metal Management and other large recyclers have communicated to their scrap buyers to quickly change their scrap pricing formulas, and in some cases to curtail or significantly cut back their buying activity.

"Overseas, they are rescinding and not honoring orders," says one Midwestern recycler. "We’re moving a little domestically, but the pricing is a little sick."

The Bureau of International Recycling (BIR) sent out a notice to its members in late October stating, "Some buyers fail to pay their invoices or request substantial discounts, although they are legally bound by the prices fixed in their contracts. This unprofessional and unethical business behavior seems to have mushroomed throughout the international recycling community and is causing serious financial difficulties for many sellers."

The organization writes that it "is currently investigating steps that member companies can take to avoid these situations. The BIR arbitration service is also at their disposal."

Domestically, steel mills have cut back melting schedules, with some conducting maintenance operations while their inventories are considerable and their order books thin.

While announcing record third quarter 2008 results, Nucor Corp., Charlotte, N.C., included comments alluding to the different landscape emerging in the fourth quarter. "Entering the fourth quarter, the global economy has been negatively impacted by the crisis in the financial markets," a company news release states. "What started out as a seasonal slowdown—due to temporary global market disruptions such as the six-month China Olympics effect and the Middle Eastern religious holidays—has now been overwhelmed by a worldwide financial crisis that is unique in both size and scope in our lifetime. The business environment has obviously become significantly more challenging for everyone, including Nucor. These conditions are such that financial projections are not practical. Therefore, we will not be providing numerical or qualitative guidance at this time."

News reports from around the world indicate that steelmakers are cutting back output as steel-intensive activities, such as infrastructure projects in China, construction in the Middle East and automotive demand in the developed world have all been hitting slow patches at the same time.

Based on late October activity, one recycler anticipates that November pricing will be lower yet. Some factors could lead to a pricing floor in the near future, including:

For now, the market for ferrous scrap has evaporated as suddenly and thoroughly as at any time in recent memory. Buyers who remain in the market are likely to wait at least another 30 days, one recycler predicts, saying, "No one wants to buy today what they can get tomorrow for less."

(Additional news about ferrous scrap, including breaking news and consuming industry reports, is available online at www.RecyclingToday.com.)