Ferrous Commodity Report

If mill buyers thought they were dealing with high prices in the first quarter of 2008, the second quarter started out by making those prices seem like "the good old days" of sub-$500 scrap.

Buyers on the April spot market ran into per-ton price increases of from $150 to $170, depending on the grade and region. Regional aggregated spot market prices compiled by Management Science Associates (MSA), Pittsburgh, through its Raw Material Data Aggregation Service (RMDAS), show mills paid in a range of from $576 to $599 per ton for the new production scrap used to define the RMDAS prompt industrial composite grade.

While No. 1 heavy melting steel (HMS) and shredded scrap traded in a lower range, pricing for those grades also moved up by $150 to $160 per ton in April compared to March.

Regionally, buyers in the North Midwest region faced the highest prices, with mills paying an average of $599 per ton for prompt industrial grades and $514 per ton for No. 1 HMS. Buyers in other regions may have paid a few dollars per ton less, but nonetheless faced record pricing that moved in a huge leap beyond what they paid 30 days previously.

The scope of the bull market was the topic of a session at the ISRI (Institute of Scrap Recycling Industries Inc.) 2008 Annual Convention in early April. At the event’s Ferrous Commodity Spotlight session, speakers from across the steel and ferrous scrap spectrum offered their insights into factors shaping the current market.

Steel industry analyst Aldo Mazzaferro of Goldman, Sachs & Co., New York, remarked that even with the economic slowdown, "U.S. steelmaking is short of capacity" to serve the domestic market, which was why steelmakers were charging $1,000 per ton for hot-band and $850 per ton for rebar.

American steelmakers are producing at about 90 to 92 percent of capacity, so "there’s really not much else to squeeze out of U.S. mills," according to Mazzaferro. Additionally, the weak dollar was not making the U.S. a preferred market for imported steel, meaning "essentially there is a bidding war for imported steel," he said.

John Harris, a metallics buyer for ArcelorMittal based at one of its Canadian locations, remarked that scrap dealers in the United States are benefiting from the weak dollar. "No steel is coming in here, [and] scrap is leaving at a faster rate because it’s a good buy anywhere in the world."

And while the booming economies of China and India are well known for their steel and scrap consumption, Harris also noted that the Middle East was playing a role. Oil-based economies there have "$1 trillion of infrastructure projects on the books for the next 10 years, and it’s all paid for. Guess what that does for [steel and scrap] demand?" Harris asked attendees.

Harris predicted that the global steel industry would continue to enjoy strong pricing for at least the next two quarters.

He was not as certain that ferrous scrap was in an overall shortage situation, remarking that a "Russian reservoir" built up during 50 years of large-scale Soviet steelmaking and virtually no exporting means there was still scrap to be obtained. Recyclers there were just starting to tap into this reservoir, according to Harris. "The system there is finally getting ‘greased’ to do [scrap] collection. They’re blowing and going over there."

Long-time shredding equipment supplier Alton Scott Newell Jr. of The Shredder Co. LLC, Canutillo, Texas, offered a prediction that the world would remain "materials short" for some time, meaning recyclers would continue to experience healthy demand for their products.

While steel industry consolidation has been taking hold, Newell was less certain that the scrap industry could consolidate in the same way. If steelmakers were buying scrap assets with the premise that they would be able to obtain scrap at a lower cost, he warned them that this "doesn’t work." He remarked that new competitors could come into the recycling and shredding industry much more readily, as there was a lower barrier to entry compared to steelmaking.

In a question-and-answer period, analyst Mazzaferro remarked on that topic, "When steel mills buy a scrap company, they aren’t buying a scrap mine. They still have to buy the scrap [continually]."

And Jeremy Sutcliffe, managing director with Australia-based Sims Metal Management, also questioned to what extent the mill companies could affect pricing. "Water finds its own level, and scrap prices find their own level—it will be whatever it will be," he remarked.

Newell noted that his company and others had been selling a number of smaller shredders to small and medium-sized scrap companies who only needed to shred 2,000 to 5,000 tons per month to make their purchases viable.

When asked if there was too much processing capacity in place in North America, Newell replied, "We’ve had enough capacity for some time," but he added that competitive companies seeking efficiency would continue to make investments in new machinery.

The ISRI 2008 Annual Convention took place April 7-10 at the Mandalay Bay Resort & Casino in Las Vegas.