Waiting game

December’s $40 per gross ton increase in shredded scrap pricing has not produced a blizzard of junk cars and other shreddable materials. Not yet at any rate, says one eastern shredder operator. Auto wreckers are hoping to see more of that increase passed along by the shredder operators before they part with more cars, he says.

Even if these price hikes had generated more shredder feedstock, it’s unlikely dealers will part with much additional tonnage now. Most are waiting until January to see if they can secure yet another price increase, either from domestic steelmakers or scrap exporters.

That said, U.S. steelmakers would accept more ferrous scrap if it was offered to them now at current prices. Unfortunately, there are no such offers. Dealers are focused on getting the scrap they sold earlier in December shipped to the mills before the Christmas holidays. Delayed or late shipments mean getting paid December’s prices for scrap delivered in January, when they expect prices to be higher.

But several mills will be operating during the Christmas holiday week. Some have more steel orders to fill. Others are anticipating better overall demand for domestic steel products in the first quarter. Steelmakers have accused some dealers of holding shredded and other obsolete scrap off the market with the hope of getting higher prices in January, but some dealers argue they don’t have enough scrap. A Pittsburgh-area trader says he doesn’t want to be oversold and unable to fill orders by the end of December.

Part of the mills’ greater expectations are based on two federal government actions. First was the U.S. Commerce Department’s ruling in early December that levied steep duties on imported Chinese sheet steel products masquerading as Vietnamese steel. Second, the department’s long-awaited Section 232 investigation of steel imports and their impact on the U.S. economy is due Jan. 16, 2018. Most U.S. steelmakers hope it will show that steel imports pose a threat to national security and should be limited. A decision favoring the domestic industry’s arguments could bolster steel output in what is predicted to be a strong sales period.

Uncertain direction

Regardless of the potential government-given bonanza, several scrap dealers say they may wait until January before selling scrap, when some anticipate $20 to $30 per ton gains. These would echo most of December’s price moves. But, as of mid-December, most dealers say they anticipate at least a $10 rise in January. That guesstimate could change in the next two weeks.

Whether dealers will get another price increase in January is uncertain. Several factors could play out over the last two weeks of December that might point out the scrap market’s direction. As indicated, several mills will operate through the Christmas holiday week, and despite paying as much as $40 more per ton for shredded scrap and other grades of obsolete scrap earlier this month, some were unable to buy as much as they wanted.

The mills will eat into their scrap inventories if faced with a supply shortfall later in December. Still, it is the start of winter, and snowstorms hit the U.S. East Coast and the Midwest in the past week. Snow is a double-barreled problem for scrap handlers and steelmakers. It can delay truck and rail shipments and also interrupts or slows scrap processing in dealers’ yards.

Consequently, some mill buyers are reluctant to consume scrap inventories fearing yet another storm could leave them with only snow to melt. They would rather pay local dealers more for emergency spot market buys than have no scrap. Rule No. 1 for all scrap buyers is to never run out of scrap. They always can pay more and live with getting yelled at by their bosses. If they run out of scrap, the mill can’t produce steel and they will be fired.

Several brokers and mill buyers decline to answer if it is likely mills will consume existing mill inventories if they run low in the last two weeks of December. Admitting that, says a Midwest mill buyer, would tip his hand and tell dealers how much tonnage he does or doesn’t have. “They can always drive by and eyeball what I have on the ground,” he says, “but they don’t know how much is still on its way here.”

Some mills bought extra tons in December but told dealers to postpone shipping that scrap until after 2018 arrives. Some dealers argue this may be simply a ploy to avoid carrying too much raw material on the books at year’s end. But one broker notes this material can sit in the railcar on a siding. It won’t be counted as part of the mill’s scrap stocks until it’s inspected and unloaded next year.

Also, the four largest domestic electric arc furnace (EAF) steelmakers, the industry’s biggest scrap consumers, have their own scrap supply units and may have amassed enough scrap in their yards to carry them through Christmas week and into mid-January. By avoiding all the hoopla of the January buy week, they may be able to make spot market buys in the second week and by mid-month at lower prices. They could pick off dealers who fail to sell as much scrap as expected.

This would not be the first time steelmakers pulled what one Chicago-area broker calls the “late December head fake.” Six years ago, he explains, dealers reassured each other throughout December that they would see prices soar by $50 per ton or more in January. During Christmas week, while many were enjoying those visions of higher prices as well as dancing sugar plums, several mills and their brokers made quiet deals with major scrap processors. When January arrived, the mills rejected offers of scrap at higher prices from the small and midsized dealers.

These dealers were caught with too much inventory that they had been piling up since the preceding November in anticipation of a January sales binge that failed to materialize. By the middle of the second week of January, many were accepting sideways and lower offers for that scrap.

Offshore versus domestic demand

Competition for scrap is more intense in the coastal areas because of the spike in export demand and the higher prices now paid at the docks. Turkish steelmakers bought a pair of cargoes from U.S. exporters in mid-December and paid $345 per metric ton for the 80/20 heavy melt and $350 per metric ton for shredded scrap delivered to a Turkish port. Other bulk cargo deals have been made with steelmakers in South America and the Far East at similar and higher prices.

Prices for containerized scrap continue to climb as well. Offers for shredded scrap loaded in a 20-foot container and dropped off at U.S. East Coast docks have soared to $330 per metric ton. Domestic mill-delivered prices for shredded scrap peaked at about $325 per ton. This has made it more difficult for the inland steelmakers to buy from alternate suppliers in the East. To take shredded away from the coastal areas, they must pay as much as $360 per ton if the rail freight cost is no more than $30 per ton. In some Midwest areas, it might be cheaper to buy busheling or bundles.

Some mills bought extra tons in December but told dealers to postpone shipping that scrap until after 2018 arrives. Some dealers argue this may be simply a ploy to avoid carrying too much raw material on the books at year’s end. But one broker notes this material can sit in the railcar on a siding.

Dealers in the regions bordering the coastal areas may be the biggest gainers. The exporters are paying coastal dealers between $270 and $280 per ton for export heavy melt, says an eastern trader, but he notes that some of the larger scrap processors there and those in inland regions have been offered as much as $300 per ton for the same scrap.

That rivals what domestic steel mills are paying for the higher quality No. 1 heavy melt. In the Cleveland and the Detroit areas, for example, where mills are paying $280 to $285 per ton for No. 1 heavy melt, the rail cost to ship it there makes export offers more lucrative for scrap dealers in the East.

A less troubling concern for some EAF-based sheet producers is the likely slowdown in industrial scrap output during the Christmas holiday week. Shipments of busheling and bundles may be reduced that week and in the first week of January. Add the threat of snow and/or colder temperatures, and that could delay truck and rail transport.

But industrial scrap has not been in tight supply this year, largely because of the growing price spread between busheling and shredded scrap. It was high enough to persuade several integrated mills to stop purchasing industrial scrap from dealers. Instead, they are consuming more home and shredded scrap, driving up the demand for the fragmented scrap.

That has left prime scrap overhanging the markets in the Upper Midwest and in Canada. As a result, flat-rolled mills were able to cut prime scrap prices more so than prices for obsolete grades in October and moderate the increases paid earlier in December. This has narrowed the so-called busheling premium to about $50 per ton. It was as high as $80 per ton in the Midwest several months ago.

Mike Marley is vice president of World Steel Exchange Marketing, a division of World Steel Dynamics, Englewood Cliffs, New Jersey. He can be contacted at mmarley@wsemgroup.com. This text is reprinted with permission.