Pumping the brakes

Although ferrous scrap prices experienced a small rebound in August, the momentum didn’t continue for long. Pricing took another significant tumble in September, with some grades losing nearly $40 per ton in value.

“We’ve lost everything that we started getting back plus some, and I heard some of the big shredders on the [Houston] port have gone down again,” says a scrap processor based in the Southwest. “Everybody’s pretty scared of what’s going to happen next month, too.”

No. 1 heavy melt steel (HMS) fell about $40 per ton in September to $208 per gross ton, a multiyear low, according to a price analysis by Greg Brown, president and CEO of Romulus, Michigan-based Benlee Inc., a roll-off trailer manufacturer. Although declines had been indicated throughout August—most grades lost nearly $5 to $10 in value throughout the month, according to pricing by Fastmarkets AMM—many sources say they hadn’t anticipated such a drastic devaluation.

“It was certainly hard to stomach,” says a Midwest scrap processor after seeing September pricing.

Sources say pricing is declining because of ongoing oversupply at scrap yards and steel mills, a trend that is likely to continue for the rest of the year as announcements of steel mill outages continue piling up.

“We’ve lost everything that we started getting back plus some, and I heard some of the big shredders on the [Houston] port have gone down again.” – a scrap processor based in the Southwest

A recent analysis by S&P Global Platts, London, found that the various U.S. sheet mill outages scheduled for this year total at least 100 days. The analysis also found that two-thirds of those outages, which include Nucor’s Hickman, Arkansas, mill and ArcelorMittal USA’s Burns Harbor, Indiana, mill, will be in October.

Many point to a weakening export market as the main source of the excess scrap. “There’s no export right now. That has caused all the domestic material to stay here, and we just can’t consume all the metal that we’re generating,” the scrap processor in the Southwest says.

Steel mills also are experiencing shorter lead times, scrap dealers say, indicating that orders are slow. One scrap dealer in the Midwest says ideal lead times are four to six weeks; however, as of late, they’ve been nearly half that or, in some cases, made to order.

Mills’ recent capability utilization rates are slowing as well. In the week ending Sept. 7, the capability utilization rate was 78.8 percent, according to the Washington-based American Iron and Steel Institute (AISI), representing a 1.7 percent decrease from the same time last year and an ongoing trend of production below 80 percent of capacity.

The slow orders come as the U.S. manufacturing sector appears to be pumping its brakes. On Sept. 3, the Tempe, Arizona-based Institute of Supply Management’s manufacturing index was 49.1 for the month of August, representing its lowest level since January 2016 and signaling a shrinking manufacturing sector in the U.S. Any number below 50 represents a contraction.

“The manufacturing sector has broken and is now in a recession. It’s official,” says Chris Rupkey, the chief financial economist at New York-based MUFG Union Bank. “The U.S. trade war with the world has blown open a great big hole in manufacturers’ confidence, and it will be a miracle if the broader economy can continue to roll on with manufacturing in decline.”

On the same day, IHS Markit, based in London, released its U.S. manufacturing Purchasing Managers’ Index (PMI), painting an even bleaker picture and pegging the PMI at its lowest level since 2009. The IHS Markit PMI is a diffusion index that summarizes market conditions as viewed by purchasing managers.

“Deteriorating exports are the key to the downturn, with new orders from foreign markets dropping at the fastest rate since 2009,” says Chris Williamson, the chief business economist at IHS Markit. “Many companies blame slower global economic growth for weakened order books but also point the finger at rising trade war tensions and tariffs.”

Exports were a considerable talking point, along with tariffs and broader economic conditions, among speakers at the 4th Steel Scrap, Billet & DRI Trade Summit, hosted by SteelMint in Bangkok in late August. Speakers there came to the consensus that world economic conditions are likely to drive scrap prices worldwide down further through the rest of the year, especially as economic conditions worsen in Turkey, a large scrap buyer.

While domestic and foreign market conditions have faltered this year, sources have been quick to recall times in recent memory when the market suffered far more. In his weekly analysis for Benlee, Brown recalls when U.S. steel production fell nearly 90 percent in just four months in 2008.

“U.S. steel production from 2007 through mid-2009—that was bad,” he says. “2019 is nothing like 2008.”