Mild turbulence

When markets are tough, ferrous scrap recyclers generally are willing to be open about it and acknowledge that profits are hard to come by. Through most of 2017, few such complaints had to be issued, though October market pricing and demand did create some challenges for recyclers who were tempted to become complacent.

In the first nine months of 2017, pricing for shredded ferrous scrap never ranged too far from $300 per ton as measured by the Raw Material Aggregation Data Service (RMDAS) managed by Pittsburgh-based MSA Inc. (The exception was a slight spike to $323 in March.)

Certain domestic and global market conditions in October, however, brought about substantial price declines of $29 per ton for shredded scrap and $40 per ton for prompt grades as measured by RMDAS.

With the books about to close on 2017, ferrous processors and traders are trying to manage through the turbulence to ideally close those books on what can be a profitable year for the sector.

Tapping the brakes

Strong sales in the automotive market have helped provide prompt scrap and auto hulks to the ferrous scrap market. On the sell side, a healthy auto sector keeps the order books of some steel mills full.

Unfortunately for the steel and scrap sectors, the long-lasting boom in vehicle sales may be ready for a lull. Auto industry analysts cite an expected cyclical decline in demand (many car owners already have purchased recently) and potential changes in lending standards as contributing factors. October 2017 vehicle sales in the United States were forecast to drop versus the September figure, which is typical according to Wards Auto, an auto sector information services provider. However, Wards says, sales could drop by 9.9 percent in October 2017 compared with an 8.8 percent average drop in the same two months in the prior seven years.

Other statistics and forecasts, on the other hand, detect a little more mileage in this decade’s automotive sales bull market.

Part of the reason October sales dropped as far as they did was because of strong sales in September. U.S. auto sales exceeded analyst expectations in September 2017 with a 6 percent year-over-year increase to 1.5 million units. This marked the first monthly improvement of 2017, according to The Truth About Cars (TTAC), www.thetruthaboutcars.com.

Through August of 2017, auto sales dropped by 3 percent compared with the same period in 2016, according to TTAC. This likely led to some of the analysis that the decade’s bull market may be at an end.

Steelmakers and scrap processors can take heart that heavier “pickup trucks played a major role in September’s improvements, growing at twice the rate of the industry at large,” according to TTAC.

However, that same fact points to the notion that storm damage in the Southeast (where pickup trucks are popular) also played a role in the September figures, TTAC notes. TTAC also posits that automakers provided greater incentives to lure buyers—up to $3,700—in September, giving more ammunition to skeptics.

Another factor weighing on domestic steel and ferrous scrap demand is the lack of progress on federal infrastructure spending. Political analysts saw a major highway and infrastructure bill as a likely early accomplishment for the Trump administration, which could find suitable allies in Congress and up and down K Street (Washington’s industry trade group corridor) for such an initiative.

Instead, the administration has focused on health care and tax reform efforts, while an infrastructure bill that could potentially help steelmakers and scrap processors alike seemingly has been neglected.

Despite worries on the automotive side and stalling on the infrastructure spending side, domestic steelmakers increased their output of crude steel through late October 2017 compared with the year before.

Figures maintained by the Washington-based American Iron and Steel Institute (AISI) show steelmakers in the U.S. produced 74.7 million tons of steel through Oct. 28, 2017. That is a 3.8 increase from the 72 million tons produced in the same time span in 2016.

A little more life

When October 2017 scrap prices dropped, recyclers and industry analysts cited some of the domestic conditions mentioned previously as well as a shortage of electrodes used to melt scrap at electric arc furnace (EAF) mills as factors.

Falling prices in previous years often were attributed to sudden declines in overseas demand for U.S. ferrous scrap; but, thus far in 2017, overseas buyers have been more consistent and, on the aggregate, have been buying more by volume.

Figures collected by the U.S. Census Bureau and tracked by the United States Geological Survey (USGS) show that in the first seven months of 2017, the U.S. exported nearly 8 million metric tons of scrap. The 7.98 million metric tons exported represents a 19.3 percent boost from the 6.69 million metric tons exported in the first seven months of 2016.

Through those seven months, Turkey has purchased 1.65 million metric tons of U.S. scrap, putting it slightly behind the 1.7 million metric tons it purchased in the same time frame in 2016.

Mexico, on the other hand, has strengthened its position in 2017 as the second-largest buyer of U.S. ferrous scrap, having purchased 39.7 percent more scrap through July 2017 compared with the end of July 2016.

The Indian subcontinent has had a split personality in 2017, with Bangladesh (up by 163 percent) and Pakistan (up by 63 percent) increasing their purchases, while India has been quieter. The decline of Indian buying likely is because of two government policies: a demonetization (or currency trade-in) policy that harmed first quarter 2017 industrial output and the rollout of a new goods and services tax in the second half of the year that had a similar impact.

A storyline (in this publication and beyond) has been the status of China’s ferrous scrap market and whether that nation is emerging as a net exporter of this material.

Whether it is a matter of quality, currency values, freight rates or other factors that affect trading patterns, figures in the first seven months of 2017 instead point to an increase of ferrous scrap shipped in the other direction—from the U.S. to China.

That increase is not minor but rather an 84.3 percent boost. That means China purchased 610,000 metric tons of ferrous scrap from the U.S. in the first seven months of 2017, placing it fourth on the overall list of buyers, behind only Turkey, Mexico and Taiwan. If a tidal wave of scrap is heading from China to North America, as of 2017 it appears the undertow of scrap in the other direction is actually stronger.

Other export growth markets for U.S. ferrous scrap in 2017, according to the USGS, include smaller but growing markets, such as Vietnam (from 108,000 to 357,000 metric tons, up 230 percent), Thailand (from 231,000 to 284,000 metric tons, up 23 percent) and Egypt (from 92,000 to 129,000 metric tons, a 40 percent increase).

Taking it all in

Considering the “scrap is bought and not sold” axiom, 2017 has proven to be a less stressful year for the ferrous sector than several previous years.

With the exception of the unwelcome drop in the October buying period, ferrous scrap pricing largely has held steady in 2017, helping recyclers keep scale prices consistent and luring in stable amounts of obsolete scrap.

Peddler and other across-the-scale activity has been described as “above average” by a recycler in the spring of 2017, while a recycler said sellers were “coming out of the woodwork” in August.

The steady scale pricing and flows have helped the value of prompt grades pull back ahead of obsolete grades. In parts of 2015 and 2016, the steady supply of prompt scrap occurring during a time when obsolete items were barely trickling across the scale virtually eliminated the premium usually enjoyed by prompt factory clips and stampings.

By September 2017, however, RMDAS pricing showed a sizable gap in U.S. average pricing. In that month, prompt grades traded at $395 per ton compared with $308 for shredded scrap. (That gap subsequently narrowed by $11 per ton in October.)

This represents a seeming return to normalcy from inverse conditions that may have peaked in November 2016, when RMDAS showed shredded scrap selling for $2-to-$6-per-ton more than prompt grades in two of its geographic regions.

The lack of flow of material into auto shredder yards that came with a steep price drop in the autumn of 2015 lasted well into 2016, before this year’s more stable situation finally led to conditions more familiar to the ferrous scrap sector.

Heading into the final weeks of 2017 and looking ahead to 2018, ferrous scrap processors, traders and buyers, as usual, have plenty of things for to worry about.

Political turmoil in Washington could rattle investors and further delay policies that could prove favorable to the domestic steel and scrap sectors. China’s potential effects on the global market range from its own economic woes to the fruition of predictions that it will export ferrous scrap.

As is generally the case in the scrap industry, easing into complacency is unlikely to be an option.

The author is editor of Recycling Today and can be contacted at btaylor@gie.net.