Off the cliff

Ferrous scrap prices took one of the steepest plunges in their history in early February, with some grades falling by more than $100 per ton.

Traders and processors cite several different factors for the drop, which for some grades represented a sudden disappearance of 27 percent of their value, depending on the region and the index used.

The February buying period as portrayed and calculated by American Metal Market (AMM) left scrap processors in the U.S. wondering whether the steep drop was the beginning of a “new normal” or whether it might be the start of a volatile roller coaster of a market in 2015.

The instant reaction was gloominess. “Markets are real ugly,” a ferrous scrap buyer in the Ohio Valley region says, “and it doesn’t look like it is going to change anytime soon.”

The buyer cites several reasons for ongoing concern. “Steel mills are under a lot of pressure, and the export market stinks because the U.S. dollar is strong,” he comments.
 

The strong dollar has not only made U.S. scrap a much tougher sell on the global market, but some mill buyers in the U.S. were reportedly taking advantage of the stronger dollar and weaker euro to bring in ferrous scrap from Europe.

Although severe winter weather has kept supply muted in parts of the northeastern U.S., it has done little to cause mill buyers to bid up the price of scrap. Export buyers reportedly purchased so few bulk cargo loads in December and January that sellers on either coast had plenty of material to fill existing orders.

Adding to downward price pressure has been an unexpected drop in furnace and melt shop activity in the U.S.

According to the American Iron and Steel Institute (AISI), Washington, in the week ending Feb. 7, 2015, domestic raw steel production was 1.77 million tons, with mills running at a capacity rate of 74.8 percent.

That compares with output of 1.82 million tons during the comparable week in 2014, when the capacity rate was a stronger 75.8 percent. That is a year-against-year drop of 3 percent. It also represented a 0.7 percent drop in output from the previous week (the last week of January 2015).

Year to date, steelmakers in the U.S. have produced 9.88 million tons, which is down 0.3 percent from the 9.9 million tons produced in the first five weeks of 2014. Thus, the latest weekly drop represents much of the new shortfall.

Speaking at the 2015 Metals Recycling Association of India (MRAI) meeting in early February in New Delhi, Doug Kramer, the current chairman of the Washington-based Institute of Scrap Recycling Industries (ISRI) and president of Los Angeles-based Kramer Metals Inc., said scrap dealers in the Pacific Coast region have been severely affected by the dwindling export markets for more than two years.

From 2003 to 2011, scrap exports “tripled in volume,” Kramer remarked, referring to the active export markets for ferrous and nonferrous scrap, particularly to China.

Those volumes have been diminishing in each of the previous three years, and 2015 is not getting off to an encouraging start, Kramer noted. He described the U.S. Pacific Coast market as being beset not only by weak markets but also by the port workers’ slowdown, which has resulted in terminals that are “beyond congestion.”

Kramer remarked that “India bucked the trend” in 2014 with its demand for U.S. scrap, despite that nation having a scrap import duty in place. In the first 11 months of 2014, while overall global demand for U.S. ferrous scrap was down, India brought in 7 percent more scrap by volume than it had the previous year.

One thing likely to bring East Asian buyers back into the ferrous scrap market is lower prices, and in the U.S. that seemed to be happening in mid-February. An AMM report indicated that buyers from China and South Korea came into the U.S. market to make bulk cargo purchases after several straight months of declining prices.

The widespread return of export buyers would be a welcome development for processors and traders in the U.S. ISRI President Robin Wiener, at a separate presentation at the MRAI event, presented January to November ferrous scrap export statistics gathered by the U.S. Department of Commerce.

While Turkey’s reduced buying (29 percent, or more than 1.3 million tons, in 2014 compared with 2013 in those first 11 months) has been felt on the East Coast, the three largest buyers off the West Coast also have stepped back from the market.

By both percentage and volume on the West Coast, China has been the biggest absentee purchaser, buying 69 percent less scrap in the first 11 months of 2014 compared with 2013. Adding to China’s 1 million-ton drop in purchases are South Korea (which has purchased 450,000 tons less) and Taiwan (down by 310,000 tons). Those three countries likely will purchase about 1.8 million tons less of ferrous scrap in 2014 compared with 2013.

The American Metal Market (AMM) Midwest Ferrous Scrap Index is calculated based on transaction data received that are then tonnage-weighted and normalized to produce a final index value. The AMM Scrap Index includes material that will be delivered within 30 days to the mill. Spot business included after the 10th of the month will not be included. The detailed methodology is available at www.amm.com/pricing/methodology.html. The AMM Ferrous Scrap Export Indices are calculated based on transaction data received that are then tonnage-weighted and normalized to produce a final index value. The detailed methodology is available at www.amm.com/pricing/methodology.html.