The wrong kind of momentum

The early October ferrous scrap buying period revealed a market where steelmakers and their brokers were steadfastly willing to buy at a low price or not at all, providing more downward momentum on pricing.

Whether purchasing for domestic mills or overseas producers, buyers in October came in with bids some $50 per ton lower for each of the major grades of ferrous scrap, according to American Metal Market (AMM).

All three of the benchmark grades calculated by AMM for its Midwest index pricing dropped below $200 per ton, with No. 1 heavy melting steel (HMS) losing 24 percent of its value in 30 days and falling to $165 per ton.

Fallout from a global steel industry in poor condition hit the Midwest and Great Lakes regions particularly hard in the fall of 2015, with U.S. Steel announcing it may idle its integrated complex in Granite City, Illinois; a potential strike looming at Alton Steel in Illinois; and the future of the former Stelco steel mills in Ontario hinging on the acceptance of scaled back benefits and other negotiable points.

Many mill buyers judged they could skip the October buying period if necessary, and in the meantime could offer bids in a new, lower price range to dealers with few other options.

The $50 drop made for an extremely unprofitable month for scrap processors. “Dealers are getting killed,” says one Midwestern recycler. Acknowledging the climate for steelmakers, he adds, “Mills are not faring much better.”

Scale prices at scrap yards that will be lower yet are likely to restrict supply in November, but recyclers are not certain that will be enough to cause a price rebound. “It looks like we will be dragging bottom for the next 120 days at least,” predicts a recycler in the Southeast.

Inventories at mills and scrap yards may determine whether the downward price momentum can be halted before year-end. “Volumes have dried up, and it is very difficult to buy scrap at this time,” the recycler in the Southeast says.

The scrap market’s woes are considered by many analysts to be tied to steel industry conditions halfway around the world in China. The intense demand for steel marked by China’s rapid urbanization and infrastructure buildout reached a temporary peak, perhaps as far back as 2013.

However, China’s largest steel producers (many of them state owned) have continued to churn out semifinished and finished steel, selling it to the global market and stockpiling it.

An Oct 4, 2015, report on the Asian Nikkei Review website cites a UBS Securities report detailing mounting steel inventories in China. “UBS Securities expects China’s crude steel capacity to exceed consumption by 441 million tons in 2015,” the article’s author says.

Although the global economy overall is by no means in crisis (with modest gross domestic product [GDP] growth the norm in most of the world’s largest economies), conditions in the steel, iron ore and ferrous scrap markets in much of the world are more reminiscent of a recession.

With China’s infrastructure investment and urbanization trends having moved beyond a peak steel intensity phase, steelmakers in China and also in some of its neighboring nations are beginning to scale back their output in 2015, according to Brussels-based WorldSteel.

Through the first eight months of 2015, the roster of Asian nations with steel slowdowns in effect includes China (down 2.1 percent, or 11.5 million metric tons); Japan (down 4.9 percent, or 3.6 million metric tons); South Korea (down 3.2 percent, or 1.5 million metric tons); and Thailand (down 7.4 percent, or 200,000 metric tons).

The slower pace at melt shops has been the direct result of China’s construction slowdown. Steelmakers in other parts of the world, however, say their problems have been caused by those same furnaces staying at full production throughout 2014 and much of 2015 and sending their output to North America, Europe or wherever else they could find a buyer.

Thus, while the U.S. may be enjoying GDP growth and a reasonably healthy building sector, steelmaking furnaces in North America are not melting more scrap as a result. Instead, steel output in the U.S. through the first eight months of 2015 is down 8.5 percent, according to WorldSteel.

This 5-million-metric-ton drop in U.S. steel production means scrap processors in the U.S. face reduced demand not only from their overseas buyers but from domestic mills as well.

As the fourth quarter began, data from the American Iron and Steel Institute (AISI), Washington, reflect the ongoing stagnant conditions for steelmakers in the U.S.

In the week ending Oct. 10, 2015, domestic raw steel production was 1.7 million tons, and the industry’s mill capacity rate was 71.3 percent. That is a 1.3 percent decline from the previous week ending Oct. 3, 2015, and a 7.3 percent decline from the output of 1.84 million tons in the week ending Oct. 10, 2014.

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 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. *FOB New York, in metric tons; **FOB Los Angeles, in metric tons.