Sonic Echo

For once, that first-quarter boom heard out in the recycling yard was not the sound of crashing prices. Rather, it was the sound of ferrous scrap going through the roof. However, a thud appears to be echoing in the second quarter as the market adjusts to a variety of tempering factors.

Prices for shredded material, in the $275-290 range in March, are likely headed down to $200 for summer. Most recyclers will find they still can do business at that price.

The run-up in prices brought sellers out of the woodwork. "They were lined up on the street," says Ron Heggart, melt shop manager for Marion Steel, Marion, Ohio. He buys scrap for the mill. "There was lots of scrap coming to market. That’s due to the high pricing," he continues.

IN AN OUT. "We’re getting quite a little bit of material," says Lois Young, recycling supervisor for Skagit River Steel and Recycling, Burlington, Wash. She says they have seen a lot of obsolete scrap that was buried on farms for years. "But we still are looking for more," Young says.

"Our flow is not bad at all," says Dennis Bloch, Bloch Steel Industries, Seattle, Wash. "But our mill is not receiving at the rate we’d like it to be."

A southern mill buyer agrees that material is flowing and flowing fast. "We haven’t had any problem getting scrap," he says. "The price ran up quickly last fall." He attributes the run-up to activity in China, Taiwan, Korea, India, Turkey and other countries, noting that their economies recovered before that of the U.S.

"Steel makers are running full-out," says Jon Spigel, vice president of trading for Tube City Inc., Conshohocken, Pa.

"With the price increase and the pretty mild winter we had in the Midwest, material flow picked up," says Raynard Brown, president of Galamba Metals Group, Kansas City, Mo.

RISING PRICES. Just about everyone on either side of the equation was amazed by the price run-up in steel and steel scrap. Between June of 2003 and February of 2004, the price of hot-rolled coil steel skyrocketed 66 percent. Hot metal prices went from $320 to $600 per ton. Many in the market imposed surcharges of $1 to $1.50 per hundredweight to cover the cost of scrap, energy and transportation.

Instead of the nice, gradual upward slope that economists like to draw—one reflecting the dance of supply and demand—the price of steel vaulted upward, changing a steady pattern of many months in a couple of leaps that would make a ballerina proud.

"This period has been one of the strangest market segments I can remember," says Marty Davis, Midland-Davis Corp., Moline, Ill. While Midland-Davis does not buy over the scale, it saw much higher scrap flow from its industrial customers.

"Every one of our industrial customers has been busier than they have been in some time," Davis says. "Material flow has been pushed by the general economy, not the recycling market."

He points to one particular customer from whom Midland-David used to pick up a roll-off box of turnings twice a week. Recently, the customer has been calling for daily pickups.

Just as that ballerina must come back to earth, nobody expected the market to stay aloft forever. The question that remains is whether the market will make a graceful touchdown or will stumble and crash.

Spigel notes that prices came down sharply in early April. "Prices got pushed up too high," he says. "Some grades were pushed to unreasonable levels. Export numbers are down, and that drives the market," he adds.

BACKWARDS POLITICS. In fact, it was exporting that drove the market in the first quarter and let it drop in the second, most observers contend. The jump in the price of steel came despite a political move that should actually have lowered the price of steel, according to classical economics.

At the end of 2003, President Bush ended the tariff on imported steel. Again, classical economics would say: more finished steel available, lower price. Two months later, the price of that hot-rolled coil zoomed north of $480 per ton.

In this case, it seems that the politicians plain got lucky. Classical economics did not go awry. Rather, two things intervened. First, the Chinese dragon’s demand for steel continues to appear endless. With China buying new and recycled steel, there was plenty of extra demand to keep prices strong. Second, the U.S. dollar—under pressure of war expenses, rising oil costs and political uncertainties—continued to slip on world markets, blunting some of the impact of the flood of imports that otherwise would be expected.

"Tariffs had no effect whatsoever," says Heggart. He credits the firm prices to several factors. For one, it was a tough winter to collect scrap. For another, the export market demand from China, South Korea and Turkey was phenomenal.

"China was driving the increase," agrees Young. Skagit River ships most of its steel to a couple of local mills, not Asia. However, the Asian demand did have an impact on pricing.

But it was not all foreign influence that drove the prices up. Domestic sheet producers were active in the market, buying scrap to supplement their hot metal business. One observer says the domestic mills alone probably accounted for $40 of the price increase.

FORWARD THINKING. Davis notes that March was an odd month. Initially, no price list was put out for bundles. March 1 was a Monday, but there was little-to-no activity. Nobody seemed to know what to do.

March 4, a Thursday, things started popping. The market was up $20 to $25 per ton, and material was moving like mad. By 3 p.m., the flurry of activity was over, and people saw prices ease.

March was, indeed, confusing. It turns out it was a long work month—starting on a Monday and offering 23 working days. Most yards realized that February, as a 29-day month this year, offered an extra work day (a total of 20 days). However, some buyers underestimated the number of scrap-flow days in March—a whopping nine more days than in February. They ended up taking a hit on any leftover material.

"With the price as high as it was, a lot of people underestimated what they would take in," Davis says. "I know we did."

Heggart says he expects the run-up to be followed by a quick drop. "Prices are going down $30 per ton," he says. He bases that on two things: "We listen to the rumor mill and look at our receipts."

A mill buyer from the South says he expects obsolete shredded contracts to see a $30 to $50 drop. Prime scrap, including bundles, is likely to fall $15 to $20, he expects.

"I can’t imagine the exporters will chase the markets," Bloch says. And, in fact, April appears to finding the export market dropping.

On the one hand, Chinese planners, well aware of the situation, indicated that they would hold back on granting more permits and financing for increased steel output. However, they are building a plant near Brazil’s mines to produce finished steel. And, they have announced plans to build several completely new cities, each to house as many as a million people in the coming decade.

TALLY UP. Given the high prices of scrap and the cost of shipping, everyone agrees that the prices of scrap will pull back.

The first indicators of a change in April pricing came in the second half of March. At that time, some mills announced they would not extend March contracts to April pricing. That typically happens when the mills anticipate an adjustment of at least $5 per ton. While not everyone predicts as severe a drop as Heggart does, they all agree with his general scenario and expect that prices will fall quite a bit more than the minimum amounts.

"My best guess is $20 to $25," Young says. She notes that in this market atmosphere of "instant revelation" of every market move, there are few surprises and everyone gets the same information at about the same time.

Scrap buyers feel that scrap dealers made a lot of money as the steel market went up, and they warn that dealers are likely to be in a lot of pain during the next three months as markets go down. Several projected a 60- to 90-day period of eroding prices.

"When you say the prices are going down $30 per ton, it sounds like a lot, but that is what they went up in February," Davis notes. He notes that price drops usually are steeper than increases. "I would not have been shocked by a $40-per-ton drop," he says. "But that only takes it back to February levels or a little below."

Davis says it is too early to tell what the market will do as summer approaches. "I won’t be surprised if it continues to drop," he says. Like many other observers, he defers any decision until the market can get a better reading on the Chinese market’s appetite for scrap.

"My guess is scrap will be in the $180 to $225 range this summer," Bloch says. "I think that range is sustainable. The Chinese cannot be out of the market forever."

Spigel notes that shredded was off by $50 per ton and other materials were off by $30 to $35 per ton . . . and that was just in April.

Looking down the road, he says he feels a sustainable price for shredded grades in the Mid-Atlantic that were close to $290 per ton will settle around $200 per ton. Heavy melt, which saw prices in the $230 to $240 level in March, will likely settle around $180.

Brown followed the consensus that prices would fall into May. Beyond that, he is not sure. "I think the $200 range for scrap may be a livable level," he concludes.

The author is a Recycling Today contributing editor based in Cleveland. He can be contacted at curt@curtharler.com.