February Scrap Pricing Now Poised to Drop $20-$40

Written by John Packard

SMU scrap sources are all telling us that the recent transactions with Turkey have “surprised” dealers, the net result may well be a much weaker domestic scrap market than anticipated as we move into February negotiations next week. A weaker scrap market, especially if it were to drop $35-$40 per gross ton would dampen price negotiations between buyers and the steel mills.

At the beginning of January most dealers expected February scrap pricing to be relatively stable. Then, over the past week the word started to leak out of an export deal done down $20. The expectations of a down February have started to sink in with one scrap dealer telling me, “…Prices will drop in Feb and now, due to the recent export sales, prices will fall more than the expected $15-20gt to more like down $30-35gt. Strong domestic demand and limited supply (most dealers have cleared the decks in Jan) should limit the drop.”

Another scrap executive provided more detail on what is driving the market and what the dealers now expect going forward:

‘The ferrous market has surprisingly become a bit of a mess as we head into the end of January.  Publicly-held scrap export companies decided earlier this week to sell several cargos to Turkish buyers at prices about $27/MT lower than the previous sale.  Then a day or so later, a privately-held exporter sold $13/MT lower, followed by two more cargoes sold by the publicly-held exporters even a few $/MT lower yet.  The new export level is now around $240/MT for the 80/20 grade.  These moves surprised the entire market, including, I think, the Turkish buyers.  I imagine that some of the most upset crowds are the finished steel sales people who are going to have a tough time pushing prices higher and maybe even keeping them at current levels as buyers begin to sit on their hands and watch the ferrous market collapse a bit.

The two primary reasons for the precipitous drops were (1) the continued very weak Turkish steel market (weak local currency, lethargic end demand, power curtailments stalling production at Turkish mills for the last month and enough of an alternative supply from the European alternative sources, no improving conditions appearing on the horizon), and (2) the need of the publicly-traded companies to liquidate some inventory they have been accumulating since early-December.  I have to think all the exporters are going to lose money on these sales, though they will succeed to some degree in resetting the market price.  As an aside, this is exactly why scrap companies should not be public.  Playing to the whims of investors rather than taking a longer view of the market can really put a crimp on taking advantage of opportunities.  But that is a story for another day.  

Despite the weakness in the Turkish market, they still bought no fewer than five US cargos this week at that I think they believe are attractive prices.  They were good traders as they bought a few cargos, watched the panic-stricken Americans offer more scrap and negotiate against themselves for a lower price, and stepped in to buy at a more attractive point for themselves.  They must have said something like “and here we thought Christmas was on December 25th, not January 25th!”

The good news: the domestic US market is operating in a very different, and more positive, situation.  Dealers liquidated a lot of inventory in December and January, and now are left without much overhang despite improved scrap flows into our yards once we got into January.  My company is probably going to end January with our lowest ferrous inventory levels in seven years.  And while we typically see scrap devalue a bit in February after the January restocking period at steel mills (most people had thinking a drop of around $10-maybe $20/GT for this February), people I am speaking with now think the US domestic drop will be more like $20-$30 from January levels, and possibly slightly more.  

Late today, however, I was already hearing resistance to attempts by mills to drop prices by $40/GT for February orders.  Exporters will offer scrap to domestic consumers for February delivery, but I doubt it will not be enough to cover solid demand here.  Those offers will push the prices lower than they would have otherwise been, however.  But low inventory levels at dealers’ yards and a continued positive outlook by mills and dealers should keep the market from collapsing.  Some even anticipate a bottom in February followed by some scrap price bump in March.  

I watch our new president and I don’t know how any hot metal man or woman, or scrap dealer cannot but feel positive about his agenda, which he is pushing aggressively.  We have now and should continue to have low import levels, we are going to build pipelines with steel made in America, there is some infrastructure work that will come this year from the FastAct and more in years to come as President Trump and Congress put together more infrastructure deals.  And tax reform will create conditions in this country for more investment and business spending.  After several years of really challenging business conditions for our industries, we could well be on the precipice of a nice run for steel and ferrous scrap.  And eventually the Turkish scrap buyers will be back with better steel demand and heartier appetite for US scrap.

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