Ferrous Scrap in Free Fall?

The domestic steel mills and their ferrous scrap suppliers traditionally negotiate pricing on scrap to be delivered during the first few days of the new month. This means the mills and their suppliers are deep into negotiations regarding February scrap purchases right now.

Last week the word amongst the “scrappies,” as well as their mill customers, was to expect a major reset in scrap prices. The domestic mills spoke about the reset during their earnings conference calls with analysts last week. The numbers being floated were for scrap to drop by $50 per gross ton and perhaps higher.

With a large reset in scrap pricing staring them in the face, many dealers expedited their deliveries of January material into the mills. The higher than perhaps anticipated shipment levels coupled with slowing demand at many of the domestic steel mills, has created higher inventories and less need to buy new scrap.

At the same time the export markets for scrap have “imploded” according to one of our sources. The higher dollar and weakening demand overseas has created a market where scrap that normally would be exported is destined to remain at home and flood into the Mid-Atlantic or Ohio Valley, putting pressure on pricing.

The automotive companies announced a record pace for new car sales during the month of January. The February build schedules are strong and the industry is creating large amounts of prime scrap. This too is putting pressure on prices as these manufacturing companies are not going to slow down.

We are learning a number of steel mills are buying less scrap than normal. Mike Marley of MetalPrices.com reported in his note to clients on Monday that NLMK Indiana would be buying minimal to no scrap this month. We learned from a second source that ArcelorMittal Dofasco was cutting back their buy. Last week we learned directly from US Steel that they are taking down 3 blast furnaces: one in Gary, one in Granite City and one in Fairfield which limits the amount of scrap that they will need at each of those facilities.

As of today (Tuesday, February 03, 2015), the scrap market has not yet settled. What we are seeing and hearing is posturing by both steel mills and scrap suppliers as they attempt to either take the numbers as low as possible or put a bottom to the slide depending on what side of the trade is being taken. We know prices will be much lower than January but we are not yet prepared to call the market down $100 per gross ton as some may be doing.

One of the east coast scrap dealers told SMU this morning that market prices had not yet settled in their area but the market was “ugly” and dealers are resigned to losing at least $50 per gross ton on February shipments.

However, one of the large national suppliers told SMU this morning, “I’m not anticipating much activity until later this week.  It appears the mills were slammed with scrap deliveries while their order books failed to meet forecasts.  This has resulted in bloated inventories and most likely will add even more downward pressure to the market.  I’ve heard reports of mills being offered scrap at down $75+/gross ton with no takers.  We could see a $100/gross ton drop if dealers panic.”

What does this mean for buyers of hot rolled, cold rolled and coated products?

If you listened to the mill conference calls this past week the domestic steel mills were trying to position market pricing by saying the decline in scrap price was just following the decline in steel prices. In other words, the mills don’t think prices should be impacted by any large reset in scrap pricing.

End users are not necessarily in agreement with the comments made by the mills. One large manufacturing company told us this morning regarding steel and scrap prices, “$520 is the cheapest I’ve seen thus far.  I am anticipating that if scrap falls that far, we will see HRC at $460 or lower as the bottom.  I am seeing import offers at $460 already.”

The last time SMU hot rolled index was anywhere near $460 per ton was during July 2009 – deep in the grasp of the Great Recession.

Another manufacturing company in the same industry as the one quoted above believes prices may be close to a bottom, “…I think that scrap move is already priced in as far as steel… We are seeing demand starting to turn a corner and at least stabilize.” This buyer went on to state that they are becoming worried as some of the items they buy have 3-4 month lead times, “…we are a little worried that we will be caught off guard.” But, nothing is cut in stone and the buyer wondered, “It’s just the tip of the ice berg that we see – could only be a floating piece of ice….”