Ferrous Scrap Prices: Sideways in February?

Steel Market Update sources disagree on whether ferrous scrap prices will see a small decline or move sideways in February. But the market remains unusual for this time of year when scrap prices normally increase as the mills restock ahead of new-year steel demand.

Scrap prices surprised the market with a $30-40 per ton decrease in January. The main cause was weak scrap demand overseas, which prompted exporters to compete for domestic buyers in the Midwest and Ohio Valley. SMU’s sources agree that the export markets are now strengthening. Combined with the difficult winter weather conditions restricting scrap flows in the U.S., scrap supplies are likely to tighten, stabilizing prices. The question is, how much?

CRU Steel Analyst Ryan McKinley said the U.S. scrap market could see another decline of $10-20/GT in February should conditions remain as they are. “However, that hinges on what occurs next week. The situation is changing as more cargoes are booked off of the East Coast and export prices are rising a bit. Should that upward momentum continue and should another round of winter weather affect scrap flows, the market could find enough support to go at least sideways. Still, flows early this month were strong prior to the winter weather and export prices are still off by quite a bit compared to where they were 60-90 days ago,” he said.

The export market is getting stronger, said a dealer in the Northeast. The latest sale off the U.S. East Coast was around $290/MT for 80/20 HMS and in the upper $290s or a bit more for shredded. “In any event, the overseas scrap market appears to have stopped declining and is bouncing a bit, as is the price for foreign rebar sales, which are important for Turkish scrap demand,” he noted.

The improvement in overseas sentiment and weaker yard inflows should disincentivize exporters from offering large volumes of scrap into the domestic market as they did in January, he added. “Mills may have overbought scrap a bit in January and assumed some of those tons from exporters would arrive in mid-February. But from what we are seeing, domestic scrap demand should remain pretty solid in February despite those large January purchases. At this point, I am hearing and thinking nothing worse than sideways pricing for February.”

The export market has clearly bottomed, agreed another source, with new sales into Turkey at higher numbers and the future contracts for February up more than $20/GT. “At these price levels, much of the coastal scrap will remain on the coast destined for international homes,” he said. “With domestic demand remaining strong, most mills will opt to keep the scrap pipelines full at sideways prices rather than risk a supply blip by lowering prices in February.”

Worsening winter weather has slowed inbound flows of material not only into the scrap yards but into the mills themselves, he added. “Shredders have little to no scrap to shred and many are already raising prices to attract more tons,” he continued. “In addition, many of the mills in the region are just now getting notice of the first cars they bought from the East Coast for January delivery. Typical transit time to the mills from the coast is 6-9 days in ideal conditions, so most of the remote scrap bought won’t be delivered until February.”

Scrap consultant John Harris of Aaristic Services Inc. expects to see a further decline in ferrous scrap prices in February as various factors temper export demand. As China enters the three-week lull for the New Year’s celebrations from Feb. 4-10, expect very little trading, he said. This will hold international trading to a minimum, limiting U.S. scrap export cargoes.

“Turkey is the swing country for setting international scrap demand and pricing. It will regularly be challenged by China for export steel sales into the Far East, Africa and Mediterranean regions. Further, scrap will also be exported from China to challenge and/or supply Turkey’s scrap needs,” Harris said.

The market could see some changes in late March as China is expected to add incentives to their market economy. Some are related to banking, but others could directly affect steel demand in China, Harris said. “Regardless of the economies outside of China claiming there is a global steel surplus, China continues to increase its yearly steel production for both internal and external sales,” he noted.

Looking ahead, Harris expects February scrap prices to continue to drop on minimal export demand. March pricing should hold as the effects of China’s economic incentives take root. April has the potential for a small increase in scrap pricing if export demand picks up, but from May onward expect minimal changes this year as prices seesaw from month to month, he predicts.

Declining or sideways pricing for scrap will not offer much support to mills such as California Steel Industries and USS-POSCO Industries that are hoping to collect higher finished steel prices. On Jan. 21, CSI and UPI announced increases of $40 per ton on flat rolled products. How soon the other mills follow suit may depend, at least in part, on where scrap prices settle for February.