Ferrous Scrap Pricing Drops $80 to $110

As we reported last week, prior to negotiations beginning for the month of February market players were predicting ferrous scrap prices would drop by $30-$50 and then $50-$70 per gross ton. Then we heard prices would drop by $100 per gross ton over the months of February and March combined. When the smoke cleared at the end of this past week we found ferrous scrap prices had fallen by $80 per gross ton on obsolete and shredded grades and by $100-$110 per gross ton on prime grades such as #1 busheling and bundles.

On Tuesday of last week, Steel Market Update sources advised us that the Detroit market became the first to settle with prime grades declining by $100 per gross ton and shred and obsolete grades by $80 per gross ton. As the week came to an end, most of the regions of the country settled in that $80 to $100 per gross ton range, with some regions seeing prices adjust by as much as $110 per gross ton.

Mike Marley, scrap guru for MetalPrices.com told his clients, “The problem is that the strong dollar has attracted a lot of low-priced foreign steel into the U.S., and the U.S. steel companies were too slow to drop their prices in response to the foreign competition. The steel companies should have dropped their finished-steel prices a lot sooner, and we’re bearing the brunt of how poorly they handled the surge of imported steel,’ said one Cincy/Indy-district scrap executive.”

It was not just the influx of cheap foreign steel that impacted the February scrap markets. We received the following from one of our scrap sources on the East Coast over the weekend, “Most trading is finished I think.  Markets settled anywhere from down $80-$100/GT – less on obsolete grades and more on prime.  That places shred in the OH Valley at $260/GT give or take, and about $15-$20 lower in Chicago.  Trading in the Mid-Atlantic was so sparse it’s difficult to gauge what the real market was, though confirmed trades that did take place were down around $100/GT.  In the south, shred prices were anywhere from $245-60/GT as well.

“Outside of the late-2008 period when the financial world was falling apart, the degree of this drop is unprecedented.  It reflects (1) the seasonal weakness of February (markets are almost always lower in February than in January), (2) the strengthening dollar making export demand for scrap weaker, (3) the build-up of finished and semi-finished inventory worldwide and in this country, and (4) the ability of the large ferrous scrap consumers in this country to take advantage of the mess that is the ferrous scrap recycling industry today and force prices to a level where the steel makers need to them to be, at least temporarily.  

“My sense going forward, as I said last week, is that the dramatic fall to these new price levels in the middle of winter is likely not sustainable.  I do not expect prices to go back to January levels necessarily, but they should rise from where we are today.  When that happens and for how long slightly higher price levels prevail is unknown.  What I do know is that you can’t sustain these price levels without some bounce in the next 45 days as demand for steel has not completely disappeared like it did in late-2008 and early-2009, and that ultimately the scrap industry will have structural changes forced upon it as more and more dealers get squeezed for cash.”

On the other hand, Timna Tanners, metals and mining analyst for Bank of America Merrill Lynch, recently suggested in a note to her customers that, using a historical average of 2.8 times iron ore, obsolete scrap should be trading around $175 per ton.

Has scrap found the bottom? We are not quite sure and will have to wait and see what happens to the price of oil, the number of tons of foreign imports that hit U.S. shores during the month of February, the status of the domestic mill order books, and the demand and inventories at service centers. These are items we will be watching very closely in the coming days.