Ferrous Scrap Update: April Bounce Ahead (Dead Cat or Otherwise)?

As Steel Market Update has discussed in previous articles on the subject of scrap pricing, the original projections by buyers of scrap were for prices to drop $20 per gross ton on all products for the month of March. The projected March reduction would have been on the heels of an $80 to $110 per gross ton drop in scrap prices during the month of February.

However, the scrap markets have a tendency to surprise, both on the way down and on the way back up.

With the poor weather that many regions of the country suffered through during the month of February combined with lower buy prices by the dealers to their scrap sources, we saw obsolete grades move sideways to up a few bucks around the country.

Obsolete grades include #1 Heavy Melt (HMS) and shredded scrap. Steel Market Update pegged the range on HMS at $230-$235 per gross ton and the range on shredded scrap we see as being $235-$255 per gross ton. The HMS numbers are a roll-over of what we saw in February, while shredded average remained about the same but our spread was wider. Prices are for Midwest mills.

Prime grades of scrap have seen good flows with automotive stamping plants running full. We pegged #1 Busheling at $235-$255 per gross ton for a $245 average which is down $12.50 per ton compared to last month. Our sources advised us that Busheling dropped anywhere from $10 to $20 per gross ton depending on the market.

“I don’t see scrap going down anymore.” Scrap Dealer

After negotiations for the month are over, the first thing the steel industry wants to know is what is going to happen next. Will scrap prices rise in April, move sideways or drop once again?

We are hearing from the dealers we speak with that April is looking like it may be a stronger buy month for the domestic mills. This does not mean prices will skyrocket from here but, we should see prices stabilize with a “strong sideways move” and, in some markets, prices could go higher by $10 to as much as $40 per ton.

The scrap dealers realize there is a de-stocking move being made by the service centers at this time. What the dealers don’t know is when will the de-stocking end and the buying frenzy begin which would bring the mills back into the market full force.

One of our dealer contacts told us earlier today, “Pricing for obsolete ended at a minimum sideways although I sold shred up $10 to $15 as availability is real tight.” He went on to tell us that inbound scrap flows are limited due to season factors and the drop in the buying prices. “I don’t expect a pick-up in flows until early April.” With the limited flows this will keep prices on obsolete grades from moving any lower in April.

Mike Marley, steel guru for MetalPrices.com spoke to SMU regarding flows of inbound scrap metal into the dealer’s yards, “It’s too early to have a good handle on what to expect pricewise in April.  Steel mills will say a flood of obsolete scrap will pour into dealer yards when the weather improves.  That’s what’s called “peddler scrap.”  It’s the guy in a pickup truck who drives around and collects old appliances and other metal products from the trash bins at apartment complexes and shopping malls.   What’s unknown is whether the big suppliers like auto wreckers and demolition contractors will be unloading.  I’m giving it another week to see.  Most of the large dealers say they have not yet seen any measurable increase from those suppliers.”   

The East Coast dealer referenced above went on to tell SMU, “I don’t see scrap going down anymore. I think the market has bottomed and I expect a firm bounce in April.” Since he was not sure where steel mill demand will be for April he pegged the bounce to be up $10 to as much as up $40 per gross ton depending on the region and needs of the mills. “SDI and Nucor bought scrap in March. That signals that we are at a bottom.”

Scrap Pricing and Iron Ore

Our East Coast dealer source wanted to talk about the relationship between scrap prices and iron ore. There has been a lot written lately in Steel Market Update and elsewhere, regarding the historic multiple scrap should be at compared to spot iron ore. We have heard multiples of 2.8 (Bank of America) to as high as 4 times that of spot scrap (example: 62% Fe iron ore fines @ $58/dmt X 4 = $232 if the multiple is a 3 then scrap should trade as low as $174 per gross ton). Scrap is trading very close to the $232 number right now.

Our dealer told us that there may be a historical relationship between scrap and iron ore, however, the two products are bought and sold very differently. Iron ore tends to be sold on a contractual or continuous basis while scrap is sold on a daily, weekly or monthly basis. So, even though there may have been a disconnect between iron ore and scrap in the recent past what is important is the price trend. Scrap has adjusted to reflect the iron ore price trend.

At this point the market for scrap will depend on how busy the steel mills are come April.

Over the longer term the scrap dealers with whom we spoke are not optimistic on scrap pricing. Our East Coast dealer pegged the range he thinks shredded scrap will follow this year as being $220 to $290 per gross ton with the upper end of the range not being hit until the very end of this year.