Harris: “Scrap is the Bellwether for Global Steel Prices”

Scrap prices are heading down and could dip below the $200/GT mark as the gap between scrap supplies and demand continues to widen. With mill operating rates declining under 80 percent and scrap export markets dropping drastically, expect steel prices to follow suit, said scrap consultant John Harris, CEO of Aaristic Services.

Scrap is the bellwether for global steel prices, though it now takes its lead from China (which accounts for more than half of global steel production), as opposed to Turkey. First, the Chinese sell their excess scrap totaling 15 to 20 percent of production into the international marketplace. This surplus exists because 90 percent of their steel is produced in integrated mills. China’s steel production, coupled with perpetual expansion, continues to exceed the nation’s steel demand by more than 10 percent. Trade disputes with the U.S. and other countries compound the situation, and China must export even more steel and scrap to avoid plant shutdowns, Harris said.

Second, Turkey is the largest scrap importer in the world. Turkey’s steel production, more than half of which is exported, is severely challenged by Chinese exports, causing a major drop in both steel prices and volumes. As a result, Turkey will not require such large volumes of imported scrap, normally about 25 million metric tons per year.

Third, scrap exports from NAFTA to Turkey and Asia will be reduced by about 50 percent, resulting in a flood of low-priced scrap back into the North American marketplace. Combined with lower operating rates and steel margins, this will continue to drive steel prices downward, Harris said.

“Is the steel industry prepared for the next market shift? How many of the steel plants do you think used their increased profits from tariff activities to upgrade their equipment and lower their operating costs in preparation for the next cycle change? The cycles continue to repeat with some minor variations just as I have seen since I joined the steel industry in 1967,” Harris added.