March Scrap Negotiations May Take Awhile

After negotiations were completed for February scrap pricing, the word being spread around the industry was to expect another drop in March, perhaps down $20 on most grades. However, the weather got brutal during the month and we are hearing that many dealers will not be able to complete deliveries on obsolete grades of ferrous scrap such as heavy melt (HMS) and shredded scrap. Flows  of prime grades (Busheling & bundles) are plentiful as the automotive stampers continue to spit out new car parts.

Mike Marley, scrap guru for MetalPrices.com told his readers on Friday, “The one-two punch of price cuts and winter weather have dropped shredded and obsolete scrap supply to the canvas. Dealers throughout in the upper Midwest and Middle Atlantic regions said the intake of these secondary scrap grades is off by as much as 50% from the modest levels they had anticipated for the midwinter. That has left many without enough scrap to fill the orders they took earlier this month. Supplies of No. 1 busheling and bundles are still plentiful. However, dealers avoid talking about that material and its likely impact on the demand and prices. Tight supplies of shredded and heavy melt are the loudest lines to their March chorus.”

One of our scrap sources on the East Coast told us, “I see basically the same — terrible obsolete flows, especially for shredder feed, but plentiful prime.  I get the feeling that some larger purchasers are indifferent to whether they buy scrap or not.   Some mills will need to buy, and those mills will not be able to take the obsolete grades down in price.  We still have a minimum of 3 weeks of weak obsolete flows.   Other mills that can substitute prime for shred more easily (it’s not a total substitution by the way) may be able to push prime prices lower.  The Canadian dollar is not helping US dealers much on that front either.  I don’t think trading will be very quick to happen next week.”

A large steel buyer does not agree with our East Coast scrap dealer. We were told that hot rolled prices are transacting at lower than what we, Platts and CRU have been publishing for significant tonnage. These transactions are pressuring prices and the expectation is for scrap to “overshoot” the bottom before stabilizing. Helping to keep the pressure on scrap are the high service center inventories which will take time to adjust and the flows of imported tonnage.

While another large scrap related company advised SMU earlier today, “While obsolete flows have been hampered by seasonality, mill inventories held steady.  I don’t foresee much upward pressure on any scrap grades at this point.  Scrap demand remains anemic as mill order books struggle.  As you note, inbound industrial shipments have seen little disruptions and we’re anticipating a recovery in obsolete grades as weather improves.  Of additional note, the significant move downward in prices of ore-based metallics will likely add supply in March and April.  Finally, the conditions that led to the decline in scrap prices persist, likely leaving scrap range bound for the next 60-90 days.”

At this moment the consensus (if there is one) seems to think prime grades could drop another $20 per gross ton. Obsolete grades are the big question mark and could vary by market. We are hearing from some (usually the dealers) who feel obsolete grades will trend sideways to up slightly. The mills, on the other hand, will try to push the prices lower, especially if they don’t need to make large buys due to weaker than normal order books.

Up, down or range bound, SMU will report what transpires in the scrap markets as we learn more in the coming days.

SMU Note: Long product mills (like those making rebar) do not want to use prime grades of scrap in their melt as the prime grades (busheling and bundles) have fewer residuals contained in the scrap. Long products producers want the residuals as they help with corrosion resistance and strength. You can learn more about residuals and their impact on steel in our Steel 101 workshop (next one will be in the Chicago area on May 19 & 20, 2015).