November Scrap Prices Moving Higher than Expected

Steel Market Update (SMU) ferrous scrap sources advised us over the weekend that strength in the Ohio Valley, as well as in the export markets, has led to ferrous scrap prices trading higher than originally thought. Talks continue in many of the regions of the country which have not yet completed scrap pricing negotiations for the month of November. Even so, the trend is clear, scrap prices are going up.

Higher scrap prices are supportive of higher flat rolled sheet prices. It is SMU opinion that steel input costs is going to be one of the stories behind the cost push we will see out of the domestic steel mills in the coming months.

Scrap Prices Outperforming Expectations

The expectation for scrap prices one week ago where for prices to increase by $15 to $30 per gross ton delivered to the domestic steel mills. As the week progressed it became obvious there were a lot more up $30 to $35 per ton deals getting done than expected. Pittsburgh and Cleveland saw a strong move on all products with most being purchased up $35 per gross ton.

Export prices for 80/20 mix are reportedly rising as questions arise about the overall availability of scrap on the world market. Mike Marley, scrap guru for World Steel Dynamics put it this way to SMU earlier today, “Much like last year, the domestic mills have cut prices drastically in the past two months and several dealers said the flows into their yards are off by much a 40 percent from the levels at mid-year.  Now, however, there is stronger offshore demand and higher prices being paid by the overseas mills.  Thus the mills in inland regions like Ohio and in the Southeast have nowhere to turn to for additional scrap. And they can’t get much from scrap exporters in Europe like they did earlier this year.  They are seeing the same spike in offshore demand and prices.”

Marley went on to describe how the spike in offshore buying could impact the U.S. ferrous scrap markets, “We have seen a significant spike in the demand and prices offered for shredded scrap and not just 80/20 HMS on the East Coast.  Indian traders are paying as much as $235 per tonne for shredded in containers at the docks.  It costs coastal shredders about $10-12 per tonne to haul a container filled with shredded to the docks. That puts the cost of shredded at about $225 per tonne F.O.B their yards. Rail or barge freights cost to Ohio or to the Southeast are about $30 per ton.  That means a mill in Oho or in South Carolina would have pay $255 per ton on a delivered to the mill basis to get that shredded from the Coast.  That $50 to $60 per ton more than they paid last month!”

Damon Sun of Daido International told us that three cargoes of scrap were sold to Shagang Steel for their blast furnace. With the high cost of coking coal the Chinese steel mills are increasing the amount of scrap being used in each charge. Sun believes the change could result in a 15 to 20 percent increase in scrap needs in China.

We got a note from one of our key scrap sources off the east coast who laid out the markets for us with the following:

“November ferrous scrap markets are trending higher than most traders anticipated they would when the week began.  Some dealers initially expected at least $20-$30 increases over October prices but mills came out on Tuesday trying to buy scrap at up $20.  Some mills were able to pick off a few dealers at that initial up $20 increase, but many other dealers held out for the up $25-$30 that seemed to be the theme across the board by the end of the trading week.  The OH Valley even witnessed some mills paying $35 higher than October prices.  Tubular mills in that region were short scrap thanks to decent order books and being unable to cover their scrap needs in October.  Some mills were reportedly running very low on scrap inventories.  The strength in this OH Valley region, and the export markets (as explained below) helped lift markets all over the country.

“As I have been suggesting over the last several weeks, the stronger November markets were a result primarily of increasingly better demand from overseas consumers.  The latest 80/20 HMS price to Turkey is around $250/mt cif, with sellers already asking for $260 and better for the next deals.  As the trading week ended, some political problems in Turkey seemed to force buyers and sellers to pause for the time being.  There were, however, unconfirmed reports of a $280 deal for 80/20 HMS out of the US Gulf Coast (that export dock usually commands a premium of $5 over East Coast cargos), and if it turns out to be true it demonstrates the true lack of scrap availability on a global level, and it’s relative inexpensive price compared to pig iron.  We think the recent met coal price increase that integrated producers have experienced since the late summer accounts for an approximately $45/ton increase in the cost of pig iron.  With iron ore prices also not backing off and even steadying recently in the mid-$60 range for 62% Fe content, international integrated mills are likely trying to maximize the amount of scrap they can consume in their blast furnaces.  We were also reading reports on Friday afternoon of Chinese buyers of scrap from US West Coast docks, which would be the first time the Chinese have come to the US looking for scrap in several years.

“All this seems to bode well for US scrap prices over the coming weeks and few months.  The increases we have experienced of late seem sustainable going forward, as slower seasonal inflows will last thru the end of the year at least.  Dealers will continue to hold back scrap so long as they think the market is going to move higher.  The weakest segment of the global market currently has been US mills, but their demand for scrap should increase in the coming weeks and months as prices have already moved higher and lead times have begun to push out. 

“I expect that we will continue to see US mills try to buy scrap throughout November to get ahead of the December buy period, but it appears at this point that prices will not retreat any time before then.”

Looking Out into the New Year

SMU asked our east coast source quoted above a follow up question regarding what the expectation should be for scrap prices as we move into the New Year. He told us:

“We typically see prices at least maintain December levels into January as mills restock on scrap following the lifting of end of the year inventory controls and better demand for steel in Q1.  Whether prices rise into January really depends on the price increases we may or may not have experienced in November and December and whether there is any more need to move prices higher.

“February prices can tend to trail off depending on how scrap flows have been in January, how much the US and foreign mills may have overbought in January, and the real strength of finished steel demand.  We have seen February buy periods following strong inflows in January where the markets have traded sharply lower.  March prices can tend to gain back what they lost in February assuming decent steel demand and mediocre seasonal inflows through February.

“So on balance, we typically do not experience a bad retreat in price through Q1 barring a dramatic move that impacts demand (a la 2015 and the collapse of oil prices).”

The question being asked of Steel Market Update by the scrap dealers: is the $30 per ton sheet price increase sticking and will there be more increases to follow?