Scrap Undergoing Fundamental Shift as Scrap Pricing Sags

Written by John Packard

Ferrous scrap prices for October delivery into the domestic steel mills have so far this month declined by $10 to $20 per gross ton. Prices vary based on geographical region and product but our sources in Chicago advised us that their prices fell by $20 per gross ton on all products.

We received the following analysis of the market from one of our eastern scrap sources over the weekend in response to inquiries made on Friday of this past week. We thought our source’s response went straight to the point and we have included it in its entirety for our readers:

“My quick reply to your email on Friday was that it’s ugly out there.  That really about sums it up.  The only question is how much uglier will it get and how quickly.  

The market for obsolete grades in October ended up down anywhere from $10/GT-$20/GT depending on when and into which district the scrap sold.  The later sales were clearly lower than earlier ones.  Prime scrap was not down quite as hard – only about $10/GT give or take.  
Export prices, on the other hand, have dropped more than $40/MT cif Turkey in the last four weeks and may not be finished dropping.  Export docks are now paying $50-$60/GT less than they were a month ago for their grade of 80/20 Heavy Melting Steel.  And that drop may or may not be finished – it was very hard and very fast.  I would guess that the exporters will have a considerable amount of trouble collecting any meaningful tonnages at those new price levels given the time of year.

But overall the dynamics of what is happening in the market now are significant.  The last major pricing dynamic change in the market occurred in June 2012 when export demand took a clear step down, RG Steel went bankrupt, several southern European economies where “on the brink,” and US domestic demand got softer.  We went from trading shredded scrap in the $440/GT – $460/GT range down in 2011 and 1H 2012 to the high $380/GT range for 2H 2012, 2013 and 2014.  That downturn happened swiftly (in part due to all those factors happening at once and it being the summer months).  The market has remained largely in that range since then with a few exceptional months of trading shredded above $400/GT and a few around $350/GT in response to one seasonal dynamic or another.   

We now appear to be on the cusp of another downward price correction that will result in a new “normal” range of trading prices.  Shredded scrap in the mid-west and OH Valley easily settled in the $360/GT range in October, which previously was around a market bottom.  US demand is still good – globally it’s the outlier at this point.  The rest of the world is experiencing less demand for various reasons depending on the region, and more importantly what demand for scrap there has been is now being eroded by increased supplies of lower cost semi–finished steel, mainly out of China.  

I say all this “appears” to be happening because I am not sure how it will play out exactly.  I have believed for the last year, obsolete scrap has been in relatively short supply.  Relative to recent domestic demand, that has not changed.  What does appear to be changing is export demand so we could see some scrap supplies that have been destined to foreign countries for the past 10 years become more and more domestically oriented instead.  But the change in flow won’t be permanent nor will it be very predictable.  Export demand and pricing collapsed in September but exporters did not flood the domestic market for scrap in October, mainly because their inventories on the piers are not deep and they had ships coming that they needed to load.  By the same token, last winter the flows of scrap into yards in the US were absolutely anemic but prices kept dropping because the exporters were offering their scrap to domestic mills.  Then transportation issues in the US caused major delays for scrap to reach their destinations at mills.   

So, the picture of how things will play out over the next few months is very murky.  Scrap flows will get tighter through the winter, foreign demand will probably not improve, export scrap will be offered to domestic mills (whether the exporters can actually ship it to those mills is another story), and prices will likely decline as a result of that.  Where prices will end up I have no idea, and I would tell you that anyone who says they know does not.”        

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