September Scrap Has Mills Pressuring Prices with Mixed Results Expected

The prices for flat rolled steel have dropped over the past few weeks which is creating a situation where the domestic steel mills want to recoup a portion (or all) of the reductions by negotiating lower ferrous scrap pricing. The mills are asking for $20 per gross ton across the board (HMS, shred, prime grades) while dealers are holding out for a sideways market if at all possible.

One of our scrap sources pegged the early discussions regarding ferrous scrap prices as follows:

“…Early indications are pointing to a weaker scrap market in September with prime grades under the most pressure.  Sentiment is building towards a down $10-20/gt move lower on bush and bundles while cuts and shred will likely be flat to slightly weaker.  Slowing domestic steel mill production and raw material inventory reductions appear to be the key drivers.  However, steady scrap export demand, particularly off the East Coast, should keep scrap moving, leaving pricing somewhat range-bound in the near term….”

A dealer off the east coast saw the market slightly differently than the multi-regional scrap company referenced above.

“Re: the upcoming September market I see it mainly as a sideways trade.  I have no doubt that the large buyers – i.e., the flat rolled mini-mills – will look for $10-$20 price cuts as they have had to reduce finished prices lately and want to maintain their margins as much as possible (notwithstanding they have been abnormally outsized now for months).  They have already indicated that is what they intend to do.  They will point to falling prices, growing import levels, and less demand as evidence of bearish trends moving forward (this is their argument for our consumption, obviously the opposite of the one their sales people are making).

“Overall, as far as scrap goes, we do not see demand being worse than in August. But I think as in the August trade there will be considerable dealer resistance for the following reasons:

“There is generally not an overabundance of scrap inventory in the system.  Obsolete flows typically begin to slow down through August, and that was exacerbated after the price declines in June, July, and August. Less demo work this year has also made that slowdown even more acute. Those who do have obsolete inventory do not have much incentive to sell into a lower market because they know it will cost them more to replace and flows will continue to slow seasonally as they always do into September and October.  And they know if they hold some scrap the prices will likely move a little higher into the end of the year.

“Export demand is slow but a bunch of new vessels were sold this week at basically sideways prices (in the high $220s/MT cif Turkey for 80/20 and around $233/MT cif for shred).  Inventories at the piers are also not deep.  And despite the Turks sitting out of the market for weeks buying virtually no scrap, their mills were unable to lower the price.  Billet import prices are generally stable into Turkey, and the spread between scrap and billet does not make it advantageous for the mills to buy more billet and less scrap.

“It is possible that prime scrap will again fall slightly into September but as in August not by as much as the mills will try to push it down. Prime scrap is still not very plentiful though relative to obsoletes it is in better supply.  I would look for prices to trade sideways to down maybe $10 for prime grades.

“Geographically, the OCTG region in Western PA and Eastern OH should be strongest due to those mills experiencing better demand from restocking and anticipation of higher and more stable oil prices relative to the beginning of this year.  The sheet mills will continue to have holes in their order books in the South and Mid-west, and will not chase scrap. Some Eastern mills will have considerably less demand for scrap due to outages and/or poor business conditions.

“I think trading will get started next week before the holiday.  The mills will try to wait to buy but I think they will run out of time as they probably prefer to get started before the 6th of the month, which is the first day back after Labor Day.”