Steel Mills Cancel March Scrap Orders, Anticipate Lower Priced Scrap in April

At the end of March the domestic steel mills cancelled any open portion of their ferrous scrap orders for March delivery with their scrap suppliers. This is always the first sign of an expectation of a drop in ferrous scrap prices once the negotiations begin in earnest for April delivery. Even with the tight supplies reported on prime grades earlier in March and the strong mill order books, all grades were cancelled.

There are many “theories” as to what could happen with scrap prices but no trades have been made yet. One of our sources told us that one of the mill-owned scrap companies was looking at down $20 on prime and $30 on the rest of the items. Another major mill is thinking down $20 on all items because down $30 couple disrupt the flows of obsolete grades. At the same time sellers seem willing to give up $10 on prime and $20 on other grades.

Our source told us, “…all of this garbage about the prime spread is too wide is nonsense, in 2008 the spread was hundreds of dollars between prime and obsolete. The market will do what the market will do.” They went on to tell us, “There is an overhang in obsolete but not a glut. Obsolete sellers seem bent on not unloading at down $30 because they will not be able to replace at down $30. Plus they recognize that mills are running well and it is only a matter of before overhang is depleted.”

One of our scrap and pig iron sources told us, “The prevailing theory is that since export is down the mills will be able to buy cheaper.  Shredded and HMS down $20-30 and prime down $10-20.  This is a bit on the aggressive side.  The Turks need to buy scrap for May but their rebar sales aren’t high enough to bring in scrap and then for them to turn a profit.  Prices for seaborne scrap have risen by $7-12 MT since they bottomed over the last two weeks.  It’s hard to say what they will do.  If they don’t buy, USA exporters will sell into the domestic market at down money.  If the Turks come in thereafter the pickings may be thin.  We’re in a similar situation as we were after the January/February market when the same basic events were in play.  That would mean down in April but up again May.” He went on to say that none of this is having any impact on pig iron prices.

Another one of our sources felt any changes in April would be off-set by the volumes of the domestic steel mills, “Look for April obsolete prices to trade lower from March by $20-$30 (probably closer to $30 though depending on the availability of prime the drop may not be so bad in certain districts), and for prime prices to move down by $10-$15.  US demand is firm and export pricing has stabilized and even improved over the last week.  If mill lead times continue to move out like they have been doing, look for scrap markets to stabilize around these trading levels as scrap supplies increase with the spring season.   Trading should happen around the middle or this coming week.” 

From SMU perspective, it would seem that the domestic steel mills would want to pick up a quick $10-$20 in the scrap market in the hopes that the new lower scrap prices do not move steel buyers to insist on discounts from last week’s spot numbers. If the industry sees scrap numbers drop by $20-$30 per gross ton then there is going to be pressure on the mills to provide relief (remember the last two $30 per ton increases in flat rolled? The domestic mills used the jump in scrap to justify the increases.)

Steel Market Update will continue to follow events as they unfold and will report on where ferrous scrap prices settled and what ended up being the most import drivers of the new levels.