What Do Ferrous Scrap Prices Tell Us About Steel Prices?

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From a short-term perspective, higher scrap prices can only mean one thing, higher steel prices. And generally speaking, we see rising scrap prices along with higher iron ore and coking coal prices as the primary drivers to higher steel prices. However, although demand looks better than it did during the first half of 2009, it remains tepid. According to a recent article from Recycling Today, ferrous scrap prices for the second month in a row, “took a sharp upward turn. After having bottomed in April 2009 according to the USGS, according to our own tracking and analysis, scrap prices have increased three months in a row.

But some of the increase in scrap prices may involve other factors than simply rising steel demand. Cold weather impacted inflows particularly here in the North but throughout much of the country during the first couple of weeks in January. Scrap supplies also remain tight because less demolition projects have taken place and when consumer demand for steel intensive white goods or automobiles remain depressed or down, consumers don’t hand over their old units that typically make their way into the scrap supply chain. Automotive demand has also remained somewhat flat. Nevertheless, prices have increased for most spot buyers to more than $300/ton, according to Recycling Today. Moreover, the national average rose to $387/ton.

Some consider exports the wild card of the scrap equation, according to the article. To give a sense of the size of scrap exports to the overall US market, we took a look at the most recent USGS Mineral Industry Survey and as of September 2009, the US exported 15.4m metric tons of a total 36.8m metric tons consumed by the domestic market or 42% of all scrap generated goes toward exports. The US did import 1.92m metric tons. If export orders decline, US producers will certainly put some price pressure on the scrap dealers for better pricing. We’d concur that export orders will help drive the scrap price equation in the short term. Now whether the mills will share any price drops with consumers should export orders falter, well, that’s a different story.

–Lisa Reisman


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