This is the second of a two part series. You can read the first post here.
Since China doesn’t produce much steel via EAF technology (they actually produced more via that method some years ago), the relationship to watch is the one between iron ore and scrap pricing (moving forward). Harris also confirmed something we have mentioned on these pages previously the US is largely self-sufficient for iron ore and coking coal. Europe (e.g. Turkey is the largest scrap importer) and China must import its key raw materials. Another key “learning for us involved the correlation between oil prices, rebar and heavy melt scrap.
What I found most interesting about the discussion related to questions from the audience around “diminished scrap flows and how that feeds into the EAF supply chain. Harris answered this by stating, “Three major consumers control 70% of the market place and they have guaranteed streams. If scrap exports go to 30m tons (the panelists said scrap exports are approximately 15m tons today) then we will see a scramble will occur with the domestics. If export prices are very high, then consumers here (mills) have to pay higher scrap prices and hence surcharges. Exports can really impact US supply/demand balance. Moss added that a weak dollar also plays a role (in increasing exports) and reiterated that utilization rates, shipping rates and the dollar in particular have a disproportional impact on prices. Harris clarified by stating he felt operating rates were les important and instead, the volume of exports impacted the domestics. For example, when exports were 5m tons/year, the scrap market remained on the coasts. When it went to 10 m tons/year, it started affecting inner mills/producers. When it went to 15m tons year, markets became export markets. When scrap exports reach 20 m tons, the market moves to parity and shifts to obsolete grades. Though Harris suggested no scrap shortages (he pointed to the 20+b tons of scrap the US has in its disposal he counted existing buildings in that number), many perceive a prime scrap shortage exists and has existed for the past 6-9 months. As scrap exports increase, we’ll see plenty of bilateral trade as the US already imports and exports scrap products.
In terms of a scrap shortage, we chuckled a bit at Harris’ reply that there is no prime scrap shortage. It reminds me of a rare earth metal debate where people argue, “there is no shortage of rare earth metals, which is true I suppose if you leave the economics out of the equation. The question becomes can one economically obtain rare earth metals and profitably sell them into the market. From this perspective, since many of the vacant office buildings and other commercial construction remains under water, it is not a given that scrap processors and dealers and just help themselves to that available 20b tons. We buy into the “perceived scrap shortage just based on historically lower automotive sales and folks hanging onto and repairing appliances (instead of buying new ones).
We will cover stainless/nickel and copper scrap markets over the next couple of days.