The Growing Importance of Ferrous Scrap Pricing As a Determinant of Overall Steel Prices

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As part of a new effort to more routinely cover both ferrous and non-ferrous scrap markets, we turn to some recent data that could have a profound impact on how analysts look at overall steel prices. Though dated August 12, 2010, Recycling Today reports that, “a new report by the firm Global Industry Analysts Inc. forecasts the global ferrous scrap market to reach 631.5 million tons by 2015. The research group notes that the figure is expected to be driven by the rise in steel production following a lull in steel industry operations due to the global recession. Ferrous scrap plays a significant role in the raw material cost calculation steel buyers often use to help determine the direction of steel prices. The Bureau of Labor statistics believes EAF production makes up “well over half of all steel production in the US. But industry participants believe that number is now north of 60% of the total market.

To clarify, steel scrap also represents a key cost factor in integrated steel-making, though not as large a percentage of the overall cost as for electric arc production. So let’s break down the numbers a bit further to analyze how scrap prices impact steel prices. According to our own cost breakdown analyses available in our Price Perspectives (our next steel edition will come out this month), the overall scrap cost factors relating to the production of one of steel are as follows:

Integrated Production Using $300 as an average scrap cost (using HMS as the ballpark form) we calculate that for integrated mills, scrap makes up about 9% of the costs to produce one ton of steel.

Electric Arc Furnace Production Again, (using HMS scrap and technically we should be using a mixed ratio of shredded and HMS), we calculate that for the electric arc furnace producers, scrap makes up about 71% of the costs to produce one ton of steel.

So when we see reports suggesting that scrap markets will continue to grow and many developing nations have much less scrap supply (e.g. China, even Turkey), we should not find ourselves surprised that ferrous scrap prices will maintain an upward price trajectory. When we examine the latest ISRI broadsheet data, we can see the index shows positive price momentum:

Source: ISRI and Bureau of Labor Statistics

And though we witnessed a few short-term dips in ferrous scrap prices for November, the long-term fundamentals appear bullish, particularly when one factors in large overseas purchases from countries such as Turkey (read our earlier analysis on Turkish scrap markets).

So though many analysts remain slightly bearish on steel prices at least in the short term, scrap-pricing volatility creates enough uncertainty that we don’t see any near term Ëœdrop-off-a-cliff’ steel pricing. In fact, the underlying scrap markets will largely support steel prices going forward.

Disagree with our analysis our numbers? Drop us a line or leave a comment.

–Lisa Reisman

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