How US Steel Scrap Trends, China and Turkey Factor Into Forecast

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As we noted earlier, David Phelps and others are calling the uncertain economic climate the biggest threat to steel companies, and to stable steel prices in 2013.

Let’s parse that a bit further as it relates to a 2013 steel price forecast.

What Scrap Markets Have to Do With Steel Prices

The world, and especially China, is still producing a lot of steel.

Total global crude steel production is up in 2012 year-on-year, and capacity utilization hovers around 78%.

current steel prices - MetalMiner IndXIn the December Raw Steels MMI® report, my colleague and MetalMiner’s managing editor Lisa Reisman noted two areas of caution when looking at steel prices. “The first involves steel imports, which have notched up in recent weeks, and [the second is] global overproduction of steel,” she said.

The Beaulieu Brothers, according to Lisa’s recent article, expect rising steel scrap prices and finished steel product prices in the next year. Related insight provided by Phillip Hoffman, VP of scrap trading for Turkey’s Colakoglu Steel, at a recent regional steel conference in Chicago, points to the underlying factors for rising prices of scrap steel.

Speaking to an audience primarily composed of service centers and distributors, Hoffman indirectly posed the question: what does China have to do with US scrap prices?

Essentially, it comes down to this: China sets a floor on global scrap pricing.

If the steel scrap price drops, Chinese mills suck up the scrap and end up having a huge surplus by taking material off the market. Of course, this has quite an effect on prices.

In China, only 9 percent — 48 million tons — of steel is produced using electric arc furnace (EAF) methods, as opposed to 90 percent being produced via BOF — if the EAF share increased only 5 percent, Hoffman intimated, that would mean a considerable boost in scrap usage and imports. (The US is one of the top 2 scrap suppliers to China; Japan is the other.)

Turkey occupies the other large half of the global scrap story. Because they import roughly one-fifth of the global scrap market, they have 38.5 million tons of capacity, which is continuing to increase, according to Hoffman. In 2011, turkey got 27% of its scrap from the US’ eight or nine scrap exporters, such as Schnitzer Steel.

today's metal prices - MetalMiner IndXHoffman showed the direct correlation between the HMS 80/20 CFR Turkey price and the Chicago price of shredded auto scrap — volatility-wise, the Chicago shredded scrap price can go up or down $50 to $100 month-to-month, based on the last seven years of data.

Which brings us to the elephant in the room: uncertainty.

To be continued in Part Three.

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