Guest contributor James May is managing director of Steel-Insight.
It was not a good February for US scrap dealers. The price of shredded scrap fell $60-100 per long ton depending on location. Prices in the Midwest dropped to around $260/ton delivered with southeastern prices around $250/ton. Prime grades dropped even more. That is a decline of 25% in a few weeks – not pretty for those that were selling higher-priced inventory.
The obvious question is why?
Well to some extent this reflects a catch-up in position between steel metallic costs. Iron ore and coal used by integrated mills fell steadily through 2014 and the early part of this year. As we have previously discussed in our MetalMiner columns, this has given a major cost advantage to integrated mills in China and the Commonwealth of Independent States. They have been increasing their exports of finished long products and billet, thus displacing international demand for scrap to feed long-product electric arc furnaces.
Global Scrap to Billet Spreads ($/metric ton)
The US is a net exporter of ferrous scrap. What that means is that when international prices decline, there is an excess of material available in the US market. Exporters choose to sell to the domestic yards instead and prices therefore slide.
The key export markets for US ferrous scrap are Turkey and Southeast Asia. Turkey depends on export markets for its long products and these are in disarray. Conflict and political upheaval have seen volumes to its key markets of Iraq and Yemen fall away while sales have come under pressure from cheap Chinese and CIS long products (thanks to their lower cost base using iron ore and coal). They were selling to the US market, but importers have stopped purchasing in the last month on expectations of a decline in US long-product prices. Finally, it has been cheaper for them to buy cheap CIS or Chinese billet rather than melt scrap. As a result, they have stopped purchasing scrap and prices plummeted.
In Southeast Asia, regional mills have also seen output fall under pressure from cheap Chinese billet and long products. They too have reduced production levels – Hyundai of South Korea for example announced in February that it was officially exiting the rebar export market in 2015 (it sold around 250,000 mt in 2014).
The global scrap to billet price spread fell to less than $100/mt in January. That was unsustainable as that is below the cost of melting scrap to make billet. Either scrap prices had to fall or billet prices go up. With 80% of merchant billet currently supplied by integrated steel mills in China and the CIS and iron ore prices falling, the obvious result was falling scrap prices. Continued in Part Two.
Steel-Insight is a steel industry price-forecasting publishing company, based in Toronto. James May, the firm’s managing director, has been a steel industry analyst for 15 years and advises some of the major global steel trading companies, steel producers and steel consumers on the outlook for steel pricing and industry trends. For more information, visit www.steel-insight.com.