The global scrap to billet price spread fell to less than $100 a metric ton 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 former Commonwealth of Independent States and iron ore prices falling, the obvious result was falling scrap prices.
While the relative position of metal costs is the fundamental reason, there is also some panic in the US market that contributed to the dramatic decline this month. The collapse in demand for tubular products for the oil and gas industries has led to idling or significant cutbacks at several mills – U.S. Steel Fairfield, Republic (that supplies round billet to U.S.Steel), V&M Star – while the reduction in energy demand will lead to lower order levels for flat product minimills from Steel Dynamics, Nucor and Svenskt Stål AB.
Global Scrap to Billet Spreads $/Metric Ton
With elevated flat product inventories, buyers have exited the market and are watching mills progressively cut pricing. They know that prices will fall again next week. With mill order levels plummeting, they are trimming production and the marginal metallic – yes, you guessed right – is in very low demand. Mills will always utilize their inventory first. The result was the exit of buyers and scrap dealers scrambling to sell their inventory.
At $250/mt or so, the relative cost position of scrap and integrated metallic is approximately in balance and downside from here is fairly limited. Yet we do not rule out further cuts in the short term. The lower scrap prices improve the cost position of flat and long product minimills. Steel buyers holding inventory will continue waiting out the market and putting pressure on producers to cut prices who, in turn, will further trim production, meaning their forward scrap buys will also be reduced. We don’t expect any major improvement until late in Q2 when inventories of finished products will begin to turn.
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.