Recently released data shows that total U.S. scrap exports dropped 15% year-on-year in 2015 — to their lowest level in nine years. So what, and why should we care?
There were two reasons, but the latter was dominant in our view:
- The strength of the US dollar – Turkish buyers switched to EU sources for example
- The displacement of scrap by Chinese billet.
Chinese steel billet made from iron ore and coal was exported at low prices. Prices so low that it made sense for many Asian, Turkish or Persian Gulf steel mills to stop using scrap (imported from the US) and roll billet instead.
Steel-Insight estimates that this trend cut the global trade in scrap sharply in 2015. Sims Metal Management — an Australian firm with a significant US export business — saw volume drop 24.1% in the second half of 2015 as it lost a lot of money.
It is closing 10 facilities, seven of which are in North America. An additional 25 locations may be closed or sold in 2016. Sims is hunkering down for an extended period of low prices and low volumes, and we think they are right to do so.
Global Scrap Market Trade (millions of metric tons)
Both factors continue to be in place through 2016, although the billet-scrap cost advantage has dropped somewhat. Nevertheless, we would expect scrap exports to be low (and imports high) in 2016.
This will keep the pressure on US domestic prices. The trade situation had an impact in February, when scrap prices struggled to move higher despite strong domestic purchasing as export cargoes were redirected toward domestic markets and export yards were limited buyers.
The international market remains the primary weakness going into March. Domestic utilization rates have moved up steadily to back over 70% and with solid profits in flat products, we would expect further gains in production levels back to at least the mid-70s by the end of the month. That should provide a modest boost to scrap pricing, but it will be exports that hold it back again.
It also means rebar prices were cut this month.
Weak international scrap prices have driven down Turkish free-on-board prices for rebar and the US market remains the most attractively priced. As a result, Turkish pricing dropped to $315/metric ton fob – around $335-340/mt cost insurance and freight. Duty-paid, landed and fot (free-on-truck) and the price for future delivery is around $340/short ton in southern Florida or Houston. This is more than $130/st below the domestic price of around $480/st ex-works in the southeast and other coastal markets.
This is higher than usual and amid a slack order intake, domestic mills have been forced to readjust to secure fabricator or distributor business and are now offering down to $450/ton ex-works in some cases, although are as always holding out for more if possible.
However, we don’t think it will hold that low for long. An upswing in international prices thanks to recent gains in iron ore (and consequently Chinese billet and, therefore, scrap) should facilitate a modest gain in domestic rebar prices in Q2 as well as improved end-user order levels.
Still, gains will be limited and we hold to our view that scrap prices won’t return to 2014 levels for a long time — we are talking at least 2-3 years. We expect scrap to trade between $150-250/short ton (HMS grade delivered US Midwest steel mill) through 2016-18.
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.