Scrap Metal

MetalMiner would like to welcome guest columnist Brad Clark a senior derivatives broker who leads the St Louis office of FIS Ltd., the London based global commodity interdealer broker.   Mr. Clark brokers physical and derivative deals on steel, iron ore, scrap and freight with a focus on the domestic US market. Prior to joining FIS, Brad was head of dry freight derivatives trading at Trafigura, one of the world largest metals and oil traders, based in Lucerne Switzerland.

By adding some coverage of futures markets, we hope to shed some light on the world of futures and swaps trading in the iron ore, US hot rolled coil, North and South Europe hot rolled coil markets and the Turkish scrap market. My goal is twofold – to help educate as well as market futures to the US steel industry…I do have a dog in this fight, but I believe wholeheartedly every word that I write on the subject.

On the non-ferrous side, softs and agricultural and oil commodities, futures markets have become an ingrained part of doing business from both a risk management/hedging point of view and from a speculative proprietary trading stand point. But on the ferrous side, futures trading represent a new concept.   As a new concept, futures trading to the steel and scrap industry along with the use of derivative products tend to conjure up a number of misconceptions and negative connotations. We hope to demystify derivatives and to provide a platform for discussion on how to properly use financial derivatives products to manage risk in markets with growing volatility. Though many would have one believe derivatives serve as the financial weapons of mass destruction, we’d argue they have their place and time. Derivatives serve as one tool in the toolbox to both manage risk and [potentially] to make money. We’d argue derivatives in and of themselves, don’t contain risk. Rather, how users make us of them creates the risk.

By Way of History

Futures markets do not represent a new field of services. In fact, farmers in the 1800s in the Midwest of America have effectively used futures to manage cash flow and plan for next year’s crop.  In the coffee houses of Amsterdam in the 1600s traders used futures to speculate on the riches the “new world held. Today the steel industry represents one of the last outposts of a de facto futureless market in the commodity space.

A Word on Volatility

Futures markets do not create volatility in the underlying physical market. Futures markets evolve out of volatile physical markets. Derivatives made their way into agricultural commodities out of need, not by accident. These markets, due to their exposure to climate and weather patterns did and do remain inherently volatile. The physical users (farmers) of these markets needed a tool to manage this volatility and thus the creation of a futures market.

Unfortunately, the term “speculators has a negative connotation.   Anyone involved in the physical steel industry can attest to the increase in volatility since 2003. A speculator however may prove a best friend. A speculator will take the risk created by the volatility off the hands of the buying organization, thereby offering protection against the volatility. For the daring individual, one can increase profits if the individual has greater knowledge of the markets than outside speculators. That individual can take the other side of a trade based on market knowledge. Either way, speculators provide liquidity to the market and take on risk from the market. They do not add risk to the market.

Brad Clark

A few days ago we took an alternative viewpoint on prospects for long-term growth within China. Some notable analysts have written concurring bearish notes on the subject, from Nouriel Roubini to George Soros. And as the comments on our post noted, opinions vary wildly with regard to China’s overall prospects.

Though I personally believe China has some extremely serious and (perhaps to some observers) intractable problems, the next set of leaders likely to lead the 9-man Standing Committee of the country’s Politburo offer quite a different perspective than previous committees. Of particular note, the latest passing of the baton from the fourth generation to the fifth provides some new clues on the incoming class of leaders via this extremely insightful (though very lengthy) post.

What we find most intriguing involves the shift in backgrounds from earlier generations of military generals who fought in the revolution, to the next set of leaders, primarily engineers (the new president, also an engineer) to a younger set with a background in law, economics and history. Whether the background of the new leaders will encourage additional reform remains to be see,n but we can certainly count on a different perspective.

The Energy Problem

That aside, today we’ll examine the markets to which we pay close attention and for which China has become the global juggernaut. Despite our comments that we might “short China if we could, the ramifications of a China slow-down do not necessarily equate to a similar drop-off for the commodities we most closely track.

In fact, the energy crisis alone might suggest rising commodity prices, not falling ones. Paul Adkins, founder of aluminum consultancy AZ China, shared some insight with MetalMiner in an email exchange in response to a recent report available for sale from his firm: “The current situation of energy shortages has been caused by inefficiency in the partially-regulated market. With some prices fixed but others floating, and with generating companies losing money, it can be said that the current crisis is entirely man-made.

The result, he suggests, will force the government to raise electricity prices “with little or no impact on inflation, though he goes on to say that may cause some de-stocking as well as a softer landing. But what happens next year may prove far more controversial. Specifically, Adkins believes a failure to heavily invest in thermal power may lead to a supply/demand power gap. Therefore, he suggests the following will likely occur:

  1. Coal prices will rise by Q4
  2. Power increases could lead to additional aluminum shortages and price increases

How all of this will impact copper markets remains to be seen, but my colleague Stuart recently penned a piece stating, “The seasonally strong period is Q2, which we have largely passed through with nary a flicker of demand; Q3 and Q4 tend to be quieter, and with industrial demand possibly impacted by widely expected power rationing in the summer, copper buying may be delayed until stocks are considerably lower, probably later in the year — though he suggested when China re-enters the market, it will create a bullish effect on prices.

And What About the Steel Market?

Gerdau Market Update in their weekly report suggests China demand for scrap remains robust. (This chart illustrates that point.) Current iron ore pricing ( of $174.20/dmt for 62% Fe fines and $152.20/dmt for 58% Fe fines) has served to drive scrap demand, according to the Bureau of International Recycling, as reported this week in Gerdau Market Update. US scrap exports based on current dollar values remain attractive, further supporting scrap prices. Of course we admit this still represents a short-term view of China demand.

The Commodity Upshot

Only slower demand from China as a result of economic policies (e.g. soft landing) could dampen commodity prices, but forced closures by industry due to power shortages will create capacity constraints amongst all heavy industries. That in and of itself will tend to support prices.

–Lisa Reisman

Followers of this site might agree that we talk a lot about drivers of pricing for various metals.

Sometimes it helps to examine those drivers in context of the big picture for a particular metal market. Say for example, steel.

FREE Download: The Monthly MMI® Report – covering Steel/Iron Ore markets.

When we look at steel markets, we end up talking about things like: the BDI (Baltic Dry Index), the cost of iron ore, coking coal, scrap, electricity prices, auto sales, housing starts, the Architecture Billings Index (ABI), building permits, etc. We could easily name another 25 indicators that coordinate with steel price movements and market trends.

However, we sometimes forget about context.

So when the AISI published its report, Profile of the American Iron and Steel Institute, we took a look to see what bits of data would best serve a steel-buying audience. Based on our review, two parts of the report have great relevance to steel buying organizations.

The first involves a complete listing of AISI members, capabilities, locations and products (hint: a great domestic steel sourcing guide). The second relates back to our discussion on drivers and metrics within the steel industry. In particular, this chart shows where in 2010, steel shipments went by industry:

Source: AISI (American Iron and Steel Institute)

As we look at this pie chart, it becomes easy to see why certain metrics have relevance within the steel industry. But what we find most interesting involves the metrics that tend not to garner much media attention. This week, we turn to something tracked by the Gerdau Market Update site, involving state fiscal metrics (yes, quick, where does that fit in the above referenced pie chart?)

Editor Peter Wright points to state fiscal receipts. Though his report cites rising state revenues for Q4 2010 vs. Q4 2009, he concludes, “Steel business activity that is driven by state or local budgets will not recover for several years,” as this chart shows. This metric impacts the construction portion of the pie chart.

Taking an 80-20 look at the pie chart, certainly by spending some time tracking metrics that serve as the measures of the health of the construction sector (and by that we include residential, commercial as well as institutional construction, read: power plant, schools, etc.), we can get our arms around a good portion of total steel spend.

Next, we look at automotive demand. For that we regularly report on monthly auto sales, but for those of you nerds out there who like more granular data, we love the automotive reports from the Consumer Metrics Institute, particularly the weekly index:

Source: Consumer Metrics Institute

So, poring over metrics that tell the story for construction and automotive gets us about 66 percent of the way there. That leaves an additional 14 percent that we really need to pay attention to. The 12 percent of shipments that went into the machinery and equipment sectors get us nearly there. Here the drivers, or metrics, may appear a bit more elusive.

But this is where we pay close attention to the ISM national manufacturing indexes as well as the manufacturing indexes coming from the regional Federal Reserve Board offices, durable goods orders and capacity utilization.

Next week, we’ll identify and discuss a few additional metrics pertaining to the steel industry.

FREE Download: The Monthly MMI® Report – covering Steel/Iron Ore markets.

That famous ad campaign, “What happens in Vegas stays in Vegas, no longer works in steel markets. During internal discussions here at MetalMiner for the past 12-18 months, I and my colleague Stuart have bantered back and forth regarding the impact of iron ore and coking coal prices in China and their relationship (or lack thereof, depending on one’s viewpoint) to scrap prices here in the US and vice-versa. Last year, the relationship appeared less than “fully correlated, to use a statistical term. But no longer¦

This past September I spoke at this event covering metals markets, where I met Roger Bassett from Plymouth Steel, who put forth a concept I had not heard articulated this way: all raw materials can be compared via “steel making units. By that, I can assume he referred to the notion that essentially key raw materials essentially become “fungible, meaning the trends in one ought to correlate with the trends in another. So as iron ore prices rise, one might expect scrap prices to follow suit.

But to understand how that trend actually correlates, we turn to an extremely informative website put out by steel producer Gerdau. In the chart below, though we can see a tight correlation between scrap and iron ore prices in China halfway through 2009, the price trends appear to have drifted apart throughout 2010, but now may head back toward a convergence:

Source: Gerdau Steel Market Update

Gerdau points to weakening demand from China buyers for iron ore and, as we recently reported, steel prices in China have correspondingly also declined due to a mix of factors including rising oil prices, poorer demand for construction related products and rising iron ore prices set to increase, according to our earlier story.

Chinese finished steel prices certainly have eased of late, particularly for construction-related products such as rebar and beams, whereas prices for cold rolled steels, used more in automotive and white goods have merely plateaued:

Source: MetalMiner IndX(SM)

If we were to superimpose our MetalMiner IndX chart of China steel prices to the US domestic steel prices, we would see a tight correlation (which is not to say that the prices were the same, merely that both markets appeared to follow a close price trend). They both moved in similar fashions. Today, we have a dichotomy in that the US market appears to still have upward price momentum (or as some believe, has started to plateau) but the Chinese market appears to have declined through the first part of this year and now plateaued.

Why?

We’ve stated why we believe Chinese steel pricing has seen downward and now plateauing price momentum. But here in the US, we still see prices ratcheting up (at least through March 14, according to Steelbenchmarker) though the economic outlook remains full of mixed signals — e.g. poor housing starts in February, against decent automotive demand and continued PPI strength. As is often the case, markets often move before reality sits in China steel prices may have declined in advance of Chinese monetary tightening and US prices may have improved based on a few positive economic indicators.

Can the divergence in steel prices between the US and China be explained via the iron ore/scrap correlation (or lack thereof)? Probably not — but no matter, we’ll keep watching all the correlations.

–Lisa Reisman

Back in early January we posted our expectations for the steel market throughout the course of this year. And though we called for higher steel prices throughout the year, we thought pricing would come in the form of a roller-coaster. Whereas we don’t anticipate any short-term dips in steel prices, the ferrous scrap markets have taken a breather so to speak. According to ISRI’s latest report, “Scrap Price Bulletin did report falling composite ferrous scrap prices this week, with No. 1 dealer bundles down $16/gt for the week to $465.17, shredded scrap down $21/gt to $454.83 and No.1 HMS off nearly $20/gt to $420.83, while other sources were reporting even bigger drops in both domestic and export ferrous scrap prices.

Despite these scrap price dips, all of the current pricing, however, appears higher than historical averages so we would not suggest steel-buying organizations will see any steel price drops in the near term. In fact, The Steel Index suggests lead times for all forms of steel (with the exception of HRC which has held steady and rebar which continues to decline) have lengthened, further suggesting that recent price increases will likely stick at least for the short term. Another indicator we track involves domestic capacity utilization. For the week ending February 12, the AISI (American Iron and Steel Institute) reported capacity utilization had increased from 74.0 during the week of February 5 to 74.8%. These utilization rates appear higher (slightly) than domestic capacity utilization during 2010, which hovered in the low 70% range, though global steel production averaged 73% throughout the year.

The Steel Index reports domestic HRC pricing in the upper $820+/ton range and CRC pricing in the $910+/ton range. These represent 15+% increases for HRC and over 13.5+% increases for CRC for the past four weeks. And though HRC and CRC prices have also risen in China, (The Steel Index reports HRC at $685/ton and CRC at $795/ton vs. our own MetalMiner IndX HRC at $704/ton and CRC at $825/ton) the discrepancy in prices between the domestic and Chinese markets would suggest we might expect to see an increase in import activity (of course the discrepancy between our own MetalMiner IndX pricing which reflects local China pricing and not export pricing, makes for an altogether different analysis).

Source: US Data From Steelbenchmarker and The Steel Index, China data from MetalMiner IndX(SM)

MetalMiner IndX(SM) is a free service. You can sign up here to view daily prices.

We will continue to monitor key steel input costs and related trends for further steel price direction.

–Lisa Reisman

The steel producers have not had the best of years; true capacity utilization has recovered a little after a surge of restocking in the first half came to an end.

Source: Dept of Commerce.

Since then, it has been bumping along at around 70 percent as producers have struggled with rising costs of scrap, coal, iron ore and natural gas, yet been largely unable to pass through increases to a lackluster market. That many have maintained profitability is a testament to how much they have learned in the last decade and what tight control they now have of their businesses. Better times are on the horizon, though, if a recent report by Credit Suisse is correct.

In a detailed report to clients the bank predicts the steel markets in North America and Europe to be on the cusp of a four-six quarter rally driven by rising raw material costs and improving demand. In and of themselves, rising raw material costs are not sufficient to drive prices higher as we have seen in the last. If demand is so weak that price rises do not stick, then the producer just gets squeezed; however, although the bank is predicting the next sustained upswing will not start until Q2 2011, early signs of rising scrap prices and Q1 finished steel price increases being accepted by the market suggest the bank is on to something.

Price forecasts courtesy of Credit Suisse and CRU

Many of the main drivers for increased demand, and, with it, the pricing power the mills are looking for, are beginning to show early signs of picking up. Auto sales have been on a steady road to recovery, as the following two graphs from CSM suggest.

After five years of falling home starts, Credit Suisse points to a rise in the pending home sales index as evidence that the construction industry could pick up next year.

In the past, there has been a strong correlation between the pending home sales index and new housing starts, but the false dawn of Q3 2009 and Q1 2010 have shaken belief that an uptick in one is a guarantee of an uptick in the other.

Finally, steel service-center inventory levels remain at historically low levels and while the rate of re-stocking for industries like construction will be slow at first, the rate of change will appear dramatic.

As a result, Credit Suisse is predicting a 12-18 month re-stock and demand-driven tightening of the market, resulting in higher steel prices and extended lead times. Consumers may do well to track some of the metrics the bank is using to make their predictions for early signs of confirmation. Where possible, early buy forwards may help to mitigate price rises expected in H2 2011 and H1 2012. Longer out, four t0 five years, the bank feels the low prices and shuttering of capacity since 2008 will result in a lack of investment in new capacity. Prices of more than US $1000 per metric ton will be needed to incentivize mills to make new investments. While Europe and the US need more steel mills like they need another recession today, the result may be in four to five years that imports play a significant, if not dominant, role in pricing and supply again.

–Stuart Burns

As both major steel scrap consuming and exporting markets, the USA and Europe are often treated as the be-all and end-all of the steel scrap market. The US’ world-leading electric arc industry has become a model of scrap-to-steel-making efficiency and scrap markets serving that industry viewed as a bellwether for the scrap market worldwide.

Source: World Steel Association

However, if there is one thing we can say for the steel industry, it is that it does not stand still and the rise of Asia has been a phenomena that even the financial crisis of 2008 barely slowed, let alone caused retraction as it did in the west.

Global steel scrap consumption will reach 631.5m tons in 2015 according to a Global Industry Analyst report widely reprinted but acknowledged here from PR Web. 2015 is probably a bit far off for us to focus on here but the point is scrap consumption patterns are changing fast and the implications will be felt as much at home in Europe or the US as they are in consuming countries; scrap is a global business. According to the report, Asia-Pacific and Europe now account for more than 70% of global steel scrap consumption, so prices and demand in these markets are equally as important as what is happening in the US. Indeed, one of the dynamics that will affect the scrap market in the medium term will be the imposition of restrictions in exports by several countries as scrap-exporting countries seek to protect domestic consumers.

Steel scrap is the key raw material used by electric arc furnace production. More than 55% of steel produced in the European Union employs steel scrap as a raw material and yet European companies using EAF technology account for only 40% of all steel production. The balance steel scrap is used as charge in the LD or BOF steel refining process mixed with pig iron from blast furnaces. The proportion of steel scrap used varies depending on the mill, the quality of the steel scrap and the end-use of the steel, Wikipedia quotes a nominal fifth (or 20%), but a very precise figure for the Japanese steel industry this year is quoted in a Chinese website at 14.5%. The Japanese steel industry is down in tons produced this year from 2007, but even so it is on track to consume nearly 14 million tons of steel scrap for LD/BOF converters and a further 24 million tons for EAF steel production, still some way short of the 48 million tons reported by the USGS for US steel scrap consumption in 2009.

As steel production has fallen in Europe, scrap recyclers have increasingly turned to export markets, shipping 22% more scrap in 2009 than 2008. Principal markets are China, India and Turkey, even though the first two do not have highly developed EAF production capability. Turkey retained its title as the largest steel scrap importer according to letsrecycle.com, at 15.6 million tons topping China’s 13.7 million tons, but even so, down on 2008’s 17+million tons import figure. Internally, Europe consumed nearly 81 million tons of steel scrap, down from over 110 million tons the year before.

Source: World Steel Association

As Asia (and in particular China) continues to grow, its steel production will have a growing impact on scrap consumption patterns, demand, and hence: prices. Although China’s steel mills are not traditionally large scrap consumers, they are increasingly adopting western production techniques and even low scrap consumption per ton of finished steel ratios have become significant when multiplied by the 600 million tons per annum capacity for the Chinese steel industry. World steel production reached 1,220 million tons in 2009 according to the World Steel Association. In the same year, the US produced just 58.1 million tons of that total. As a major steel scrap exporter, the US is going to be increasingly driven by the demands of the global steel scrap market rather than the domestic. Could we see steel scrap export quotas imposed in the US? Probably not in the short term. The US produces much more steel scrap than it consumes, but a weak dollar is arguably making US steel scrap even more attractive than US steel.

Tell us about what you are seeing in steel markets today. Complete our 4 question MetalMiner Steel Market Pulse Survey.

–Stuart Burns


[survey_fly]

Back in early October we published a post entitled: The Case For Steel Price Increases Weakens. We hesitated slightly about calling any outright price declines for several reasons. Ironically, only a month later, we now have multiple mills announcing price increases. AK Steel, will raise base prices for new HRC orders by $30/ton and CRC and coated products by $40/ton effective immediately according to BusinessWeek.   Severstal according to its own website, also raised prices for HRC, CRC and galvanized products by $40/ton effective immediately for shipments through end-December (the company has also announced price increases for January shipments). Finally, Nucor also announced price increases last week, according to Platts “a minimum $30/short ton increase in the base prices of its hot-rolled coil, cold-rolled coil and galvanized products.

In our post of October 4, we called out four conditions that would drive steel prices higher. These drivers include the following:

  • Raw material costs to remain high and volatile
  • Domestic producers must continue to closely monitor production rates. At the time we suggested that though the mills were carefully monitoring production, we felt that with the addition of ThyssenKrupp to the mix late in 2010, producers may have less success in monitoring production rates.
  • An improvement in order books from mills. At the time we said we don’t see a lot of support for that based on recent earnings guidance from several producers.
  • Finally, rising steel prices require strong demand from key manufacturing sectors

So where do we stand today on November 9?

Raw material costs do indeed remain volatile and have moved up in recent weeks. Whether one examines iron ore fines (now up to $157.20/dry metric ton for 62% Fe fines or $126.2/dry metric ton for 58% fines) according to The Steel Index or scrap prices according to October 28 data released by SteelBenchmarker, (shredded scrap is at $334/metric ton, No 1 HMS at $304/metric ton and busheling scrap at $377/metric ton) raw materials have crept up from September and early October numbers.   As for coking coal, my colleague Stuart reported recently these prices will likely increase after this quarter. Score 1 for rising steel raw material costs.

Turning to domestic production, we know from the AISI that steel capacity utilization rates through November 6 dropped to 66.8%, only 5.3% higher than the same time period during 2009. Score 1 for domestic producers holding the line on utilization.

In terms of order books from mills the only evidence we have of rising order books involves lead times. Looking at data from The Steel Index we see a mixed bag on lead times. Lead times appear to have extended for HRC, CRC and HDG but appear to have shortened for plate and rebar. Generally speaking, longer lead times suggest larger order books. Score .5 points for lead times supporting price increases.

Last, we turn to demand from large steel-buying OEMs. We find this a challenging metric to gauge. On the one hand, we saw some better automotive numbers out of October and anecdotally distributors point to very low customer inventories (signaling some re-stocking may appear in the near-term) but the anemic economic recovery and lousy construction markets will continue to put pressure on demand. Score .5 points from key steel buying sectors.

What do our signals tell us? We may see some continued price strength through the end of Q4 but after re-stocking, we’ll need some cheery economic news to sustain the upward price momentum.

Perhaps we can solicit some thoughts from MetalMiner readers via the MetalMiner Steel Market Pulse series (see survey below). We will publish results on Friday.

[survey_fly]

–Lisa Reisman

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

As we continue to develop our coverage of the steel industry, we find ourselves struck by the number of enigmas we encounter in our research. For example, about ten days ago, my colleague Stuart wrote a two part series examining the steel industry from a US and UK perspective. In that second post, Stuart rattled off a number of countries that export an excessive amount of steel tonnage when compared to the size and demand for steel within those local markets, “according to the ISSB, the former Soviet states of Russia, Ukraine and Kazakhstan collectively import 3 million metric tons, internally trade just 8 million metric tons but export a whopping 49 million metric tons. Though Stuart’s post did not mention Turkey specifically, Turkey clearly exports a significant amount of steel in proportion to its own local demand. Consider the following data from the World Steel Association:

Source: World Steel Association

US steel demand, typically in the 100+ ton range, has slipped to between 58 million metric tons in 2009, due to the economy whereas Turkey’s production reached 25 million metric tons despite the fact that Turkey has only one quarter the population as the US. According to H. Metin Surmen from Traxys Europe S.A (a raw materials trading company), “ Turkey has always been a steel producing country which has produced more than its consumes. Turkey has to export its production and manage its product range wisely.

Now let’s turn to the method of steel production.

Turkey produces steel using both EAF and BOF production methods but clearly EAF production methods have increased as a percentage of overall steel production:

Source: World Steel Association

Examining Turkey’s exports, we’ll let you draw your own conclusions:

Source: World Steel Association

It is no surprise to see how Turkey’s purchases of scrap (most of it coming from the United States) drives scrap prices on the world market. Although ferrous scrap prices have declined this month by $25-34/gross ton for obsolete grades and $55/ton for Chicago bushelings, according to ISRI, fresh Turkish scrap buying may drive US scrap prices higher.

And though steel price momentum appears to be moving in a downward direction (and many analysts have revised their forecasts lower as we will we with our fourth quarter price perspective), Turkish scrap purchases do impact domestic scrap price levels. If we see some Q4 scrap purchases from Turkey, we suspect the scrap numbers to increase domestically lending some support (although perhaps limited support) to steel prices here. Stay tuned.

–Lisa Reisman

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