Scrap Metal

We have to admit we find it refreshing reading the ISRI weekly Friday reports. Why refreshing you may ask? We like reading upbeat reports written in a glass-half-full sort of voice. Sometimes we struggle to strike the right balance on tone between reporting on some of the negative economic data we see and at the same time continue to look for positive news to report on as well. This week’s scrap numbers and trends suggest looking down that road in the middle¦

Ferrous Demand¦

Demand for steel, according to the World Steel Association will hit 1.34b metric tons in 2011, a 5.4% increase from 2010. ISRI reports that the demand increases will come from China, Brazil and even the US and EU, though at a slower rate. India will also see noted increased demand perhaps up to 13.6% next year while Japan’s demand will likely slow due to its appreciated currency and weak construction markets. Though demand (and growth) numbers appear positive, actual ferrous scrap prices appear to have trended lower in recent days. According to MEPS, prices appear as follows:

HMS No. 1 $350-360 MT FOB

HMS No 2 $360-370 MT FOB

Platts reports Midwest shredded scrap at $345/ton. Scrap Price Bulletin also reports declining prices. How will this impact HRC prices? According to ISRI, Steel Business Briefing reports the spot market at $580-600/ton FOB and AMM reports HRC at $560/ton “down $29/ton from two weeks ago.

Our own MetalMiner IndX(SM) free to all registered users reports HRC in China at $619.99/ton, down from $647.87/ton one month ago.

Non-Ferrous Demand¦

ISRI reports multiple sources pointing to bullish copper forecasts for the year ahead. Scotia Bank expects an average cost next year of $3.60/lb and Morgan Stanley concurs with the same average cost. Goldman Sachs, on the other hand, calls for copper to reach $4.22/lb exceeding all price records. Macquarie also calls for copper prices to trade between $4-5/lb next year.

Ironically, despite the bullish copper indicators, the scrap markets have witnessed larger spreads than one would expect, however, demand may have fallen due to the Chinese Golden Holiday break.

Aluminum, taking some of its pricing cues from the copper market has also risen, mostly due to a falling dollar as well as some increased demand as we noted in our MetalMiner Aluminum Pulse report of last week. Not surprisingly, aluminum scrap markets have tightened as prices have inched higher for old sheet and cast (ISRI reports prices in the $.70/lb range, delivered Midwest). ISRI also notes additional talk of “tightness in the market for aluminum scrap and raw material price increases.

–Lisa Reisman

MetalMiner has published quarterly price forecasts this year outlining a range of factors that impact steel prices. We have held that prices would increase from the beginning of the year through some of the second quarter, dip back in the third quarter and rise again slightly in the fourth. But the case for a rising fourth quarter appears to have weakened due to a number of factors. Three weeks ago, we presented a ferrous and non-ferrous metals forecast to a group of western Michigan business executives. At that time, we outlined only three metals in a decisively bull market copper, tin and to a lesser extent nickel. We called aluminum and zinc as flat to rising and lead and steel as “sideways markets. Although the ferrous scrap markets have performed well through the middle of August, analysts are reporting the first signs of downward price pressure.

According to ISRI’s Friday Report quoting Morgan Stanley, the bank sees a drop in prices of $10-40/ton due to lower LME billet prices combined with lower October US scrap prices. The report goes on to say that IHS Global Insight calls scrap “grossly overpriced given the level of consumption. That firm also calls for declining steel prices through Q4 and into 2011. We wouldn’t characterize scrap prices as “grossly overpriced for several reasons. First, the timing of purchases from overseas buyers, particularly from Turkey can greatly impact domestic scrap prices. When they come into the market, for example and buy up large quantities, domestic buyers may find themselves in a scramble. Second, though iron ore and coking coal prices don’t directly impact EAF production methods a correlation exists among iron ore, coking coal and scrap prices. In other words, they tend to move in a similar fashion. And though spot iron ore prices may have drifted down recently they remain historically high. When one thinks of raw materials as “iron-making units the relationship amongst all steel-making materials appears stronger.

The latest steel prices as reported by Steelbenchmarker.com, show slight price declines for HRC and standard plate. #1 Busheling scrap appears flat at $398/net ton whereas shredded scrap declined slightly to $347/net ton and #1HMS down 2% at $313/net ton. Credit-Suisse, in a recent steel report, suggests that US imports of steel products have “reached a plateau which will likely not cause any uptick in steel prices due to sluggish end use demand, excess production capacity and slightly declining raw material prices.

The case for rising steel prices would need to see several conditions met. The first raw material costs to remain high and volatile (which they likely will). The second domestic producers must continue to closely monitor production rates. We feel they are doing that but with the addition of ThyssenKrupp to the mix late in 2010, producers may have less success in monitoring production rates. The third condition requires a continuation of mills reporting as large (or larger order books) than late summer order books but here 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 this may remain the only area in which the case for rising steel prices exists.

More likely than not, we’ll see steel prices trading sideways through Q4. After that, it may more depend upon economic conditions and end user demand.

–Lisa Reisman

Besides confirming a stainless steel and nickel market outlook recently reported by my colleague Stuart, panelists at the ISRI Commodity Round Table conference last week in Chicago covered several additional trends that we have not previously reported nor have we seen in various metals publications. One observation made by panelist Michael Wright, ELG Haniel GMBH and also President of the British Metals Recycling Association, which we have now heard twice at two separate events, involves the notion of “exchangeability of metal units. In other words, according to Wright, “consumers no longer want to buy stainless steel, they want to buy Ëœmetal units’ with specified levels of various alloying elements such as nickel, molybdenum and iron. We heard a similar comment regarding buying “iron making units, which we will return to in a follow-up post. The purchase of these Ëœmetal units’ places additional responsibility onto the supplier according to Wright, because consumers dictate the actual chemical composition of the particular stainless they intend to purchase. For example, a customer may dictate chrome at 16-17% max. Producers often find it challenging to hit the customer’s targets.

A second trend impacting stainless steel supply chains involves residual levels within the scrap supply chain. An inherent conflict exists between what scrap dealers and suppliers want to deliver to producers (smelters) and what those producers want to receive. Essentially the producers want residual levels held as low as possible (as stated by Missy Bilz of North American Stainless) whereas scrap suppliers would like to see residual levels raised. Also related to residuals, another question examined which types of stainless applications could best tolerate higher residuals. Wright pointed out that kitchenware and cutlery could withstand higher coppers (though he added that makes it a nightmare for recycling) but some industry specifications for say oil and gas would take too long to change and therefore would not be a good candidate for evaluating residual levels.

Another big point of discussion involved the addition of a new flat roll mill coming on stream later this year (ThyssenKrupp). Currently, the US has three major flat roll mills. An audience member wanted to know how the addition of ThyssenKrupp would impact the availability of scrap.  The panelists agreed that a fourth mill would change all of the dynamics of buying scrap in the US. The US will need to consume that material here (vs. export it). That discussion evolved into questions about stainless steel over-capacity within the US market. Another audience member wanted to know whether M&A consolidation would take some of the over-capacity offline or would existing producers need to shut down capacity. Panelists suggested that Thyssen had already started to undercut the market, though their pricing appears less severe on the steel side (vs. the stainless side). Speaker Chris Olin of Cleveland Research Company, a firm that provides sell side research for carbon, stainless and high performance materials, said, “There is a pretty big need to rationalize supply. When asked whether or not the market could expect further consolidation in the stainless sector, panelist Michael Wright answered, “No, the greatest growth rate for stainless production will occur in China. The growth rate is there. In China, there is little opportunity to join up with a Chinese company or a scrap operation. It is proving very difficult. I don’t see any consolidations in recycling perhaps some activity around merging grades.

Panelists also shared a few statistics that we thought MetalMiner readers might find of interest:

  1. The number of times a ton of nickel turns on the LME for stainless production (25x)!
  2. Stainless has the highest recycle rate of any metal (over 80%)
  3. Between 2008 and 2013 As a percentage of total world stainless production, Asia’s share will grow from 55% to 68%. However, scrap generation will run well behind demand. China will generate only 25-30% of its requirement. It’s too expensive for China and that’s why they are going into nickel pig iron.

–Lisa Reisman

This is the second of a two part series. You can read the first post here.

Since China doesn’t produce much steel via EAF technology (they actually produced more via that method some years ago), the relationship to watch is the one between iron ore and scrap pricing (moving forward). Harris also confirmed something we have mentioned on these pages previously the US is largely self-sufficient for iron ore and coking coal. Europe (e.g. Turkey is the largest scrap importer) and China must import its key raw materials. Another key “learning for us involved the correlation between oil prices, rebar and heavy melt scrap.

What I found most interesting about the discussion related to questions from the audience around “diminished scrap flows and how that feeds into the EAF supply chain. Harris answered this by stating, “Three major consumers control 70% of the market place and they have guaranteed streams. If scrap exports go to 30m tons (the panelists said scrap exports are approximately 15m tons today) then we will see a scramble will occur with the domestics. If export prices are very high, then consumers here (mills) have to pay higher scrap prices and hence surcharges. Exports can really impact US supply/demand balance. Moss added that a weak dollar also plays a role (in increasing exports) and reiterated that utilization rates, shipping rates and the dollar in particular have a disproportional impact on prices. Harris clarified by stating he felt operating rates were les important and instead, the volume of exports impacted the domestics. For example, when exports were 5m tons/year, the scrap market remained on the coasts. When it went to 10 m tons/year, it started affecting inner mills/producers. When it went to 15m tons year, markets became export markets. When scrap exports reach 20 m tons, the market moves to parity and shifts to obsolete grades. Though Harris suggested no scrap shortages (he pointed to the 20+b tons of scrap the US has in its disposal he counted existing buildings in that number), many perceive a prime scrap shortage exists and has existed for the past 6-9 months. As scrap exports increase, we’ll see plenty of bilateral trade as the US already imports and exports scrap products.

In terms of a scrap shortage, we chuckled a bit at Harris’ reply that there is no prime scrap shortage. It reminds me of a rare earth metal debate where people argue, “there is no shortage of rare earth metals, which is true I suppose if you leave the economics out of the equation. The question becomes can one economically obtain rare earth metals and profitably sell them into the market. From this perspective, since many of the vacant office buildings and other commercial construction remains under water, it is not a given that scrap processors and dealers and just help themselves to that available 20b tons. We buy into the “perceived scrap shortage just based on historically lower automotive sales and folks hanging onto and repairing appliances (instead of buying new ones).

We will cover stainless/nickel and copper scrap markets over the next couple of days.

–Lisa Reisman

I’ve already fallen a bit behind on my reporting from the ISRI conference held here in Chicago this week (I had to finalize a metal market overview I am giving to a group of manufacturers in Western Michigan on tomorrow if truth be told). When I came back from the conference, my husband asked, “what did you learn and what did you find interesting? First, I’m happy he was willing to sit through and listen to my synopsis (we’re going to start video blogging some of this in the next week to ten days because it’s almost easier to explain it than to write it). Anyhow, let’s start with what I learned.   The first speaker, James Moss of First River Consulting gave an excellent industry overview.

Like us here at MetalMiner, Moss feels one must look at many more macroeconomic features to “get a grip as to what is going on. He cited two statistics of interest. The first, that the developing world will consume 75% of global steel production and the second that the US will consume only 6% of global steel production helps set the stage for what Moss calls “the story of the next generation. He went on to say that the US saw a 45% demand decline in this latest recession, ranking it among the top four declines of the 20th (and now 21st) centuries. Perhaps the most interesting “lesson learned that Moss shared involved this one statement, “Scrap behaves just like any other mineral. I’m assuming he means the market dynamics for scrap behave like any other commodity. He went on to point out that there is a greater than .90 correlation between scrap generation and steel consumption. 50% of scrap generation came from the “obsolete stream and now 75% of scrap supply comes from that stream, placing a lot of pressure on scrap yards. In addition, the US is now the world’s largest ferrous scrap exporter. Moss also said   that our vast obsolete scrap supply, if converted to steel on US soil, will allow our own domestic steel industry to become stronger via the export of finished products as opposed to raw materials.

John Harris, Director of NAFTA Metallics for ArcelorMittal, definitely wins the “most colorful speaker award. With 25+ years of industry experience, he had lots of insights to share.   He defined the NAFTA scrap markets (from an export perspective) as being driven by three features: the Euro/Dollar exchange rate, freight costs and the Middle East oil price. In addition, Harris painted a clearer picture of the scrap market players within North America and explained the spread between prime and obsolete scrap prices by stating that, “Consumers of scrap in NAFTA control over 77% of the market and exports in NAFTA are controlled by two players with about 80% of the market. He went on to say, “According to the IIS, the NAFTA region is at a 110 m metric ton production rate. Of that production, EAF represents 56%. Of the 56%, 60% is black carbon on the electric side, which doesn’t exist in other global markets. If we look at the published operating rates of AMM, January was 61%. The spread between prime and obsolete was $80. The highest operating rates reached 74.9%. The spread was $145 between prime and obsolete. Today we are operating at a 70.6% capacity rate (Ed. Note: last week’s numbers according to the American Iron and Steel Institute) with a $100/spread.”

In a follow-up post we’ll share a few more additional insights from the ferrous round table discussions from the ISRI conference.

–Lisa Reisman

This week I am attending the ISRI conference here in Chicago. For those of you not familiar with ISRI (Institute of Scrap Recycling Industries), they put on quite a comprehensive commodities round table event covering a full range of scrap markets. We’ll try to cover key metals-related scrap markets over the coming three days. Monday kicked off with ferrous metals and in particular, a lengthy discussion about the development of scrap futures markets here in the US. Before your eyes glaze over, consider some of the key pieces of background information shared by panel speakers Pat McCormick of World Steel Exchange and Paul Shellman of the CME (whom MetalMiner has spoken to previously on the subject of futures markets). Both speakers confirmed two trends related to steel scrap prices. The first trend involves steel price volatility specifically that volatility will not go away (no surprise there). The second trend involves the long-term cyclical growth of global steel production (and hence the rising demand for scrap). Paul also pointed to several other trends of interest, in particular, “spot pricing in steel making raw materials will become the new paradigm. And though the iron ore producers moved to quarterly price contracts, spot pricing reigns supreme.

Because spot pricing creates greater volatility, “the industry will have to deal with persistent price volatility, according to Shellman, “futures will help manage price exposures. Shellman continued by saying that vertical integration simply doesn’t work. It hasn’t worked in other markets and won’t work for steel. And though many metals markets have balked at futures contracts, many of the “newer futures tools have actually done remarkably well, notably the molybdenum and cobalt contracts.

In many respects, the Chinese are much further ahead of the US when it comes to steel futures contracts. Pat mentioned that the Shanghai rebar contract has already traded more than 200m tons of steel. One conference attendee posed the following question, “we’ve survived a long time without these tools. Why are these tools necessary now and what is the downside? How can these ultimately be instituted by people and companies? Pat from World Steel Exchange answered by saying, “The price movement for scrap was pretty much a flat line. The volatility and inventory risk in dollars and cents has become more significant. Now we have a slow-growth advanced country economic outlook. It’s hard to transfer the price changes (editor’s note: price fluctuations) down the supply chain. Someone has to manage the risk. The number one question people should be asking is, “how do I manage my exposure to scrap? Obviously the panelists believe steel scrap futures contracts can serve as a big part of the answer.

Another audience member asked whether or not the “speculators have caused the increase in prices for other markets (much attention gets paid to oil speculators at the top of the market in 2008). Paul Shellman answered that question, “futures markets change the contango/backwardation of the forward price but they don’t change the underlying supply/demand equation in the physicals markets. Futures markets have highly restrictive participation as to who gets to take possession of say crude oil and in this case steel scrap. In a regulated market, it is controlled.”

As to the steel scrap contract specifications, Pat suggested his firm had developed three contracts – each for 20 gross tons. For prime scrap he suggested No. 1 busheling .999 even though the index is a composite index meaning it covers multiple geographies. Participants can hedge exposure to price change. For obsolete there will be a shredded contract, now favored from a handling standpoint. On the international market Pat said there would be a No. 1 HMS contract because it is still a very popular export grade.

Scrap buyers and sellers will want to pay close attention when these futures contracts are launched.

–Lisa Reisman

I have to admit something. I’m conflicted by a couple of pieces of economic data that leave me scratching my head. Though many analysts and market commentators tend to focus on things like unemployment data (I tend to ignore it from the standpoint that it isn’t a leading economic indicator but rather a lagging one) or reported GDP growth (it too is a lagging indicator), I see a bunch of mixed signals with what I typically see as leading economic indicators. Clearly, we see a negative and protracted situation with regard to consumer spending, which comprises 70% of overall GDP. (See our earlier post on that topic). But on the flip side, many indicators look quite positive. Let’s take a look at some of those.

Is it possible that the manufacturing sector leads the economy? Take a look at this chart courtesy of the ISRI (Institute of Scrap Recycling Industries):

Source: ISRI

But let’s not stop there. The latest ISRI Scrap Index shows an uptick, led by copper scrap and HMS. Furthermore, ISM data looks quite positive, even surpassing expectations as the overall manufacturing index moved from 55.5 in July to 56.3 in August, exceeding analysts’ expectations. In addition, production bumped up 2.9% from July combined with steady price increases. ISRI also reports positive euro zone numbers for industrial production growing 2.5% from May to June. However, the ISRI did temper its own data by acknowledging that the pace of growth will not likely continue. Last, the ISRI reports an uptick in the China PMI from 51.2 to 51.7. So all in all we can interpret this quite positively and that may be what Brian Beaulieu has seen as well (we reported his claim of having a very good track record of successfully predicting economic growth or lack thereof – he does not see a double-dip for 2010).

And as we like to point out, Alan Greenspan often looked at scrap markets for signs and direction as to the overall economy. Here the data also seems to support upward price momentum. Goldman Sachs has recently called for higher steel prices on the back of higher scrap prices and higher iron ore prices. According to the ISRI, No. 1 HMS increased by $37/ton compared to July and some are calling for more price increases for shredded scrap due to overseas demand. All of these indicators would suggest steel prices remain supported, despite subdued domestic demand. On the non-ferrous side, the ISRI reports less momentum for prices for both copper and aluminum even citing aluminum producer Rusal as holding prices stable for the balance of the year. Midwest aluminum premiums have also eased a bit, according to the ISRI.

Anecdotally, we know of some major corporations that have indicated greater growth during the second half of this year than during the first half. Some steel producers have seen larger order books as well.

Will the manufacturing sector keep the US economy out of recession by the time mid-term elections roll along? Stay tuned. September 30’s revised Q2 GDP numbers will provide the first indicator.

By the way, we’ll be at the ISRI Commodities Forum next week in Chicago from September 13-15. If you will be there, please find us and say hello. We’d love to hear meet you!

–Lisa Reisman

Yesterday, we reported on ThyssenKrupp’s new strategy of using pricing formulas and price indexes as part of an annual contracting process. Though that strategy is nothing new, it highlighted the need for metal buying organizations to pay close attention to what happens within the scrap markets of their respective metals. Generally speaking, MetalMiner has not covered the ferrous and non-ferrous metal scrap markets as much as it could. Hopefully, that will change as we start reporting more frequent scrap market data from the ISRI (Institute of Scrap Recycling Industries). In its latest report published on Friday, the headline news includes higher ferrous scrap prices both for shredded scrap as well as No. 1 HMS scrap, flat aluminum scrap prices or rather, aluminum scrap prices not following firmer aluminum prices as tightly as one might expect, yet copper spreads for most grades remain tight.

ISRI quoted Platts indicating last week’s shredded scrap price increased by “$20/ton to a midpoint of $345/ton delivered Midwest. Also according to ISRI, Scrap Price Bulletin reported No. 1 HMS composite price at $303.50/ton and shredded scrap at $335.50/ton. Perhaps not ironically, several steel mills announced price increases.

On the non-ferrous side, according to ISRI, “the concern for most secondary smelters as August gets underway has more to do with what has been termed Ëœsluggish and potty’ demand for A-380 alloy than any worry about getting scrap to feed their furnaces. Copper remains tight according to the ISRI because of China buying and pressure from export markets. Aluminum scrap in China currently trades at $1899/ton while bright copper scrap currently trades at $7175/ton according to our own MetalMiner IndX(SM).

We will endeavor to publish historical scrap numbers from China over the coming days.

–Lisa Reisman

As the Big 3 iron ore producers have altered the way they manage contracts with key steel customers (going from annual to quarterly back to spot, most likely), steel producers have faced a challenge in aligning sales contracts with purchase contracts. According to a recent article, about 60% of ThyssenKrupp’s customers have long term or annual contracts. It appears as though Thyssen would like to move to annual contracts with formulas, adjusting on a quarterly basis to avoid a time-consuming negotiation process. Instead, Thyssen will rely upon raw material indexes and pre-agreed upon formulas with clients to set the annual contracts that will automatically adjust on a quarterly basis. Apparently, this represents the first time Thyssen has openly discussed its contracting process.

Of course, using price indexes as a means of contract negotiation is nothing new. In fact, many metal buying organizations regularly deploy index-based formulas as a means of not so much saving money but reducing risk. MetalMiner has written extensively about the use of price indexes as a basis for contract discussions we have re-linked to two posts which go one step further in laying out the contracting options for rising, falling and flat markets:

Metal Decision Trees: Sourcing Strategies and Risk Mitigation Methods

Metal Decision Trees: Sourcing Strategies and Risk Mitigation Methods Part 2

In the case of steel coming from integrated producers iron ore and coking coal represent the two largest cost factors in producing one ton of steel. Iron ore spot prices continue to rise, see chart below:

Source: Iron Ore and Steel Derivatives Association

In addition, our own models show a 39% increase in iron ore from the April July time frame. For coking coal, the numbers increased by 4% over the same time period (we used $167 as our iron ore input cost per ton and $117 per ton for coking coal those numbers based on IMF data and EIA data).

For steel coming from EAF producers, the major cost variable involves scrap. Although steel scrap prices have drifted down in recent months, they remain higher than 2009 price levels and in recent days have seen upward movement for both No. 1 HMS scrap and shredded scrap. We will post an article tomorrow covering metal scrap markets.

In the meantime, the tracking of key raw material cost inputs remains a primary function for most metal category sourcing managers. Combined with a strategic sourcing initiative to lower the value-add costs (the non-metal related cost elements), the use of price indexes can help mitigate price risk.

As many of you know, MetalMiner operates a global metals price index, MetalMiner IndX(SM) for a range of steel products and non-ferrous metals covering several Asian markets. The service is free. You may register for the service here.

–Lisa Reisman

Perhaps some of you caught the headlines this past week that Severstal Sparrows Point announced a $125/ton iron ore surcharge, “The Severstal NA spokesperson, Elizabeth Kovach, told SMU in an email statement: “¦we are confirming an increase of $125 per ton for shipments to non-indexed contracts for Severstal Sparrows Point products effective June 1, 2010. This increase partially offsets the significant escalation in raw materials costs, which have increased in the range of 120 percent this year alone. The more interesting point that John Packard raises in his post involves the speculation of one steel executive, “who believes it is only a matter of time before some form of iron ore and/or scrap surcharge for both contract and spot customers will become commonplace.

And though in our price forecasts on steel we felt the US market would see some impact from rising iron ore prices incurred by the Asian steel mills, we felt that the US market still faced much less volatility with regard to iron ore due to a couple of key factors.

First, more than half of US steel production comes from Electric Arc Furnaces (EAFs) which, “now account for well over half of American steel production, according to a December 2009 Bureau of Labor Statistics report. Last year, the US produced 58.1 m metric tons of steel as compared to 91.4m metric tons in 2007. (The US typically produces in the 90+m metric ton range). China produced 567.8m metric tons in 2009 and 500.3 m metric tons in 2008. (And are currently on pace to produce 612m metric tons this year, according to data from the World Steel Association). We have seen estimates that EAF production in China represents 9.1% of total steel production, according to the World Steel Association. We should add that electric arc furnace making methods in China are not quite the same as electric arc furnace making methods in the US (e.g. the Chinese use much less scrap and instead add hot metal or cold pig iron). If the US produces more than half of its steel via EAF, iron ore surcharges do not at all relate to that same percentage of the market. Read more

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