From a short-term perspective, higher scrap prices can only mean one thing, higher steel prices. And generally speaking, we see rising scrap prices along with higher iron ore and coking coal prices as the primary drivers to higher steel prices. However, although demand looks better than it did during the first half of 2009, it remains tepid. According to a recent article from Recycling Today, ferrous scrap prices for the second month in a row, “took a sharp upward turn. After having bottomed in April 2009 according to the USGS, according to our own tracking and analysis, scrap prices have increased three months in a row.
But some of the increase in scrap prices may involve other factors than simply rising steel demand. Cold weather impacted inflows particularly here in the North but throughout much of the country during the first couple of weeks in January. Scrap supplies also remain tight because less demolition projects have taken place and when consumer demand for steel intensive white goods or automobiles remain depressed or down, consumers don’t hand over their old units that typically make their way into the scrap supply chain. Automotive demand has also remained somewhat flat. Nevertheless, prices have increased for most spot buyers to more than $300/ton, according to Recycling Today. Moreover, the national average rose to $387/ton.
Some consider exports the wild card of the scrap equation, according to the article. To give a sense of the size of scrap exports to the overall US market, we took a look at the most recent USGS Mineral Industry Survey and as of September 2009, the US exported 15.4m metric tons of a total 36.8m metric tons consumed by the domestic market or 42% of all scrap generated goes toward exports. The US did import 1.92m metric tons. If export orders decline, US producers will certainly put some price pressure on the scrap dealers for better pricing. We’d concur that export orders will help drive the scrap price equation in the short term. Now whether the mills will share any price drops with consumers should export orders falter, well, that’s a different story.
We spend quite a bit of time talking about trends in two key steel making raw material sectors, iron ore and coking coal (we reported on both materials last week) but admittedly don’t track scrap markets as closely as we should, though we will endeavor to do so going forward because scrap markets provide as many price clues as some of these other raw material inputs. What trends should we watch in terms of scrap? As it turns out, quite a few, take for example the following:
80% of scrap supply comes from old household goods and cars which this year have not turned as quickly as in previous years due to the recession
According to the same article, Sims Metal Management, the world’s largest metals and electronics recycler sees a 79m ton decline in scrap consumption this year (of course this makes sense in relation to declining production volumes in 2009)
New mills coming on stream (with the exception of China mills) use electric arc furnace technology and hence require steel scrap. Since some of these countries have higher growth rates then the US, scrap demand has grown faster than in the US
A falling dollar makes US scrap exports more attractive in overseas markets. In particular, it has fallen against Australian and Brazilian currencies (those two countries account for a large percentage of iron ore) so the product substitution becomes attractive for steel producers thereby reducing scrap supply
Finally, when the markets went haywire during the summer of 2008, scrap became so “dear that much of the easy-to-get available scrap had been used leaving scrap inventories depressed.
Former Federal Reserve Chairman Alan Greenspan used to track No. 1 heavy melt steel scrap (he references that practice in his autobiography). He felt it served as a good proxy for manufacturing demand. When scrap prices increased, manufacturing demand followed. Whether or not that trend holds true today remains to be seen.
But according to MetalPrices.com, scrap steel prices, despite the ups and downs from one year ago, still trade within the same range as they did last year. But obviously any changes in availability could impact cost:
In addition to MetalMiner’s adaptation of an integrated steel production cost model, if you are interested in downloading the model, fill out the form here and you can download it for free:
We will endeavor to publish an electric arc furnace production cost model within the next two weeks. We use these models to help tell us the “should cost for various steel making operations.
The announcement that Boeing will be offering increased quantities of aluminum scrap for auction this quarter may indicate an increase in activity at the Seattle plane maker and will certainly be a welcome increase in supply to a market in need of more top quality segregated scrap. Lack of plentiful good quality scrap has been one contributing factor in billet prices, and it doesn’t come much better than traceable segregated scrap from the aerospace industry. According to Metal Bulletin, Boeing will be offering an additional 380,000 lbs across all grades — equivalent to about an 18% increase. As welcome as this scrap generation from Boeing will be, it is set to fall in the years ahead as production of the Dreamliner takes over from older models. The 787 has a far higher percentage of carbon fiber in its construction.
Shipping Lines use the same principles of supply and demand to judge freight rates as does any other business. Typically a
route in one direction is more popular than the reverse. For example containers travelling from China or Europe to the USA, bringing in finished goods, commanded a higher rate than the same containers being sent back to those overseas markets.
Shipping lines are keen just to re-position the container back to where the demand is greatest ready for the next load and
would happily take low value cargo (at low rates) like metal scrap just to cover the cost of returning the container. The US
demand for imports over the last 10 years has made this a steady one way bet, until about 12 months ago according to the the Wall Street Journal. Read more
Many companies look on scrap as a problem to dispose of when in fact it could be viewed as a source of incremental profit and an opportunity to achieve some measure of natural hedging against metal price volatility. Ferrous and non ferrous scrap is obviously a product of any manufacturing process that as a business one seeks to minimize. Any material that is not being transformed into a saleable finished product represents a cost that the business unit has to incur. However unlike virtually all other direct material inputs to a business, scrap has the ability to create a separate revenue stream and as such it deserves its own strategy. Read more