Secondary’s a Shrinking Market, Say Service Center Execs

Written by Tim Triplett

The secondary steel business is shrinking. Not only are quality-conscious mills producing fewer nonprime coils, there are fewer distributors in the business of buying them and fewer customers interested in using them.

Steel Market Update interviewed several veterans of the secondary steel market, who all agreed the business is changing—and not always for the better. “There used to be an opportunity to make a good living selling secondary, but not so much anymore,” said one executive. “The mills are getting better at producing less secondary, so they don’t need as many of us as they did in the past,” added another distributor. “It will always be a part of the steel business, but it will be different in the future.”

Roughly 3-4 percent of domestic steel production ends up in the secondary market when it falls short of the original specification due to surface defects and other flaws. Mills offer this “nonprime” material at a discount to service centers that may have customers who find it suitable for alternative applications and are looking for quick delivery.

Describing a common shift, one service center exec in the Midwest said his company’s product mix is evolving toward more prime products and less secondary. Nonprime is unpredictable and difficult to manage, he explained. “It’s difficult to scale and grow with just nonprime. It’s substantially more difficult to know what you are buying and what you are selling with secondary. It’s hard to match what you have in inventory to what a customer may be looking for because of the wide-ranging nature of the defects.”

He added: “We still believe in using the nonprime world to supplement what we are doing, but as a company we are moving away from the real down and dirty stuff we used to buy for inventory. Now we make sure we have somewhere to go with it.”

Because some mills are marketing their secondary more aggressively, brick-and-mortar distributors sometimes find themselves at a disadvantage to buyers and brokers with less overhead, noted another executive. “Because the spreads aren’t there to cover the costs, a lot of service centers are migrating more into a prime base. There are fewer selling nonprime.”

Sellers of secondary report that their customer base is dwindling. Construction, for example, has historically been a big outlet for secondary steel. Construction products are often behind a wall or buried in the ground where cosmetic flaws are unimportant. Non-load-bearing interior wall studs used to be a big application for secondary coils. Today, construction products companies are moving away from nonprime toward more graded and certified material. “The industry has gone to a specification that manufacturers must adhere to or they can’t be certified. It has driven a lot of the small regional stud manufacturers out of the marketplace,” said one source.

Several steelmakers have announced plans to build new capacity or to bring old capacity back online over the next several years, potentially adding some 15-20 million tons of new production to the U.S. market. Inevitably, even with the latest technology, new steel production will generate more nonprime material. Just as there are concerns about excess capacity oversupplying the prime steel market, the same is true for secondary. Raising the question: What will happen to nonprime prices in the future? “We’ll worry about that when the time comes,” said one source, who like many is skeptical the mills will all follow through with their grandiose expansion plans.

Individual mills view the secondary market differently. Some mills see their secondary business as a profit center and try to maximize what they can get for every single coil. Others go to market with the mindset that finding buyers for their secondary and getting rid of it is just as important as the price.

The mills are doing a better job of marketing their secondary material, narrowing the spread with prime pricing, said one source. “In the past it was just lists that went out. Now with internet and online marketing, it is more of an auction.”

Mills use varying formats to solicit bids for secondary. Some still use the old school method and send out a list to regular buyers. Some send out a list with their target pricing, others a list with a reserve price. More and more use an online platform and electronic bidding to streamline the process—at the expense of personal relationships, complain some salespeople who long for the good old days.

Historically, the price of secondary steel has cycled up and down with the price of prime, but the old rule of thumb no longer always applies. Because the mills have different approaches and different priorities, one may seek a rate of 35 cents and another 25 cents for basically the same steel.

It’s difficult to generalize about secondary pricing because it varies so greatly by product and by mill, say service center sources. Instead of buying a package of coils—some good, some not so good—buyers are cherry-picking the best and leaving the rest. Popular items with lots of applications, such as galvanized G60 from 14-18 gauge, get snapped up quickly at prices not far below prime. High-strength steels that are difficult to process and have few alternate uses often have no takers at any price and end up getting remelted by the mill.

Most experts believe there will always be a secondary market for steel, but in a decade or two it is likely to be a shadow of its former self. “There will always be a seconds-type business, but it continues to shrink. There will always be pockets of material that need to be moved, but less and less, with fewer people doing it,” predicted one distributor.

“In secondary, we have to deal with the market that is dealt to us. We will continue to be participants, because it does have value, but there are a lot of risks that go along with it,” concluded another.

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