Final Thoughts: US-Canada scrap flows set for change?

More recently, Canadian steelmakers have undertaken an effort to decarbonize and modernize, a journey many countries around the have undertaken as well. And the two largest flat-rolled steel mills in Canada are no exception. They are transitioning from coal-based blast furnace (BF) production to EAF production. And the EAF method requires considerably more scrap than the BF method.

ArcelorMittal-Dofasco, in Hamilton, Ontario, aims to complete its transition by 2028. The mills’ scrap needs will therefore increase. But plans also include a direct-reduced iron (DRI) module capable of producing 2.5 million metric tons (mt) per year. This should mitigate Dofasco’s projected scrap requirements.

However, some market participants theorize that ferrous scrap – especially prime grades formerly exported to the US — will be retained for use in Canada. 

A similar transition is underway at Algoma Steel in Sault Ste Marie, Ontario. The company is replacing two blast furnaces with two EAFs that will require a great deal of scrap and ore-based metallics (OBMs). Unlike Dofasco, Algoma will not have a DRI installation to reduce its dependence on scrap and pig iron from outside sources.

The US Section 232 tariff on Canadian steel, which now stands at 50%, has curbed steel production at Canadian mills. The tariff has also increased the amount of scrap available for export because Canadian mills are consuming less, according to a scrap source in Canada.

Most Canadian scrap is exported to US mills. It goes not only to bordering states but also to mills as far away as Northeast Arkansas. Market participants, however, have questioned whether Canadian scrap will remain available for importation to the US in the future.

The change in plans to completely transition to EAF melting at Algoma in 2026 has brought this eventuality into present reality. How will the new increased scrap demand at Algoma affect flows into the US? In 2024, Canada exported ~3.0 million metric tons of ferrous scrap to the US, according to US Geological Survey data.

Given its location at the top of the Great Lakes, Algoma is not preferential for rail deliveries from Eastern Canada. The competition for Canadian scrap with Dofasco and other mills in the East could present a challenge to secure enough material from this region.

This may necessitate actually importing scrap from the US. A quick look at the map of the Great Lakes will show Algoma’s location is accessible for maritime shipping. Chicago is only two sailing days away from Sault Ste Marie. This district’s lack of scrap-consuming EAFs could invite exportation to Algoma via water transport – winter weather conditions notwithstanding.

This move has been done in the past, according to a Chicago-based scrap trader. He said it has not been happening lately, probably due the tariffs. But if the trade does resume, it could impact the downriver springboard trade from Chicago to mills on the Lower Mississippi.

Sourcing basic pig iron for Algoma could also be a challenge. Would Cleveland-Cliffs’ mill at Nanticoke, Ontario, supply Algoma with pig iron given the price of hot-rolled coil (HRC)? That said, with US tariffs still in place on steel, it could be a possible source. Another possible source could be U.S. Steel’s Gary Works in Northwest Indiana. That is, if U.S. Steel does not use all of the pig iron made at Gary Works internally.

Brazilian imports would be hard to break into and would face expensive logistical costs. If pig iron was not available in sufficient quantities, it would put more upward pressure on prime grades of scrap – unless DRI/HBI could be obtained.

To summarize, the specter of losing significant volumes of Canadian scrap may come sooner than expected. Without these tonnages, US steelmakers could see a rise in their scrap costs – as has been predicted for years now. There was already apprehension when “reciprocal” tariffs on all Canadian imports were threatened earlier this year. Because market participants feared that scrap might be included too.

So, despite some skepticism about the potential dislocations in the scrap market as decarbonization takes hold, one thing should be becoming increasingly obvious: the cost of ferrous scrap, especially low residual grades, is likely to rise.