About one hour before our newsletter was to be sent out on Tuesday evening SMU got a call from one of our close contacts/sources in Asia. We had asked him a question about the Chinese market earlier in the day (overnight for him) and he decided that so much was happening in China that an email was not good enough so he called SMU on Tuesday evening (Wednesday morning in Asia). This contact is a trading source who handles all kinds of products out of and into China from iron ore, scrap, flat rolled, billets, rebar (they call it debar), etc.
First, he reminded us that the Chinese authorities have closed 100-120 million tons of EAF and induction furnaces that did not meet the Chinese equivalent of the EPA emissions standards. He told us, "John, there is a big development as China is now exporting scrap. This has never been done before." He told us the scrap being sold was bundles and the price is $200/MT FOB Southern China. The scrap was being offered in 15,000-20,000 metric ton lots and is being exported to Hong Kong, Thailand and Egypt. The price includes the Chinese government taxes that have to be paid domestically. He told me to expect the exports to continue for 6 to 8 months. He explained that a number of the furnaces that were shut down were being upgraded and would return to operation. Even so, he thought that would only be 20 percent of the 110-120 million tons that was shut down.
Steel Market Update covers the flat rolled steel markets in North America as well as items, such as ferrous scrap pricing and supply, which impact North American steel prices. Negotiations for January ferrous scrap pricing to the U.S. steel mills began in earnest last week and we wrote articles about scrap pricing in our Thursday and Sunday evening issues of our Executive level newsletter. Today we are looking at the subject about future scrap prices (February, March 2017). One of our scrap sources shared the following with us earlier this morning:
I believe a lot of mills think this is the peak of the market. I think the scrap guys are playing it a little in that direction, but I think the first quarter is already in the books as “stable” from here. February could fall a bit, or rise a bit, I don’t see much in either direction. March is the wild card. I think March has room to move up in my opinion. The temps have been cold, flows are not great, and mill demand is better than most think. I think mills are overestimating the amount of supply out there. Who didn’t sell everything in January, probably plus a little paper? Is there going to be a big reservoir of scrap behind this for the next 60 days? No. V&M, Koppel, Big River, Timken buying more, all of these are playing against the mills. Steel order books are solid through March, and with this latest price increase, I don’t think they’ll carry all $40, but it probably pushed the order books out until April/May. I think we’re in this range for a while, with a fall coming when the weather breaks in April/May.
Supply of ferrous scrap continues to be an issue for the domestic steel mills. On Friday of this past week scrap prices settled in the Detroit market up $50 per gross ton. However, many of our scrap sources are advising that the rest of the country is in limbo as many dealers think the market is stronger than up $50.
As negotiations between the domestic steel mills and their ferrous scrap suppliers conclude we are seeing scrap prices rise with the Chicago markets “catching up” with some of the other regions. Dealers are reporting robust sales, especially to sheet mills as they are picking up spot market share from the integrated mills.
Chicago area prices are reported to be:
Steel Market Update learned on Tuesday of this week that two domestic steel mills are offering to pay higher prices for shredded scrap from east coast dealers. Shredded scrap buy offers have been made at $180-$185 per gross ton up $10 to $15 per gross ton higher than November numbers (and higher than October numbers since November prices moved sideways to up slightly on the east coast).
Scrap prices are an important piece of the puzzle which will ultimately lead the domestic steel mills to announce price increases on flat rolled steel. The firming of scrap pricing will help lay a floor to flat rolled steel pricing and could help pave the way for a turnaround as the domestic mills work to remove steelmaking capacity from the market in an effort to adjust to the lower buying levels we have seen over the past few months.
One of our scrap contacts told us, “Ferrous exports off the east coast, in both bulk and container, have been and continue to be at a price level that will keep scrap from moving off the coast and into the domestic market. This price relationship will last throughout the year.”
Ferrous scrap is an important ingredient used by both fully integrated mills (blast furnace/BOF) and mini mills (electric arc furnace). The price paid for various grades of scrap such as heavy melt (HMS), shredded scrap and prime grades such as busheling and bundles, is a key cost factor to steel mills as well as steel buyers as they negotiate with the mills for hot rolled, cold rolled, galvanized and Galvalume steels.
As Steel Market Update has discussed in previous articles on the subject of scrap pricing, the original projections by buyers of scrap were for prices to drop $20 per gross ton on all products for the month of March. The projected March reduction would have been on the heels of an $80 to $110 per gross ton drop in scrap prices during the month of February.
However, the scrap markets have a tendency to surprise, both on the way down and on the way back up.
March ferrous scrap negotiations began in earnest on Monday. We anticipate they will take some time to complete as there is not a full agreement as to what direction scrap prices need to go after the huge drop in pricing for February.
After negotiations were completed for February scrap pricing, the word being spread around the industry was to expect another drop in March, perhaps down $20 on most grades. However, the weather got brutal during the month and we are hearing that many dealers will not be able to complete deliveries on obsolete grades of ferrous scrap such as heavy melt (HMS) and shredded scrap. Flows of prime grades (Busheling & bundles) are plentiful as the automotive stampers continue to spit out new car parts. So what direction will scrap prices take for March delivery?
During Nucor’s earnings conference call the company’s CEO, John Ferriola told the analysts that scrap prices would drop “dramatically” during the 1st Quarter 2015. He told the analysts that steel prices have already gone down and scrap prices “have to” follow.
Our scrap sources are telling us that lackluster demand at the steel mills, weak export market and declining iron ore prices are precursors to a continued price correction for ferrous scrap.
Ferrous scrap price negotiations are slated to begin in earnest for January today. Steel Market Update anticipates we will have details of scrap pricing on #1 heavy melt, shredded scrap and #1 busheling scrap later this week. Here is what one of our scrap sources told Steel Market Update this morning:
Shredded scrap prices are up approximately $20 per ton compared to where they were the first week of December. According to Mike Marley of MetalPrices.com, shred is in tight supply in several Midwest cities due to the decline in the flows of shredded feedstock due to the lower selling prices in October and November and auto wreckers and smaller dealers being content to sit on the sidelines until they see higher prices being offered.