April 2005

Scrap steel market forecast: the future's so bright...

If you’re in the recycling industry, unless you’ve been living under a pile of busheling in an abandoned scrapyard, you know what prices have done. In an industry that’s not very glamorous, quotes like, “literally exploded,” “ongoing uncertainty,” “wild ride,” “a guessing game,” “emotion in the market,” and “uncharted territory,” are uncharacteristically dramatic, but apt.

After the drama of the past year, what does the future look like? Obviously, no one has a foolproof crystal ball, and several sources were downright skittish about public predictions. Others, like Nucor Steel, would only say that they didn’t do forecasting, while the Ductile Iron Society said they didn’t keep any sort of pricing records.

Alan H. McCoy, vice president of government and public relations for AK Steel suggested that forecasting isn’t reliable. “You can look backwards and see what looks like a trend,” he said, but that doesn’t really serve as a good predictor of what prices will do in the future.

When asked for predictions, Rocky Mountain Steel Mills’ spokesman said, “If anybody knew that, they’d be rich.”

Bob Garino of the Institute of Scrap Recycling Industries (ISRI) said, “We are not allowed to forecast because we represent both the buyers and the sellers, but we can comment on what has happened and what we see happening now.” He noted that market forecasts were strong earlier this year, and that the relationship between factory bundles and structural grades is coming back into balance.

Other associations followed suit, saying their charter wouldn’t allow them to make market predictions. But while ISRI couldn’t make predictions, it could report information from members and other sources.

Garino offered an ISRI article that, quoting the International Iron and Steel Institute (IISI) in Belgium, states, “Overall, IISI anticipates a sustained period of higher global steel production and ongoing tightness in ferrous scrap which means that ‘prices for scrap are going to stay high.’ By 2010, the group projects, global steel production will total 1.3 billion mt, requiring 388 mt of merchant scrap – 96 million mt more than was needed in 2004.”

Global predictions look good, but what does that mean closer to home?

Craig Robbins, a buyer at Tube City’s brokerage office in Gary, Indiana, was skeptical of his prognostication skills. “I just finished taking my foot out of my mouth,” he said, noting that March prices weren’t as expected. “We thought that March would maintain a February level, but it didn’t – it dropped significantly,” he said. “As high as things got, and to drop off so fast, I don’t think anybody expected that.”

Other market anomalies made him cautious. “January is usually strong, but it dropped.”

As far as the future, Robbin said, “Nobody knows.” But common market predictors look good. “Everybody’s order books are still strong.”

Like others, Robbins noted influences on the domestic market. “Overseas will play a role, when and if they enter the market again, which will send prices through the roof again.”

He noted that while overall “it’s a guessing game,” there were some things he was more sure of. Because of the relatively low quantity of structural grades available now, partially due to weather conditions, “in the near future, I do not see it dropping, because it can’t.”

A man of few words, Jay Rabinovitz of Schnitzer Steel said, “We are very optimistic about the market. This has been a wild ride we’ve been on.” He called the future market, “Total uncharted territory.”

To bring the future into perspective Herb Lewis, raw material buyer at International Steel Group, Inc. (ISG) looked into the past. “At an ISRI meeting in 1996, Albert Cozzi stood up and predicted that bundles would be over $200 a ton, and was laughed off of the stage.”

While that prediction seemed to be wild exaggeration in 1996, within two years of that meeting, prices hit the predicted mark, and in November of the past year, prices were twice as high.

Lewis noted that dealer bundles dropped $60 recently, but he wasn’t alarmed by the drop. He said, “Prices peaked out in the November time frame and have been correcting since.”

He also noted, “Prime grades are dropping faster than the obsolete grades.” The explanation for that disparity is that steel mills are mixing some of the lower grades of scrap steel in with the prime grades, so there is more demand for the obsolete grades as an ingredient in the steelmaking process.

Lewis added, “Prices are as high as I’ve ever seen. Ores, alloys, all the stuff we need to make the steel are ridiculously higher.”

As his crystal ball clarified, Lewis said. “April, May, the market may kick upward, then hit a balance point.” The export market, and particularly China, will affect domestic prices. Lewis said, “When the export market heats up, that will prop up the prices a bit; probably mid-summer.”

Jay Marshall of Allied World Resources (AWR) was even more positive. He said, “I see the prices going north as they have been.”

“The Marshall Theory,” he said, “is that ‘all boats float in the same water.’ You can’t look at scrap steel prices alone; you have to look at other products the steel mills buy.” He noted that iron ore prices had been rising dramatically.

Marshall said that scrap prices are “going to go up until China and the world economy stops growing.” He explained that the demand for steel in China is higher now than in other countries. Until demand is met and world markets equalize, prices will keep rising.

He said that there are two major factors in the price of scrap, “the imbalance of supply and demand and the increasing price of fuel oil.” When supply and demand come into balance, prices will level off.

Steve Wulff, vice president of marketing and communications at David J. Joseph said, “Prices literally exploded last year,” but noted that, “in the past 60 days [at the time of the interview] prices have adjusted back down.”

Wulff said, “Our general sense over the next few years, prices will be higher than in 2002 and 2003, but lower than in 2004. There was an awful lot of emotion in the market,” which drove prices higher than they should have been.

Positive predictors, according to Wulff, are that the steel business is better and the demand for steel on the worldwide market is growing.

Greg Crawford vice president of operations for the Steel Recycling Institute said that historically, going toward the summer season, prices would always trend down, “but that rule has been in disarray over the past few years.”

Like others, Crawford pointed to China’s buying as an “ongoing uncertainty” in what could have been a relatively predictable market. “When China enters the market, there is a large purchase with not much advance notification,” he said. Available scrap for the next month is disrupted; it leaves a void behind for the domestic markets, so scrap prices are higher.

When scrap prices get high enough, scrap substitutes – virgin iron units – are used. “There is an economic balance point,” Crawford explained, where scrap substitutes make economic sense in steelmaking. He noted that prices of new steel products had been kept artificially depressed for years, but now those prices have gone up.

As for the future, Crawford summed it up best: “We’ll all watch with avid interest.”

 


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