April 2008

Steel industry sees prices pacing consumption

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Imports and exports experience sea-borne freight rates nearly four times higher than normal.

A slowdown in the economy is not hurting demand for scrap steel.

High scrap steel prices are helping to boost the bottom line at scrap dealers, according to John Anton, an economist in Washington D.C. for the forecasting firm Global Insight, Inc. But he said higher prices are often neutral, because dealers also have to pay more for material. High prices mostly help steel suppliers who have a captive ore supply.

“It is certainly helping integrated mills. They are getting the benefits of high prices driven by scrap without having to pay high prices for ore,” Anton said.

High production by domestic mills, plus exports are driving high prices, Anton said. Mills were caught short on supply, he said. Mills in Turkey, for example, were hit when bad weather in Russia and the Ukraine prevented Turkish mills from buying scrap in Eastern Europe. Turkey instead turned to the United States to buy scrap supply.  

The biggest issue facing the scrap steel market is a tug of war between imports and exports, Anton said. Plus, sea borne freight rates are high – about four times higher than normal. He said that he expects the spike in freight rates will not last, however.

Steel producers are noticing the higher prices. John Surma, chairman and chief executive officer of Pittsburgh-based United States Steel Corp, mentioned higher prices for scrap while discussing the company’s quarterly results. “We expect significant cost increases for raw materials, particularly for purchased scrap, coke and alloys,” he said.

There is currently enough demand for steel to justify higher prices, said Bob Garino, director of commodities at the Institute of Scrap Recycling Industries Inc., a trade association in Washington D.C. He cited higher input costs as a reason for higher prices.

“You have a lot of cost side pressures that the steel mills have to contend with. We are seeing higher steel prices based on cost push as opposed to demand pull,” he said.

“We’ve had a weak dollar and that makes both scrap and finished steel more attractive to offshore buyers,” Garino said. “The export market has been very strong.”

Steel production worldwide is increasing, according to the International Iron and Steel Institute in Brussels. Crude steel output totaled 113 million metric tons in January, an increase of 4.9 percent compared to January of 2007. The United States produced 8.4 metric tons in January, an increase of 11.4 percent over the same month last year.

Garino said that he does not anticipate a let up in global steel making. He said that he expects China to lead the way with other markets in Asia following close behind.

“I am fairly optimistic about the United States’ economy. I think all this talk about recession will pretty much fade away, certainly before mid-year,” Garino said.

Garino said that the scrap steel industry is more of a lagging indicator of the overall economy than a leading indicator. He said that a steel mill is not going to buy scrap material unless it has orders to fill. “If you look at the individual markets, you are not seeing great demand, but obviously enough to keep the mills going,” Garino said.

Garino said a lot of the steel mills went into 2007 with rather low inventories. Therefore some of the current demand for scrap steel is inventory building.

Another factor that might impact the scrap steel market is consolidation. “The industry is rather fragmented. There are a lot of smaller companies that could consolidate into larger ones. I think that the industry could stand some consolidation,” Garino said.

The United States has around 2,000 scrap processors and more than 70 end markets that use scrap steel, according to the Steel Recycling Institute. The Pittsburgh-based trade association estimates more steel is recycled than aluminum, paper, glass and plastic combined each year. The steel recycling rate is estimated at 68.7 percent.

“Prices are subject to demand and the forecast for demand worldwide is increasing, thus, prices will follow,” said Bill Heenan, president of the Steel Recycling Institute. Heenan cited growth in demand for steel from both China and India.

“This boom is directly attributable to infrastructure development and nothing uses more steel than buildings, highways, bridges, airports, and other infrastructure,” he said. “Pricing has been steadily increasing as consumption has steadily increased.”

The total value of domestic purchases of scrap steel from all domestic purchases and exports was $20.7 billion in 2007, up about 37 percent from 2006, according to research by the United States Geological Survey, part of the Department of the Interior.

An estimated 66 million tons of steel was recycled in steel mills and foundries throughout the year. Of that total amount, exports of ferrous scrap increased to an estimated 16.2 million tons from 14.9 million tons in 2006, according to the survey.

Most exports went to Turkey, China, South Korea, Canada and Taiwan, in descending order. The export of the scrap material increased in value from $4.2 billion in 2006 to an estimated $6.8 billion in 2007, according to the Geological Survey.

The steel recycling rate for automobiles in 2006, the latest year for which statistics were available, was about 104 percent, according to the government research.

A rate greater than 100 percent is possible because the steel industry recycled more steel from automobiles than was used in production of new vehicles during the year.

The recycling rate for appliances and steel cans was 90 percent and 63 percent, respectively, according to the survey, while the recycling rates for construction materials was 98 percent for plates and beams and 65 percent for rebar and other materials.