July 2005

Scrap steel market update
by Donna M. Currie E-mail the author

A few months ago, scrap steel market predictions were optimistic – perhaps overly so. Today, the rosy glasses have come off and stark realism has set in. The market is “going through a period of adjustment,” according to Bob Garino of the Institute of Scrap Recycling Industries (ISRI).

Jay Marshall of Allied World Resources simply said that he was “puzzled by the whole thing.”

But the news is not necessarily bad. Greg Crawford, vice president of operations for the Steel Recycling Institute (SRI) explained that it’s normal for scrap prices to decline in summer. “In the summer, normally that is the harvest season for scrap where scrap more easily comes into the collection points at the various yards and as such with the supply getting larger in the summer the prices tend to trend down as the supply becomes more ample.”

So we expect summer scrap prices to go down as the supply increases. “But,” Crawford said, “we have not seen an abundance of supply due to the collections that have taken place over the past couple of years by way of export scrap to China.”

Crawford sees the market doing better than normal. “As we look at information about the price of steel scrap continuing through the summer, they seem to be holding level which is actually a pretty strong economic signal…And indeed, order for new steel products is following in turn.”

“In order to meet the orders,” Crawford explained, “the demand has to be even stronger than normal in the summer to be a level trend. With the scrap prices holding firm throughout the summer, this is good news for the recycling business.”

Market predictions are like weather forecasting; sometimes the fronts move through before the picnic is over. Bob Garino explained, “We had some real concerns about the second half – but it came sooner.”

It’s not so much a matter of a bad economy, but that “mills have healthy inventories on both the finished side and the raw materials side,” according to Garino. “There were some real reasons prices were bid up and everything got ahead of itself. A lot of over-buying occurred.”

So, while the markets are good for finished product, Garino said there is “available material to meet the needs of both the domestic and the international markets,” which means that not as much scrap is needed, thus prices have gone down.

The scrap price also “depends on the strength of the global economy,” Garino said. “There are concerns of a slightly slower growth rate.”

As usual, China plays a role in the market. If China doesn’t use the steel that they have already made, they may sell it on the world market. China is still not going to be a net producer of steel, but that extra steel on the market will have an effect. “China is key to the ferrous market,” Garino said.

Garino also explained the role that auto bundles have on the market. He said they have a greater significance in the market than the small quantity justifies, “but they set the tone for the market.” According to Garino, last November, the price was $442.50, and this June it is down to $155, which is a 65% drop. But if you look at past years, this year’s price isn’t bad. In 2004, the price was $161, in 2003 it was $103, in 2002 it was $97 and in 2001 it was $77.

“Last year at this time, the prices were on their way up,” Garino said. But now we’re looking at prices going down from record highs. Since the prices went down so fast, some people may think that it’s an over-reaction and that the market will come back, so they will lay down scrap and wait. “It’s a guess,” Garino said.

Herb Lewis, raw material buyer at International Steel Group, Inc. (ISG) saw a softening in the steel sector, “we’re not chasing volume with bad pricing,” he said.

The simple fact is that there is just less demand for scrap. “Electric furnaces have scrap on the ground, and they aren’t even buying this month,” Lewis said. When the auto makers are buying for the new model year, there will be more demand for steel in the market. “July is going to be the leveling-off month, then it will begin going back up.”

Right now, mills aren’t buying much scrap, and if anyone has scrap they have to sell, they aren’t getting much for it. On the other hand, people aren’t selling much of the scrap they have – they are holding it for better prices.

As far as market highs, “I don’t think it will get to the $400+ level again – at least not in my career,” Lewis said.

Steve Wulff, vice president of marketing and communication at David J. Joseph said, “Demand has gotten very slack as mills have cut back operating turns,” and are doing maintenance at the plants sooner than they had originally planned.

For example, U.S. Steel is taking down its Gary Works blast furnace three months early for scheduled improvements and Mittal has taken down furnaces in Cleveland and outside of Chicago.

Wulff said that new mill orders are few and far between, while the scrap supply is good. And at the same time, “customers had more steel inventory than anyone knew about,” so there is no need for mills to produce steel they won’t be selling. “This isn’t a market that is stimulated by low prices,” Wulff explained. If people don’t need the material, they don’t buy it just because the prices are low.

Export is very quiet, but, as Wulff said, “China doesn’t telegraph its intentions.”

June may still not be the bottom, “but there isn’t a lot of room on the bottom for price adjustments,” according to Wulff, while there is still a “fair amount of volatility in the market.” Wulff predicted that there could be “bounces of $15-$20-$30” at a time, but no sustained trends.”

When asked about the recent price drop, Brad Zolla at Tube City’s brokerage in Gary Indiana said, “The most obvious reason is the slowdown in the automotive sector.” Sheet mills are slow, he said, while “bar mills are running full through the summer.” But both draw from the same pool of scrap, so there is plenty of scrap available.

That comment explains the disparity in opinions about the mills’ activity. Whether you see a slowdown or not depends on whether you’re talking to people who are familiar with sheet mills, typically in the Midwest, and their manufacturing customers – or whether you are talking to bar mills, typically in the south, who sell to the construction industry.

As far as the future, Zolla has heard a few different scenarios. Most people, he said, “don’t expect another large drop, while others are very bullish.” He also said that some of the scrap dealers “would rather hold onto their scrap rather than selling inventory at a loss. They are banking on the market coming back.”

Whether that is a good bet or not, Zolla couldn’t predict. “It’s all supply and demand,” he said.

So, while the price has gone down, no one seems to be concerned about the general health of the market. The consensus is that prices will go up, down, stay level, or wobble around a bit. In a nutshell, it’s business as usual.

 


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