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An interactive Publication for Price Discovery, Data, Tools, News & AnalysisAn interactive Publication for Price Discovery, Data, Tools, News & Analysis
Ferrous ChallengesBy Michael Marley
The International Iron Metallics Association Miami, FL
October 18, 2013
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Current Market
• Soft Sideways market• Scrap speak – dealers would like prices to remain
unchanged, but somewhat expect a small $5-10 per ton drop
• Mills hear that as willingness to accept $10 per ton less, so offer $20 per ton less to test the market
Expectation
• Some mills were able to buy at lower prices early• But just for about 15 or 20 minutes• Prices then rebounded to September levels
Experience
Driving Forces Behind the Price Strength
• We’ve seen this “soft sideways but really down $10 per ton” several times in the past few years
• What were the driving forces for this sudden and unexpected strengthening this time?
Repeat Performance
• Demand is still strong for steel products• Mills making those products were buying as much
scrap as they normally do each month• Several flat-rolled mills announced price increases
of $20 to $30 per ton on the first Monday of the month.
• Negotiating new pricing contracts• Fending off efforts to move to futures based pricing
Mill Driven
Broader Goal Than Monthly Price Settlement
• In a soft sideways market, hot-rolled coil prices get driven down
• Better for mills to step up and stabilize scrap prices• Industry taking steps to move away from scrap
surcharges and adopt pricing discipline
CRU-Minus Contracts
• Mills have shifted their practice to keeping low scrap inventories – two weeks or less for some mills
• Meaning they have to buy scrap every month regardless of steel demand; shifting pricing power to the scrap dealers who know they will have sales
Low Scrap Inventories
Six Month Pricing Pattern Likely to Continue
• Early talk of $30 per ton not unusual mid-month• Unlike last year when prices would swing $40 to
$50 per ton from month to month
Strong Sideways Market
• Has grown to 20 million tonnes from 10 million tonnes a decade ago
• Unpredictable – monthly buys are inconsistent in volume and timing
Ferrous Export Market
Turkish Impact on Scrap Market• Scrap purchases from the US off almost 20%• Annualized impact is 1.2 million tons• Buy obsolete scrap – heavy melt and shredded• Buy in 30,000-40,000 tonne bulk cargoes• Sometimes buy 3 or 4 cargoes at a time.• Have bought as many as 10 cargoes within days of
each other• Don’t only buy during the first week of the month• Asian mills buy a mix of bulk cargoes and
containerized shipments
Demand
• All of the scrap comes from the East and Gulf Coasts and US mills must raise the prices to keep supply in the home market
• Can impact inland mills in OH and PA in heavy buying periods
• Scrap to Asia comes from the West Coast where there are less US mills competing for the scrap
Supply
Psychological Impact of Wild Demand Swings
• US mills typically buy in the first week of each month
• The price goes as high as it needs to for the scrap yards to collect the required scrap
• When the export demand spikes mid-month, it can displace the scrap headed for US mills
Risk of Being Caught Short
• Buying binges reduced this year• Demand more predictable• Market has adjusted with a more sideway pattern• But will it change? And when?
More Rational Pattern This Year
Challenge No. 2: Shortage and Oversupply
• Favorite scrap for the Turkish mills• Has been in tight supply this year• Despite their reduced purchases
Heavy Melt
• In oversupply this year• Why?Shredded
• Pool of obsolete scrap not as deep as it once was• Higher prices have drawn out more scrap including
demolition scrap• Some dealers have changed processing practices• Export scrap has lower specs and similar prices• US mills not interested in export scrap mix
How is this possible?
Shredder vs Shredder Competition
• Ferrous recovery from export 80/20 heavy melt is probably better than from junk cars
• US mills won’t buy it, and the export markets aren’t buying it, so it’s available and looking for a home
• Shredders happy to accept higher copper and aluminum as it helps their bottom line
• New high tech downstream separation systems recover these metals which account for the majority of shredders’ profit margins these days
Export Scrap Migrating to
Shredders
• Cars are now picked clean of heavy iron components like motors before they get to a shredder.
• Some shredder operators now estimate the ferrous recovery percentage from cars as low as 66% these days down from 75-80% formerly
Junk Cars Not a Great Source of Iron Anymore
Shredder Business Highly Competitive
• Snow and ice disrupts scrap inflow into yards• Usually only affects obsolete scrap flows as prompt
industrial scrap is a by-product of manufacturing• Some dealers begin to “lay down” tons in the fall at
lower costs hoping to capitalize on the anticipated higher prices
Winter Prices Usually Higher
• Shredder overpopulation• Moderate summer weather brought out a lot of old
scrap• Dealers have lowered their scale prices• Auto wreckers and smaller scrap dealers may hold
feedstock off the market• Intense fight for junkers for those who don’t own
feeder yards• Mill-owned shredders don’t have freight costs or
profit requirement
Not So This Year –Why?
No. 1 Busheling Role Setting Prices
• Auto industry’s factory bundles were the benchmark for industrial scrap for many decades
• Role defaulted to busheling when factory bundle sales ended
• Busheling is cleaner and yields more raw steel than shredded
• Typically sells for a $40-50 per ton premium to shredded
• In 2008, some mill paid a $300 per ton premium
Bellwether -Premium to
Shredded
• Strong automotive production increased busheling supply last year
• Busheling prices dropped below shredded• Faced with an oversupply, big yards held on to only
the higher quality black busheling to sell to specialty mills and foundries
• And tossed unsold mill-grade busheling into their shredders
• This year, busheling selling for a $70 per ton premium to shredded
Price Inversion Last Year
Impact of Nucor’s New DRI Plant
• At the end of 2013, Nucor will bring online its new 2.5 million ton per year direct reduced iron ore plant in St. Parish, Louisiana
• Nucor already has a 1.5 million metric tonne plant in Trinidad that feeds DRI to its Berkeley County sheet mill
• Some believe this DRI will displace only pig iron, but it could also displace busheling
Challenge to Busheling
Supremacy
• More than iron, the new DRI plant provides Nucor a powerful tool in the David J. Joseph’s traders hands when bargaining for scrap
• The fear of being caught with 2,000 tons of busheling scrap will shift the pricing power away from the scrap dealers
Leverage
“Continuing Orders” in Jeopardy
• Mills maintain ongoing relationships with key local suppliers consistently taking a specified tonnage
• Volumes of busheling scrap are highly predictable, pretty consistent and allocations are generally set
Scrap Speak for Regular Monthly
Buys
• With the new DRI plant, Nucor now has the option of taking the busheling scrap if the price is attractive, or opting to pass and using internally produced DRI
• This would cause dealers to scramble to find new homes for the displace scrap, competing with each other, and putting downward pressure on prices
• Thus, there will be significant pressure on scrap dealers to accept whatever price Nucor is offering
Nucor DRI Adds Price Discipline
Nucor Won’t Exit the Scrap Market
• Nucor not likely to abandon the new DRI plant• But will likely continue to use prime scrap• Just maybe less• For sure, will use the flexibility in negotiating scrap
purchases
Nucor Will Use DRI
• CEO John Ferriola suggested a potential second plant at the recent DRI conference in New Orleans
• Just a possibility and years away• Some would argue it would be foolish to free up a
lot of prime scrap for its rivals• And in particular, the new sheet mill that John
Correnti is building in Arkansas
And Scrap
Nucor Leader and Pacesetter
• If the cost equation works, there could be other plants producing iron for domestic mills and further weakening the demand for busheling
• VoestAlpine plans to build a DRI plant in Texas and ship iron to Europe
• Republic Steel may be considering a DRI plant for its new melt shop in Lorain, OH
Me Too, Me Too
• In an interview with Steel Business Briefing in May, Nucor chairman Dan DiMicco suggested that the company could become a merchant producer of DRI/HBI in the future
• Won’t have to look far for customers• Other US steelmakers have been frustrated by the
erratic behavior of some offshore DRI suppliers.
Merchant Producer?
Busheling Not As Sexy As It Once Was
• When prompt industrials steel scrap was solely a by-product of the steel sheet in integrated mills, it was seen as a lot cleaner scrap with fewer residual or tramp elements
• That’s not true any longer. Industrial steel scrap from the BOF-made sheet steel is now mixed with the EAF sheet steel scrap
No Longer Pure
• More steel mills and foundries now buy pig iron to dilute the residuals in bushing as well as what they are already seeing in shredded and heavy melt scrap
Pig Needed to Dilute Residuals