Lower mill operating rates help create ferrous scrap price volatility, one analyst contends.
Price volatility has been reintroduced into the ferrous scrap market in the summer of 2012, causing the moderator of the 2012 Institute of Scrap Recycling Industries Inc. (ISRI) Commodities Roundtable Forum ferrous scrap session to ask panelists what had caused the return of roller coaster pricing.
The answer to the question, posed by moderator Frank Goulding of Newell Recycling of Atlanta LLC, East Point, Ga., was tied to the lower operating rates of steel mills in the United States by panelist Michelle Applebaum of MARI, Highland Park, Ill.
As mills adjust their production levels, said Applebaum, “I would estimate that for the next five to seven years, until mills start operating at a higher capacity,” ferrous scrap price volatility will be part of the picture, she commented.
To combat the volatility, many steel producers are turning to direct reduced iron (DRI) and other scrap supplements, and the timing may be right to do so, said Applebaum. Previously, the high cost of natural gas presented a barrier to the widespread use of the feedstock. However, the abundance of natural gas being produced in the eastern United States has lowered that cost significantly.
Mills that are concerned about a shortage of ferrous scrap may not need to worry too much, said panelist John Keyes, a district trading vice president with Tube City IMS, Glassport, Pa. “I’m amazed at the number of places scrap will come from over the years,” he commented, pointing to the demolition of steel mills, automotive plants and rail cars.
More recently, Keyes said he has seen scrap coming from the demolition of paper mills throughout North America and sugar mills in the Southern U.S. and the Caribbean region. “It’s a resilient market; when the scrap price makes it affordable, demolition follows,” he remarked.
On the demand side, Keyes said the recent slowdown in Chinese economic growth has had a ripple effect on ferrous scrap demand in Turkey. “Chinese billets are being sold there for a cheaper price, so [Turkish mills] are shutting down their electric arc furnaces (EAFs) while keeping their rolling mills going.”
When asked about the narrow price difference between prime grades of ferrous scrap and shredded and heavy melting scrap (HMS) grades in the summer of 2012, panelists pointed to melt shop preferences. Even though prime grades may have been tempting, EAF melt shop managers “tend to not like change,” said Fred Hauptstueck of Steel Dynamics Inc., Fort Wayne, Ind., so they kept buying shred.
Keyes of IMS agreed with that assessment, noting that buyers from integrated mills with more flexibility in their feedstock “were the winners” during that timeframe, when “big, heavy square things were on sale.”
Panelist Young-Jin Chang of CME Group, Chicago, provided an overview of the CME’s new futures contract service for the U.S. Midwest #1 Busheling Ferrous Scrap grade tied to the American Metal Market price, and she fielded questions on how it might be of use to ferrous scrap traders. Goulding of Newell Recycling predicted that his company will “probably continue to sell scrap at the beginning of the month” but said the index could “provide a good indicator of where the [scrap] market is headed.”
Keyes of Tube City IMS said that should the index take hold, it could mean more frequent communication when it is purchasing scrap on behalf of mill customers. “It’s their money,” he noted. “We’d be joined at the hip more than we already are.”
The ISRI Commodities Roundtable Forum was Sept. 11-12 at the Hyatt Regency Chicago.