In the third quarter of 2018, the steel industry in the United States enjoyed growing levels of output. In mid-September, the nation’s mills were operating at slightly more than 80 percent of capacity, a level seldom reached since the great plunge in output tied to the financial crisis of 2008.
For U.S.-based steel companies, the increased activity has led to growing revenue and considerable profits. One steelmaker after another reported healthy results for the first half of 2018, and more good news is expected when second-half results are announced.
Ferrous scrap recyclers are by no means singing the blues in 2018, but some of their potential prosperity has eluded them because of political and economic circumstances in the Republic of Turkey.
Turkey makes steel that is shipped throughout the Middle East, North Africa and other nearby regions. Steelmakers there rely on scrap-fed electric arc furnace (EAF) technology, putting the nation annually atop the list of ferrous scrap importers—and giving it an outsized role in determining the price of scrap in North America and Europe.
This past decade, Turkey is one of the world’s nations that has seen an elected president take consistent measures to put himself in a position of permanent power.
Since assuming the role of prime minister in 2003—and then president in 2014—Recep Tayyip Erdogan has taken advantage of his popularity to clamp down on potential rivals and tip the scales so his Justice and Development Party (AKP) can enjoy an increasingly secure perch atop Turkey’s government.
During much of Erdogan's time in power, his maneuvers have had few negative impacts on Turkey’s economy. His self-reliance on steering the ship of state appears to have encountered troubles in 2018, however, and the ripple effects reach all the way to the U.S. ferrous scrap market.
Despite the health of the U.S. domestic steel industry, ferrous scrap prices exhibited a downward trend in August as portrayed by transaction figures for the first three weeks of that month collected by Pittsburgh-based Management Science Associates (MSA) Inc. for its Raw Materials Data Aggregation Service (RMDAS). September pricing, as gathered in surveys conducted by American Metal Market (AMM), showed a second set of similar price drops.
RMDAS pricing for August showed No. 1 heavy melting steel (HMS) prices dropping $22 per ton in August and shredded scrap declining $21 in value. The two grades, which also are most commonly exported, declined by similar or slightly higher amounts in the RMDAS North Central/East region, where Turkish mill buyers have their greatest influence.
Economic and steel industry-specific woes in Turkey have played a lead role in the price drop. The value of the Turkish lira and expectations for the Turkish economy dropped in the summer of 2018 after Erdogan made questionable decisions and the Trump administration imposed increased metals tariffs against Turkey.
The movement of ferrous scrap into Turkey in August dropped sharply in part because the United States hit the country with tariffs that ranged from 25 percent to 50 percent on its steel. By the second week in August, mill buyers throughout the U.S. anticipated that scrap recyclers in the Northeast would have plenty of shredded and HMS scrap available to serve the domestic market.
According to a web posting by London-based Freight Investor Services (FIS), the initial uncertainty surrounding the tariffs made some Turkish banks reluctant to open letters of credit (LCs) or caused them to engage in long delays in issuing the LCs to Turkish steelmakers seeking to buy scrap.
Adding to the woes of Turkish steelmakers was the decline in value of the Turkish lira, which could increase the price of scrap imports considerably for Turkish mills.
The problems for the lira began before the U.S. tariffs took effect. In early July, Erdogan replaced Turkey’s established and experienced chief economic advisor with his son-in-law. The appointment drew a hostile reaction from investors and currency traders, sending the nation’s stock market index and the value of its currency sharply downward.
The negative sentiment in Turkey was likely a main reason U.S. mill buyers returned from the July 4 holiday feeling they had the upper hand, stalling what had been upward momentum in ferrous scrap pricing. As Turkey’s economy hit its rough patch, U.S. mill buyers knew processors on the East Coast would need to turn toward domestic mills if they needed to sell ferrous scrap.
Turkey’s troubles led not only to a halt in rising ferrous scrap prices in July but also to the subsequent declines of about $20 per month in the U.S. market in August and September. Those price drops occurred despite consistent strength in domestic steelmaking output. To what extent Turkey and the global scrap market will recover in the fourth quarter have become leading issues for scrap recyclers as 2018 draws to a close.
Blip or trend?
A saying within economics circles holds that there is no cure for high prices like high prices. That is, as the price of something becomes inflated, the market will react by buying less of it, weakening pricing from the demand side.
The opposite can hold true in the global ferrous scrap market: When prices fall rapidly, opportunistic buyers can swoop in and stimulate demand as quickly as it had previously disappeared.
In late 2018, the reemergence of demand could be coming from several different places, including Turkey itself. By mid-September, AMM was reporting that mill buyers in Turkey were again booking bulk cargoes off the U.S. East Coast, in part because lower prices made returning to the U.S. market advantageous.
Within Turkey, a September Wall Street Journal article portrays the economy as tilting between a recession or significant inflation. Turkey’s greater than 5 percent gross domestic product (GDP) growth in recent years has been good for its steelmakers. A domestic recession, though, would put pressure on steelmakers to rely even more on exports.
Despite the U.S. tariffs, thus far in 2018, Turkey’s steel producers are retaining their ability to tap into overseas markets.
In its figures for the first eight months of 2018, the Turkish Steel Exporters’ Association (ÇiB) reports steel exports from Turkey valued at $9.6 billion, representing a 28.5 percent increase compared with the same time frame in 2017.
According to an online report from the Günesli, Turkey-based Hürriyet Daily News, the news in 2018 has not been all good as exports of construction-sector steel products, which the newspaper describes as “the main export items of the steel sector,” have been decreasing because of import policies set not only by the U.S. but also by Egypt and the United Arab Emirates.
FIS and various media outlets have reported that, in response, steelmakers in Turkey have shifted their attention to selling more finished steel products into Southeast Asia (where China has traditionally been the major steel supplier).
AMM’s mid-September report indicates this geographic redirecting effort was causing Turkey not only to re-enter the U.S. scrap market but also to bid up prices. A steel shipper from Turkey told AMM that to justify higher steel prices to its buyers in Southeast Asia, Turkish mills need to point to higher ferrous scrap prices in the U.S.
Beyond Turkey re-entering the market, lower ferrous scrap prices tend to trigger more containerized ferrous scrap sales off the East Coast to India. As well, the market in the fourth quarter seems poised to receive ongoing demand from U.S. steel mills operating at a healthy capacity rate.
Nonetheless, ferrous scrap recyclers in the U.S. have learned from recent scrap export history to observe economic and political events in Turkey closely. (See the sidebar “A history of imports” on page 85.)
If Turkish mills were to struggle in the face of a difficult economy, or if they opt to turn away from the U.S. scrap market in favor of Russia or Western Europe, the impact on U.S. scrap prices will be sudden and significant.