Domestic ferrous scrap market remains on ‘sideways’ trajectory

A soft sideways market at the start of May was something not many domestic ferrous scrap market participants were expecting as April progressed, but according to Kalvin Adams, vice president of business development at SA Recycling, predictions of a strong sideways market didn’t materialize by the end of that month.

During a ferrous market update webinar May 8 hosted by the Recycled Materials Association (ReMA) and market intelligence service Davis Index, Adams, whose California-based company operates approximately 130 scrap yards across the United States, said mill cancellations played a role in the shift.

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“I think a lot of participants were awfully surprised at the last week of April when we started getting mill cancellations,” Adams said. “I think we all started out April thinking May was going to be a strong sideways [market]. I think that was a pretty common belief in the market, and then at the end of April we started getting mill cancellations from all the major consumers, whether it was prime scrap, shredded scrap [or other products], and that was in the Southeast and on the West Coast.

“So, enter a soft sideways market after you start getting cancellations. We’re currently navigating that entire landscape right now.”

In the short term, he said he’s not entirely sure where things are headed but added, “We’re going to fight for sideways, and I think that’s where the market needs to be.”

He noted that the export market has been somewhat weaker recently, with a large volume of low-cost Chinese billet currently available that is lowering containerized demand off the East Coast and West Coast, and that domestic mills are attempting to take advantage.

“I’m not sure where exactly this month trades out,” Adams said. “I think, over the medium- to long-term, there’s so much capacity coming on, especially from the EAF [electric arc furnace] side, that there’s going to be a shortage of scrap. I think this year overall we’re going to trend higher.”

Davis Index founder and CEO Sean Davidson moderated the webinar and asked Adams whether the April market optimism was rooted in fundamentals that scrap companies hadn’t quite been able to realize by the start of May, and Adams said that in March and April, scrap flows were not substantial, which created such optimism.

“I think there seemed to be a shortage on the supply side from the actual dealers and processors,” Adams said. “I think that lower amount of flows really lent credence to that possibility of a strong sideways [market] because markets really had to pick up to get additional flows to get the mills what they wanted.

“A lot of people took smaller packages expecting that we were at the bottom, and I think dealers filled those packages quicker than we originally thought we would,” he added. “When the mills saw packages were filled and things were flowing better than expected, I think that’s where it comes in and where they’re able to hold the market down a little bit. … You can only hold back so much.”

Straight from the source

Adams wondered if the decisions of steelmakers Nucor Corp. and Cleveland-Cliffs to start reporting their own consumer spot prices (CSP) for hot-rolled steel coil (HRC) would increase market volatility domestically, and if other mills might begin to do the same.

Both companies began disclosing their HRC pricing at the start of April. As of May 6, Charlotte, North Carolina-based Nucor listed its base HRC price at $765 per ton, while Cleveland-based Cleveland-Cliffs’ latest listing, on April 26, priced it at $850 per ton.

RELATED: Nucor makes online steel pricing commitment | Cleveland-Cliffs publishes HRC price

So far, Adams said he hasn’t seen the mills’ price reporting play out in the market, but it’s very early.

“We’re not sure about the methodology of how it’s actually being reported, or how they’re arriving at those numbers,” he said. “And I don’t know if anybody really understands the impact it’s going to have on the markets. But it represents a huge shift and could percolate down to the dealer level and serve as a benchmark for what the scrap price should be and could be a huge change for our industry.”

Davidson said it’s still far away from being proven as a useful instrument for the steel market as it will take time to establish, but it will be very interesting to watch. “I like that publicly traded companies are at least willing to share. We have to see and track how good it is on the way down and on the way up. Overall, I think it’s a good development. More transparency is always good for the industry.”

The outlook in Asia

Arshdeep Singh, a director at Singapore-based trading company Vital Solutions, said that while demand has been weak in Asia recently, prices have held relatively steady.

He noted that China has played a major role in that market weakness, especially in northern Asia, due to issues in its real estate sector, among others. “You see some of those exports, billets come out and start at cheaper and cheaper levels,” Singh said. “The flat products and HRC are coming out and being offered at lower levels.”

He added that Chinese exports are affecting everything in the nearby region, which has been a key reason for the down market there, and the same story has been playing out for countries such as South Korea, Taiwan, Vietnam and others with respect to a down real estate market and slowed construction projects, for example. Additionally, he pointed to high interest rates and a general lack of demand as hurting the ferrous sector.

“Capacity utilization rates of mills are down,” Singh continued. “Everything has been fairly negative the last three to four months, and we haven’t seen this in the markets in quite a while.”

In South Asia, Singh said Bangladesh and Pakistan have experienced severe foreign exchange issues. “Foreign banks can’t extend limits to mills who want to import scrap for their steel. Their first preference would be to bring in food products and fertilizer [for example]. Steel can suffer. It’s fairly tight on what Bangladesh and Pakistan will import in regard to scrap.”

He said, however, that India has maintained some stability and hasn’t had financial issues, and mills have begun restocking since the country’s general elections began April 19.

Looking ahead

Adams and Singh both shared what excites and worries them about the months ahead.

“The most exciting thing right now is increased capacity coming online,” Adams said. “Another mill being built or more capacity coming up. It shows there’s going to be a supply shortage with all that capacity coming online. We’re moving to more green steel, so it will require more scrap. It’s going to help scrap dealers and processors more than anything.”

His biggest worry was the ever-changing floor for scrap pricing and what harmful effects a “black swan event” could have on the market.

“Inflation is not slowing down, and production costs are continuing to increase,” he said. “That new floor for sales prices for that everyday dealer and processor, that’s going to determine how long everybody can stay alive. Production costs are getting higher. … The floor is constantly resetting to a new high as labor and production costs rise. The fear would be that an event would bring prices below that newest floor, which would then hurt the market overall. Every year there’s a new floor being established.”

Singh agreed that one exciting aspect is the increasing importance of scrap for mills as companies around the world transition to producing green steel products. “There’s growth in different markets, and this pull for scrap in different markets. But what’s also concerning is if it becomes a regional thing and disrupts global flows. It could be interesting as it plays out.”