Ferrous scrap gains as steel prices soar

Features - Ferrous Pricing Trends

After bottoming out in mid-February, steel prices are touching new highs again.

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Steel prices, which had been on an upward trajectory since the COVID-19 pandemic, started softening late in the third quarter of 2021 as steel supply increased and lead times shortened. Ferrous scrap prices began adjusting slightly downward in tandem with this trend as producers managed their margins. However, this downtrend, which was expected throughout 2022, shifted gears with Russia’s invasion of Ukraine Feb. 24.

Going down, then up

Hot-rolled coil (HRC) steel prices bottomed out at around $920 to $950 per net ton in mid-February from a height that approached $2,000 per net ton ($2,204 per metric ton) free on board (fob) U.S. Midwest mill in late September 2021. Lead times quickly grew from three to more than six weeks as steelmaking raw material disruptions elevated prices, fuel prices surged and some steelmakers increased raw materials demand to fill the void created by the lack of steel from Russia and Ukraine in the global market.

A leap in prices

The changing dynamics of steel availability, higher raw materials prices and increased orders set finished steel prices soaring in March. They were near $1,400 per net ton fob U.S. Midwest mill in late March following the material’s leap by an average of 43 percent to $1,300 per net ton fob by mid-March.

High import prices into the U.S., potential shortages in Europe and overall continued strong activity despite lower automotive production had some market participants predicting that finished steel prices could rise to the September 2021 highs of $1,930 to $1,960 per net ton fob, while others believe $1,600 per net ton fob could be the limit into the summer because of lower buying activity from customers compared with the more optimistic late 2021 demand and the continued chip shortage.

In rebar, fabricators were beginning to experience a slight easing of prices by early February, but now with imported rebar prices higher than domestic prices, most anticipate a supply crunch into the summer. When imported offers were withdrawn after the war began and returned at substantially higher prices, fabricators flocked to domestic mills to book orders, buying most of the product that was available in the open market. Whether imported or domestic, rebar consumers expect deliveries by late June or July at best.

Rebar prices Feb. 23 stood at a heightened $1,000 to $1,020 per net ton ($1,102 to $1,124 per metric ton) fob U.S. Midwest mill and rose by 14 percent to $1,160 per net ton in late March. Prices are anticipated to increase further through April and May, with buyers having no choice but to accept them.

Steel producers of HRC, rebar and other finished steel products do not expect higher prices to stop projects, pointing to a similar trend in 2021. Any risk to projects and continued growth, however, is feared from spiraling inflationary pressures, higher interest rates and high oil and gas prices, as well as inadequate access to reliable energy sources. The latter has been an issue in the EU market and not anticipated to have the same effect in the U.S. because of domestic oil and gas production.

Impact on scrap

Ferrous scrap was not the main driver for the rise and fall in steel prices over the past two years. Ferrous scrap and finished steel prices remained related but became somewhat disengaged as economies contracted because of COVID-19 and bounced rapidly after pandemic measures were implemented. Pent-up demand and extra purchases in light of supply chain headwinds heightened the immediate supply-demand gap that supported higher prices. U.S. mills also enjoyed protections from Section 232 and other anti-dumping and circumventing cases.

Ferrous scrap input costs have expanded since then, making them an essential driver for the uptrend in steel prices despite the short-term disengagement. Scrap supply and demand have remained relatively steady over the past year, but demand is anticipated to outpace supply in the near term.

Domestic ferrous scrap also is being pressured on export activity and prices that rallied since January. The growth over the last four months is evident in the daily Davis Index for Turkish imports of U.S.-origin heavy melting steel (HMS) 1&2 (80:20), which has risen every month since January from $457.50 per metric ton cost and freight (cfr) Jan. 4, to $496.69 per metric ton cfr Feb. 4, $629.94 per metric ton cfr March 4 and $652.89 per metric ton cfr April 4.

Scrap also is influenced by fuel costs as sellers report doubled monthly fuel costs since 2020.

Steel mills are referencing rising scrap prices to boost their pricing, with participants anticipating HRC settling at around $1,500 to $1,600 per net ton fob by the end of April. HRC levels approaching $2,000 per net ton fob in the near term also are not out of the question especially with supply limitations.

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Prime scrap demand increases

Mills often look at HRC versus No. 1 busheling as a historical profit indicator with a preferred spread of HRC over No. 1 busheling at approximately $200 per net ton minimum. Mills use the indicator to avoid losses when the gap narrows beyond this level.

Given the current trends, prime scrap rates will continue to increase as basic pig iron (BPI) surged after the war and is lifting the prices for domestic prime scrap grades. With No. 1 busheling rising to $800 to $900 per gross ton or more in April, depending on region and mill, with higher prices reported for springboard buys, HRC pricing will rise as well to maintain the mentioned spread. Grades such as No. 1 HMS, shredded and plate and structural (P&S) 5 feet will continue being supported upward but influenced by more flexible supply sources.

Supply & demand trends

The outlook for supply and demand points to some divergence, though many scenarios are possible, and markets along with prices have changed daily and sometimes hourly when considering a material like BPI as an example.

Ferrous scrap supply gradually is becoming limited in relation to present and future mill demand. The increasing tightness will result in scrap prices holding firm or rising. This trend could extend through 2022 and beyond, with more capacities coming online throughout the year.

The loss of scrap and BPI volumes from Russia and Ukraine also will continue supporting higher ferrous scrap prices. The loss of steel production in Europe because of high energy costs also has made some regional scrap loads available for export.

Disrupted supply, considering the current global geopolitical and economic risks involved, will boost steel prices yet again. Still, the market dynamic remains unclear beyond May. Until then, prices are expected to stay firm, as much depends on the outcome of the war, inflation and interest rates.

Tara Loftin and Zulma Herrera are ferrous analysts at Davis Index and can be contacted at tara.loftin@davisindex.com and zulma.herrera@davisindex.com