Counting on a rebound
Photo by Brian Taylor

Counting on a rebound

Features - Ferrous Commodity Focus

As vaccination rates rise around the world, steelmakers and ferrous scrap processors are expecting healthy global demand to follow.

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May 11, 2021

Photos by Brian Taylor
What awaits the ferrous scrap market in the final two-thirds of 2021 is still tied to the pandemic as domestic and global steel demand depends in part on how household consumers, corporations and governments spend and invest postpandemic.

Veteran ferrous scrap recyclers have experienced plenty of supply, demand and pricing volatility, but market conditions tied to the pandemic presented uncharted territory even for them in 2020. COVID-19 and related workplace restrictions have been the leading influence on the market since March of last year, but the rollout of vaccines finally could be bringing that era to an end.

What awaits the ferrous scrap market in the final two-thirds of 2021 is still tied to the pandemic, however, because domestic and global demand for steel will depend in great part on how household consumers, corporations and governments spend and invest to make up for the “lost time” caused by COVID-19.

Based on rising steel output levels, government stimulus proposals and perceived pent-up household consumer demand, if scrap processors can round up suitable supplies of material in 2021, it likely will be put up for bid in a global steelmaking market that needs the scrap.

If they build it, they’ll need steel

Trade associations in the United States and globally have been providing data that confirm what many scrap processors have experienced on the ground: Steel mills have been ramping back up in response to government infrastructure spending and a rebound in household consumer spending.

As the economies around the world opened back up (even with distancing restrictions in place), steel demand began rising in the second half of 2020 after bottoming out in April and May.

The steel output figures collected by the Washington-based American Iron and Steel Institute (AISI) and many of its overseas counterparts have shown that steelmaking rebound continuing in the first half of 2021.

As vaccines have been introduced, consumer (and some investor) optimism has risen further. In the metals sector, optimism also is being buoyed by President Joe Biden administration’s proposal to spend up to $2 trillion on U.S. infrastructure projects.

In an endorsement of the Biden plan, AISI President and CEO Kevin Dempsey states, “Each $1 billion in infrastructure spending requires about 50,000 net tons of steel, and each $1 trillion invested in infrastructure has the potential to create 11 million jobs in our economy over the next decade.”

Other steel- and scrap-consuming nations, including Mexico and India, likewise are proposing infrastructure spending as a way to ensure their respective gross domestic products return to pre-COVID-19 levels and their unemployment rates head downward.

One of the few countries that could produce less steel in 2021 is China, but not all industry observers would call that bad news. The nation has been accused of churning out more steel than it can consume, and administrators in the country also say they want to move away from emissions-intensive basic oxygen furnace (BOF) production to more recycling-friendly electric arc furnace (EAF) production.

Whether scrap generated in the U.S. stays home or moves into hungry export markets, its value so far in 2021 has exceeded the low prices processors contended with in 2019 and early 2020.

Prices that gain attention

In the first half of 2021, pricing tracked by Fastmarkets AMM and the Raw Material Data Aggregation Service (RMDAS) of Pittsburgh-based MSA Inc. have stayed in a healthy $430 to $570 range. That compares with pricing in much of 2020 when even prompt grades could not crack the $300 per ton ceiling.

Prices also have demonstrated a sharp divergence in value between obsolete grades and the prompt grades collected from factories in the U.S.

The dichotomy largely has stemmed from the supply side rather than demand and illustrates the concept of supply elasticity. Prompt scrap sold at a $138 to $164 per ton premium over obsolete grades in early April, according to Fastmarkets AMM surveyed pricing. This was caused in large part by a semiconductor supply bottleneck that had slowed automotive assembly activity.

The same April surveys show that while prompt scrap gained another 2.5 percent in value, obsolete shredded and No. 1 heavy melting steel (HMS) grades lost more than 4 percent of their value in April. This was thanks in part to relatively buoyant overall metals prices bringing sufficient volumes across scrap yard scales.

The financial reports and statements of publicly traded companies covering the first quarter of 2021 have included Indiana-based EAF steelmaker Steel Dynamics Inc. predicting possible “record earnings” in the quarter; Texas-based steel and recycling company Commercial Metals Co. also reporting “record core earnings” in the quarter; and Oregon-based recycler and steelmaker Schnitzer Steel Industries Inc. reporting increased revenue and earnings in its quarter that ended Feb. 28.

To what extent the good times can last is always on the minds of scrap recyclers, who know that what goes up always will come down.

The heat is on

Should mass vaccinations serve to put the economic factor of COVID-19 in the rearview mirror, steelmakers and scrap recyclers seem poised to be part of a hotter mid-2021 market.

In an early April presentation prepared for a private client based in Orlando, Florida, Becky E. Hites of Atlanta-based Steel-Insights LLC predicted that hot-rolled band steel prices could “decline by midsummer [2021] as orders catch up with demand; before then, odds are prices will continue to climb.”

Domestic output has room to grow, the consultant said, with AISI reporting a 77.9 percent mill operating capacity rate in early April, which Hites called “below the 80 percent targeted benchmark.”

A healthy domestic market is always welcome news for recyclers, she said, because scrap-fed EAF market share in the U.S. represents 71 percent of its steel production, which is among the highest market shares in the world.

The market-responsive steel industry in the United States also has room to grow because it idled furnaces in response to COVID-19 more so than in other nations. Hites predicted a 3.3 percent rise in global steel output in 2021 but a 23 percent rebound in U.S. output compared with 2020.

Any number of wider economic factors (inflation), domestic governmental issues (gridlock or debt concerns) or geopolitical circumstances (confrontations in East Asia or the Ukraine) overhang the optimism of investors and household consumers. However, as of April, scrap dealers and steelmakers have reasons to think they will remain profitable in 2021.

The author is the senior editor with the Recycling Today Media Group and can be contacted at btaylor@gie.net.