Holding Steady

Stability has characterized the market for No. 2 shredded scrap in recent months.

May 15, 2012

The ferrous scrap market is governed by the forces of supply and demand. And judging by the relative stability exhibited by the No. 2 shredded scrap grade throughout the last year, these forces have been adequately balanced.

“Markets have normalized,” an auto shredder operator based in Georgia says. “They are not moving up or down much.”

He predicts that the market will remain level in the Southeast. However, he says he expects to see pricing for No. 2 shred in the Northeast to increase by $10 to $15 per ton, reaching parity with pricing in the Southeast.

“We are not going to see a downturn in the market any time soon,” the Georgia-based processor says. “In the worst case scenario, it will remain level. In the best case scenario, we’ll see a bit of a pop.”

An Ohio-based scrap processor says he expects pricing for No. 2 shred to move sideways in May.

He adds that more dramatic swings in pricing create more interesting times for scrap processors and also can prsent opportunities to adjust pricing to improve their margins. “When pricing is sideways, there is not much you can do,” he says.

Feeling the Squeeze
With more auto shredder yards competing for material, margins are on the minds of all operators.

“Processors are being squeezed because there are too many shredders online,” a shredder operator in Illinois says. “This is a cycle where you realize that if you are going to compete with your neighbor, you are not going to put in a baler or a shear; you are going to put in a shredder.”

A look at the number of auto shredders in the U.S. bears that out. As of the 2010 Recycling Today auto shredder list and map, 291 auto shredders were installed in the United States, 17 of which were idle as of October 2010. A number of new auto shredder installations have been announced since the last list was published in 2010.

While the Illinois-based processor says he’s uncertain how long this cycle will continue, he believes the amount of obsolete material available for processing and the number of auto shredders in operation will synchronize eventually.

In the meantime, competition for material is intense.

“We are finding it harder and harder to get the material to fill our contracts,” a shredder operator in Virginia says. “This past month, even with that, the mills tried hard to push prices down, which hurts yards trying to keep volumes up.”

The Georgia-based processor says, “Shredder feed is in short supply only because there are so many shredders.”

Competition for material has led auto shredder operators to sacrifice their margins, according to sources.

“We are probably doing a little better than breaking even,” the Georgia-based processor says of his operation. “If you can take 5 percent to the bottom line, you are doing very well. Right now, that’s not available.”

Current market conditions have some recyclers focused on improving their operational efficiencies. During the Institute of Scrap Recycling Industries Inc. (ISRI) 2012 Convention and Exposition, Rich Brady, executive vice president of OmniSource’s ferrous commercial group, spoke about how OmniSource has been focusing on this area.

“For a long time, companies were able to run their equipment at a 50 percent rate,” Brady said, adding that current market conditions are making this approach unwise.

“Buying aggressively and churning inventories” are important from an operational perspective, as is “using technology to heighten the quality of our overall product...for mill customers and foundry customers,” Brady said. “We’re finding that these customers are responding to the value-added products [and] very specific packages.”

Brady said these “engineered packages have become very important to us,” referring to this approach as preferable to the “commoditized approach” of selling scrap shipments on the spot market.

The Georgia-based processor says he sees signs that supply tightness is easing in his region. As of April, he says his company’s average daily buy had increased slightly. “We’ve seen a 10 percent increase in flow month on month since the beginning of the year,” he adds.

Recyclers in the East and Midwest are used to seeing an influx of material into their yards come April; but, the mild winter means scrap kept flowing.

Thawing Not Required
The Ohio-based processor says scrap continued to flow into his yard through the winter. “Normally we see an influx in spring, but [the flow] never stopped. The normal April rush never occurred,” he says.

The Georgia-based scrap processor says, apart from the February tornados in the Midwest, the mild winter weather also meant yards did not see an increase in the number of vehicles scrapped. “If we get hurricanes and ice storms, we see an increase in scrapped cars.”

OmniSource’s Brady told attendees of the Spotlight on Ferrous session at the ISRI convention that the mild winter weather would result in recyclers recording improved volumes in the first quarter. However, he said recyclers would not see the “spring thaw” they have come to expect in April and May as a result.

“We’ve actually seen some flows decreasing a bit in April,” Brady said, “which is not normal.”

The steady flow of scrap through the winter has been matched by consistant demand from domestic mill buyers. Offshore orders, however, have been somewhat soft.

* Average mill spot buying price for No. 2 shredded scrap, defined as containing 0.17 percent or greater copper content, calculated by MSA Inc.’s Raw Material Data Aggregation Service (RMDAS), http://rmdas.msa.com.

Maintaining Demand
“Demand is good through the second quarter,” the processor based in Illinois says of the domestic market.

While he says export demand is “not robust,” there has been some activity. He adds that much of the material produced by coastal processors has been going to domestic mills.

The Georgia-based processor also characterizes domestic demand as good, citing a capacity utilization rate of 79 percent in the U.S. as of early April.

He says domestic prices for ferrous scrap have been so strong recently, overseas buyers have not been sourcing material from the Southeast, with the exception of Florida.

However, he says he has seen export activity, particularly to India, increase more recently. “I’ve seen a leveling of exports to Turkey,” he adds “And as far as Southeast Asia, nothing is going off the East Coast right now.”

Speaking at the Spotlight on Ferrous session at the ISRI convention, Pat McCormick of World Steel Exchange, Englewood Cliffs, N.J., said Turkish steel mills were affected by the Arab Spring uprisings of early and mid-2011 and pulled back on their scrap purchasing as a result. He added that buyers for Chinese mills tend to step in to buy additional scrap when prices decline because of global events such as these.

McCormick said he anticipated modest growth in world steel production in 2012. “We expect global steel growth of 1.6 percent in 2012—about one-third of the 2011 growth rate.”

Looking ahead to 2013, McCormick said World Steel Exchange and its sister company World Steel Dynamics predict a “bounce back” in the first half of 2013 that could result in steel production growing by 5 percent for the year. Steel and ferrous scrap prices are predicted to increase as a result, he added.

The growing number of auto shredders in operation in the U.S. means the amount of No. 2 shred available also has increased, as some operators decide to send some material that would normally be used to produce No. 1 heavy melting steel (HMS) to the shredder.

The Virginia-based processor says her company is even sending prime scrap through the shredder these days. “We are shredding more and more as the prime grades seem to have been flooded on the market.”

She continues, “Inside our company, we are very focused on buying and selling shred material. We do the prime grades, but we have to pay a premium for that material, and the prices when sold don’t always reflect that. Shred seems to be where we have more control on our margins.”

The growing number of auto shredders in operation is forcing steel mills to use more shredded scrap in their melt mix, the processor based in Illinois says. “They have to adjust their models,” he says, “The rule of thumb had been that they couldn’t use more than 50 percent shred. Now they will have to find a way to use more.”

He adds that demand for other ferrous grades remains strong largely because less supply is available. Plate and structural (P&S) material appears to be an exception, with the Illinois-based processor saying it is in oversupply because of the large number of demolition projects that were able to continue through the winter.

“There is almost no demand for P&S,” the processor based in Georgia adds.

While markets for some grades are softer than others, scrap recyclers generally have a positive outlook through the end of the year.

Looking Ahead
The processor based in Georgia says scrap markets have generally experienced an upturn in the third quarter. “That has historically always been the case,” he says.

“The third quarter is a good time period for the scrap business.”

He adds, “Overall, I expect to see a level market for the next few months.”

The Illinois-based processor also foresees a steady market for ferrous scrap in the next three to six months. He says he believes the election year has led to uncertainty and reluctance on the part of buyers of new steel to put in long-term orders for material. However, he says he expects scrap demand to remain strong and pricing to remain at current levels.

Offering a more skeptical view of the market through the end of 2012 is the processor based in Virginia. “I think it is going to be a possible roller coaster,” she says. “I think you will see some yards hold material because they don’t feel the market should have taken the downturn it did in April.

“A lot of yards I know have low stock right now,” she continues. “The more the mills push prices down, the worse it will get. I think we may see another drop and then possibly a spike to get the volume back where they need it.”

The writer is managing editor of Recycling Today and can be reached at dtoto@gie.net.