Elusive numbers

Industry analysts appear divided on the topic of whether the supply of ferrous scrap is plentiful on a global scale, or whether as some say, it’s becoming increasingly scarce. Most experts say it’s hard to know for sure, but they point to industry indicators that may help provide some clues.

Analysts also say that knowing the truth about ferrous scrap levels will almost certainly affect pricing: Too much ferrous scrap, and prices will fall. However if there’s not enough, prices will almost definitely rise.

Knowing which of these pictures is more accurate could be particularly telling: The health of the global steel industry going forward rides in part on the costs of its raw materials, which for many steelmakers around the world, comprises a good deal of ferrous scrap. At least for the time being.
 

By the numbers

Steel production capacity, at below 80% for most of 2013, has not been particularly dazzling in recent months. And while recent upticks in pricing and orders may indicate a strengthening market, they’re also par for the course in the winter ordering season, industry analysts say.

John Harris, a steel industry analyst based in Innisfil, Ontario, Canada, and former executive with ArcelorMittal, says an examination of current steel industry capacity utilisation rates (at around 77.5% for the 65 countries reporting to the Brussels-based World Steel Association) implies the supply of scrap could be considered sufficient to meet current demand.

“There is lots of scrap out there,” says Harris, adding, “You put a price out there that’s higher than the current market price and you get flooded.”

Jarek Mlodziejewski, a senior analyst with The Steel Index, based in the United Kingdom, says it’s difficult to know for sure whether the supply of ferrous scrap is plentiful, and individual scrap yards may be reluctant to let mills know how much is available, to prevent steel mill buyers from trying to squeeze down prices. “If there’s a lot of supply, the price will go down,” he says.

Michael Marley of MetalPrices.com and editor of the newsletter Marley’s Heavy Melt Weekly says the supply of ferrous scrap seems to vary by grade. Marley notes that in the winter, the supply of heavy melt and demolition scrap normally tends to dry up because of the slowing demolition market and less peddler traffic.

“There are seasonal factors making some of the obsolete grades tight,” Marley says, referring to both demolition and obsolete grades of scrap. But he adds, “shredded is not as bad as some anticipated, despite all the saber rattling by some of the shredders that they are cutting processing levels.”

And he adds, “The supply of prime [grades] seems to be rolling right along,” he says, with plenty of busheling and bundles on the market.

If prices are to provide any clues, they indicate that for most of 2013, prices were a bit lower than in 2012. However in November prices rebounded a bit, reflecting a possible seasonal increase in demand.

November pricing gains on the North American Raw Material Data Aggregation Service (RMDAS) ferrous scrap market index by U.S.-based Management Science Associates were around 13% for No. 1 heavy melt (to $375) and about 8.6% for No. 2 shredded scrap (to $391) from October levels.
 

Import leader

A key to understanding the ferrous scrap picture could be a look at the world’s largest importer of steel scrap, Turkey, which imported some 22.4 million tonnes of scrap in 2012, according to the World Steel Association’s Steel Statistical Yearbook 2013. In a distant second place was South Korea, with imports of around 10 million tonnes.

Marley says the Turkish steel mills look to three major markets to feed their operations: Western Europe, the Soviet Union/Eastern Europe and the United States, each representing about one-third of the country’s need for scrap. During the winter months, Marley says, Turkish buyers are more restricted to buying their ferrous scrap from Western European and U.S. Gulf Coast exporters. It’s also a time when supplies tend to tighten, leading to margin pressures for steel mills.

Turkey has been historically dependent upon ferrous scrap to feed its steel mills, which are largely electric arc furnace (EAF) mills fed with scrap rather than with iron ore. As such, U.S. imports of ferrous scrap can be expensive for Turkish mills, analysts say.

Marley says strong demand for scrap within the U.S. market in recent months has put a limit on the amount of scrap that U.S. suppliers are willing to offer to Turkish buyers at their desired price levels. Add on freight charges, and the margin for Turkish mills becomes even smaller.

“Demand is pretty strong in the U.S., particularly for shredded, so they are going to have to pay bigger numbers to take it away from U.S. consumers,” Marley says. “That’s difficult to do in the South, where you have steel mills paying as much as $400 a ton for shredded.”

Marley says an important consideration for Turkish mills is the price they are able to receive from export markets for their key finished product, which often is rebar.

“If they’re not able to get the price up as much as they’d like to, I’m sure they’re going to be less enthusiastic about importing scrap from as distant a location as the U.S., because the freight costs are a heavy factor.” Marley estimates it may cost around $34 per ton to send a boatload of ferrous scrap to Turkey from the Southern U.S. or Western Europe. In order for Turkish mills to make any sort of profit on their finished product, says Marley, the delivered price should probably be less than $350. “It’s going to be tough to make that number, particularly if there isn’t a lot of material available,” he says.

Backing up that cost picture is the fact that Turkey has decreased its import levels in 2013, says Mlodziejewski. He notes that Turkey is trying to source more of its scrap internally, citing recent Steel Index research reports and Worldsteel import numbers.

“Last year they used about 20% domestic scrap,” he says, adding that this year, the country is on track to use 30% domestic scrap, leading to a reduction of 15% to 20% in scrap imports to Turkey. It was a drop that caught even Mlodziejewski by surprise. “I wasn’t expecting such a large jump in using domestic scrap,” he says. “A third of their scrap is now from domestic sources.”

According to figures from The Steel Index, for the first nine months of 2013, Turkey imported 14.7 million tonnes, compared with 16.9 million tonnes for the same period of 2012, a 13% decrease, Mlodziejewski says. “If the trend continues, I expect to see a 15 to 20% drop.”
 

On that note, Harris says steel producers in Turkey and other countries have in fact been working to change the cost structure of how they produce steel. “A lot of them are changing the dynamics of the way they are working,” he says, as they work to become less dependent on scrap. For this reason, Harris adds, the steel market could be a difficult one in the months ahead.

However Marley says Turkey’s goal of being less dependent on imports is still a long way off in his view. “In order to have a good base of obsolete scrap you’ve got to have a good, solid consumer society,” he says. But in many parts of Turkey, he adds, “it still is a developing country.”
 

Signs of strength

Marley describes the U.S. ferrous scrap market as relatively strong for the past year. Looking at the market from 2010 to the present, he says, “we’ve seen scrap trading in a pretty narrow range.” With the exception of a price fall in November of 2011, he says, “the range over the last couple of years hasn’t really gone too far out of whack.”

Similarly, Mlodziejewski pointed to strong finished steel prices in the U.S. throughout 2013. “This has led to U.S. steel mills having pretty good order books and quite healthy demand for local scrap,” he says.

That said, Marley characterises the U.S. steel industry outlook as mixed. “It’s driven largely by the automotive demand and how strong that’s been,” he says, explaining that strong auto sales account for much of the steel sheet consumption in the U.S.

He says the U.S. steel industry looks healthier than others but is driven largely by automotive demand. “How long that will continue is questionable,” he says. Finished product demand from the construction sector, he notes, has not been particularly strong.

“Some mills are running flat out. Others that are not automotive-related are not doing well at all,” says Marley. The average operating rate of between 75% and 80% also points to a mixed picture. “Usually it’s up in the 90s or high 80s, so we’re not near that at all.”

Positive forecasts for 2014 will depend as well on the continued recovery in Europe, says Marley. “The steel industry in Europe has not been doing well at all.”

Other export markets for steel scrap look promising. Mlodziejewski points to signs of a slight economic recovery in India over the last few weeks. That country has been plagued with currency devaluation troubles in recent months and significantly cut back on scrap imports throughout most of 2013.

“The demand for their finished product has improved a little bit, but the main caveat has been higher international scrap prices, as well as the availability of domestic scrap in India which has acted as a break on imports,” says Mlodziejewski. In addition, a 2.5% tariff placed on scrap imports, ostensibly to protect the country’s direct reduced iron industry Mlodziejewski says, has affected imports.

Mlodziejewski also says that economic figures posted in recent weeks indicate continued optimism that the currency situation will work itself out, as well as optimism in light of the upcoming general election in India. “Economically, India seems to be doing a bit better,” Mlodziejewski says.

Nations throughout the Middle East also look promising in terms of their need for finished steel products. Mlodziejewski referred to the growing need for steel and infrastructure upgrades in places like Syria, Iran and Iraq. “There’s a lot of potential in the Middle East,” he says.

He notes that countries which tend to use high levels of scrap in their consuming mills, such as those heavily EAF-based, should experience good demand in the months ahead. That means places like Turkey, India, South Korea, Thailand and Indonesia. “They will need to have scrap if their steel industry improves,” says Mlodziejewski. “They are the ones who import the most scrap, so it stands to reason they will import more and more of it.”

Meanwhile China, the world’s largest producer of finished steel, also is expected to increase its steel production capacity in 2014, triggering fears of a steel glut among industry analysts. Mlodziejewski says China’s steelmaking capacity now stands at around 700 to 800 million tonnes per year, a level that is reportedly more than all other regions combined.

However Mlodziejewski also describes China’s finished steel market as more regional than global. “China only exports about 5% to 6% of its total capacity, and most of it to the regional bloc, so not a great amount,” he says. “They tend not to have a great impact on the global market.”

Marley also dismisses the fear of a market glut. “I don’t see it at this point because they are a growing economy and a lot of their steel is being consumed at home,” he says. “Their goal isn’t really to export steel. Their goal is to export [manufactured] products.”

Similarly Harris questions whether there really is too much steelmaking capacity in China. “It depends on who you listen to,” he says. “It’s absolutely not transparent.”

Mlodziejewski adds too that the steel market tends to be largely relationship driven, pointing to the example of Turkish steel mills and their loyal buyers throughout the region. “That relationship alone will account for a great deal of the spread,” he says.

It’s not to say that buyers won’t explore new markets, but analysts say steel buyers tend to be loyal. “Steel is becoming an increasingly regional product, where raw material remains global,” says Mlodziejewski. Only when sharp price volatility is seen will buyers explore other options for their steel products, he says.

At the moment, though, many insiders are describing more of a scarcity of scrap than a glut of steel. Outside of the U.S., says Marley, scrap can be tougher to come by. And in light of strong demand for ferrous scrap worldwide over the last decade, the supply of scrap throughout the U.S. appears to be diminishing at a faster rate than it has, he says.

“I think we’re draining that pool and I think that’s what has driven up ferrous prices to some degree,” says Marley. “There’s not as many cars to shred or buildings to tear down.”

Mlodziejewski also has heard comments from industry insiders who fear that the supply of scrap will dwindle, but he hasn’t yet joined that camp. “If the price is right anybody will go find scrap and sell it,” he says.

The author is managing editor of Recycling Today Global Edition magazine and can be reached at lmckenna@gie.net.