Going up?

The stainless steel scrap market has been one of the strongest in the metals recycling industry in recent months, owing to a period of rising nickel prices and changing demand flows for stainless steel scrap.

A number of inter-related factors have converged to keep the market for stainless steel scrap strong and the price high for nickel, a key component.

One major factor has been a redistribution in production capacity in Europe and the U.S., with European mills closing or cutting back on capacity, while in the U.S., the ramp-up of an additional stainless steel melt shop in Alabama has increased the need for stainless steel scrap to unprecedented levels.

Along with this, supply concerns have apparently affected the world’s single-largest producer of stainless steel, China, a country that in recent years used less scrap than other major producers. A ban on the export of Indonesian nickel ores, an important source of nickel units for Chinese mills, is now threatening to affect the cost structure for these producers, with low-cost stocks of nickel ores and nickel pig iron (NPI) possibly nearing depletion.

Experts throughout the industry and from around the world can’t predict the future, but after six months of continuously rising nickel prices, and apparent speculation by trading companies, they describe a variety of scenarios.
 

Competing forecasts

Barry Hunter, president of Hunter Alloys, based in based in Boonton, N.J., and a past chairman of the Bureau of International Recycling’s (BIR) Stainless Steel and Special Alloys Committtee, says today’s market is nearly unprecedented.

One reason for this, he says, is the fact that the U.S. now has four major flat-rolled producers of stainless steel, up from three, with the addition of a new stainless melt shop currently owned by Finland-based Outokumpu. The plant is expected to add around 900,000 tonnes of melt capacity when fully up and running. In the meantime, expected European capacity cutbacks have been at least as much or greater than that level. With all these facilities using a significant amount of stainless steel scrap as feedstock—anywhere from 60 to 80% of their charges—it’s evident that the U.S. need for scrap has increased while Europe’s current need has been reduced.

“The U.S. has imported some scrap now,” says Hunter. “That is in direct correlation to less demand resulting in lower scrap prices within the European market.” Hunter said U.S. mills had been able to purchase their required scrap at historically reduced percentage discount levels to the London Metal Exchange (LME) price of nickel, but still higher than European calculations. He said U.S. iron values were also higher than European levels, making the U.S. the most attractive market for stainless scrap in the first half of 2014.

Hunter also referred to the Indonesian nickel ore ban as another “game changer” able to eventually affect scrap flows and pricing.

“Whoever is the lowest-cost producer has the advantage, and in the U.S., the lowest cost production has always been in relation to the availability of scrap,” Hunter said, adding, “In China that low cost position of NPI has been basically eliminated.”

“We have a situation where the primary nickel that has been added into Chinese stainless steel has come from the conversion of Indonesian ores into nickel pig iron,” he said. “With the ban now a reality, the question becomes, when do the Chinese have to consider entering the international scrap market in earnest.”

At least one source says that may already have occurred. Anshul Gupta, CEO of Pan Gulf International General Trading, based in Sharjah, U.A.E., says his firm’s analysts believe China’s once large inventory of NPI could be depleted by September 2014. He referred to major buying sprees in the final quarter of 2013 in preparation for a possible ban. Gupta also said Chinese stainless mills had recently approached his company in search of stainless steel scrap.

“I haven’t had an order of scrap to China in the past three years almost, but now we are [fielding them]. The mills started approaching us and negotiating,” he said. “We see the China market as a big player in 2014.”
 

Panel discussion

Hunter and two others from the stainless and alloys industry discussing the market for stainless steel scrap were cautiously optimistic at the recent 2014 BIR World Recycling Convention, held in Miami in early June. Hunter moderated a panel featuring executives from two major wholesale suppliers in the industry: Paul Gielen of Cronimet, headquartered in Germany, and Simon Merrills of the U.S.-based offices of ELG Metals. (Parent company ELG Haniel GmbH is headquartered in Germany.)

The panelists appeared to differ on whether scrap would be in oversupply around the world. Gielen said he expects that both the European and U.S. markets will see an oversupply based on the recent volatility in the price of nickel and related speculation in the market.

“Looking at the behaviour of some steel scrap traders, people do store material,” he said. “Last year we saw people buying stainless steel scrap when nickel was at $18,000.” The price later dropped to $13,000, he said, at which point in time many of those buyers decided to store the material.

Gielen also said he believes buying patterns at Chinese mills, which now represent half of all stainless steel production, is key to the future scrap business. But he conceded that China’s continued dependency on prime material instead of scrap could disturb Cronimet’s forecasts.

Gielen forecast that the stainless steel scrap business, at a level of around 2 million tonnes in 2010, would increase to more than 6 million tonnes in 2025. He said China produced around 17 million tonnes of stainless in 2013, up from 1 million tonnes in 2000. However, Gielen said, China utilizes the least amount of scrap to produce stainless steel compared to other producers. U.S. and European-based producers of stainless steel have traditionally used between 60% and 75% stainless steel scrap for production, compared with China’s proportion of around 30%, Gielen said.

One big change has been declining stainless steel production in Europe. “Europe has been reducing its production over the last years, in compensating for the increase of stainless steel by China,” he said. Until recently however, European mills had to import stainless steel scrap to remain self-sufficient.

“We expect that from this year onward, Europe will have an oversupply of stainless steel scrap and is in need of exporting material,” Gielen said.

Since 2005, China has increasingly used more NPI, Gielen said, and has had “the lowest nickel unit costs in the world.” But Gielen also pointed to historical patterns likely to be repeated: an increase in the price of nickel on the LME predicating an increase in scrap prices.

“I think we are just at the turning points,” he said. Gielen said the Indonesian ban was likely to create a 200,000 tonne shortage of nickel units in China, “which has to be compensated one way or the other,” he said.

“There will be a shortage of stainless steel scrap in China and a need for imports if they are interested in taking stainless steel scrap in the same level we see in the rest of the world.”

Three scenarios could affect China’s production costs going forward, Gielen said: a curtailing of the ban, China’s direct investment in nickel ore mining or a movement to the use of more stainless steel scrap. In his view, however, China is not likely to increase its dependence on scrap for the long term. Furthermore Gielen said he believes the NPI situation in China will eventually be resolved.

“You will most likely see China want to have control over what they are doing, so then the stainless steel scrap could be a little more difficult,” he concluded.
 

A divergent view

In his presentation, Merrills reported that conditions in the U.S. have changed rapidly since the opening of Outukumpu’s new melt shop, which could be at capacity by the end of 2014. Unlike Gielen, however, Merrills believes both the U.S. and Europe could experience a shortage of scrap in the coming months.

“There has been a dramatic shift from an oversupply of scrap to a shortage and all in the space of a few months,” he said.

Merrills said with the addition of the new mill, ELG anticipates U.S. consuming mills will need to import around 12,000 tonnes of scrap per month.

“How much of that deficit is made up by imports is very much dependent on buyers’ discounts to primary elements.” Merrills said lower discounts to primary not only attract scrap to the market but also bring primary metal into play.

“The American mills have a choice: reduce the scrap ratio or pay a higher price,” he said.

Merrills also said the recent rise in nickel pricing could be helpful. “Higher nickel prices will not only loosen scrap from speculators’ hands but encourage demolition and consequent capital investments in some new industrial projects, now made viable by higher returns from investment recovery,” Merrills said.

Hunter, Gielen and Merrills agreed that it’s anyone’s guess what the long term holds for the stainless steel scrap market. Even so, the panelists said it’s currently a good business to be in.

Gielen said lower stainless steel scrap prices were key in order for the Western world to be able to compete with China. But he also referred to the situation of two and three-month order books for his company, “which at the moment for us is heaven,” he said. “Is that sustainable? Even our customers are not really sure.”

Merrills agreed. “We have got customers who have got strengthening order books and have lead times that are as good as they’ve been in many, many months,” he said.

Merrills also surmised that history could repeat itself. “We could see continually rising prices for the next year, and when you have continually rising prices, everybody wants to beat inflation, and put down a bit of inventory.”

Given all of this, said Merrills, the roller coaster ride will likely continue. “I think it is therefore pretty safe to assume that buying activity in all areas of stainless steel will continue to pick up.”

The author is managing editor of Recycling Today Global Edition.