The following is an excerpt from Patrick McCormick’s remarks made at the AMM Steel Scrap & Raw Materials Conference in Charlotte, Nov. 3, 2009.
What is driving the high levels of U.S. scrap exports?
Considering the global financial meltdown, general industrial malaise, and consumer timidity, it may seem counter-intuitive that U.S. 2009 steel scrap exports are near the peak levels observed in 2008. This is in contrast to the low levels of U.S. steel capacity utilization, which remains depressed at 64.7 percent for the week ending November 7, 2009 (up from a low of 41 percent in December 2008).
The observed disconnect between the level of U.S. scrap export activity and U.S. steel production is not surprising. U.S. steel production was less than 10 percent of global steel production in 2008 and is currently running less than 6 percent of global steel production in 2009.
The demand for steel scrap exports is driven by a number of factors outside of the U.S. domestic market. Several of these factors are described below.
1) New mills coming on-line in non-China developing countries are primarily producing steel via Electric Arc Furnaces. Steel scrap is their primary feedstock. Considering that these countries also have higher economic growth rates than the U.S. adds to their demand for steel scrap. The key takeaway is steel scrap demand is growing faster outside of the U.S.
2) Russia is keeping more scrap at home. While some of the low-hanging fruit in terms of scrap, i.e. scrap that is close to cheap transportation has been harvested over the last several years, Russia is now consuming more domestic scrap to produce steel in newly added electric arc furnaces. A study of 2nd quarter steel scrap trade flows (2007 -2009) from 54 countries shows scrap exports have increased from the U.S. and Canada while Russian exports have plummeted in 2009.
3) The declining dollar makes U.S. exports more attractive. The U.S. dollar versus the Euro has declined from 1.25 in October 2008 to 1.50 in November 2009. That means $250/metric ton steel scrap that sold for €200 in Oct 2008 now sells for €167 Euro in November 2009. The long term outlook for the U.S. dollar remains bearish given the size of the U.S. budget deficit.
4) China has shown a renewed appetite for scrap imports. Chinese steel scrap imports averaged roughly between 200,000-350,000 metric tons per month in 2007 and 2008. Since January 2009 imports have averaged around 1.2 million metric tons per month. We believe China will continue to buy large amounts of steel scrap as long as it is priced below other available iron units such as iron ore/pig iron.
The key question going forward is “will the demand for U.S. steel scrap exports be sustainable?” We believe the answer is yes. The key drivers will be a continuation of developing countries’ (non-China) electric arc furnace steel capacity additions and the expectation that the US dollar remains weak versus other currencies.
Interestingly, the US dollar has recently lost more value against the currencies of key iron ore producing countries; Australia and Brazil. Steel scrap priced in dollars has become a more attractively priced iron unit for international steel producers. – Pat McCormick.