In February, we were just starting to ask whether the Coronavirus would be contained or whether there was more to come. Unfortunately, the latter proved correct and the markets since then have been decimated by a worldwide pandemic not seen in over 100 years.
The undertone had been positive as we entered this period, with slowly improving markets reflected by the US Purchasing Managers’ Index moving into expansion territory above the key 50-point level. That situation was not to last.
As the COVID-19 virus entered the USA and began its rapid spread, city after city and state after state introduced lockdowns. In turn, major manufacturers implemented shutdowns, including those in key sectors for metals; notably, all major US vehicle manufacturers went into shutdown in March and remain there today. With virtually no demand, metals markets were quick to feel the effects and headed south. This limited demand as well as uncertainty drove US mill decisions to shut down and/or reduce production programmes. The results were mixed.
At the beginning of March, mill scrap buying had been strong in what was a longer month; however, scrap inventories were also healthy. Mills quickly settled deals at sideways scrap prices. Dealers were eager sellers as there was some uncertainty with virus-related issues already filtering out of China. While the impact had not yet been truly felt in the USA, there was some sense of unease in forward markets.
By April, the USA was feeling the full effects of the virus. With complete shutdowns in key industries and plummeting oil prices, some major mills in immediately affected sectors left the market completely. This was reflected in those mills originally indicating April scrap price drops of US$ 60-80 per tonne and more. However, other mills and foundries not yet affected in sectors like construction still had strong production programmes. As the supply of scrap had dropped as precipitously as the rest of the economy, there were concerns about its availability. In the end, the market fell closer to US$ 40 on average, with a few early deals done US$ 50 lower but subsequent ones at nearer US$ 30 lower. Prime fared better than shred/cuts as manufacturing shutdowns took a toll on the former’s production.
With shutdowns in place and much lower scrap prices, the flow of scrap has now dropped more than 50% in some regions, and there is no belief that these levels will improve in the short term. In turn, a precipitous fall in US mills’ capacity utilization has been followed by stabilization in the mid-50% range.
As the first wave of virus cases appears to be peaking, the move to return some levels of commerce and manufacturing seems to be gaining traction. New steel prices have dropped significantly, but that has been based on a lack of demand. As the economy begins to reopen, some demand will return - albeit at a lower level. In turn, inventories at steel service centres have been depleted, with no restocking currently taking place. That has been supportive of a price floor on scrap, on a limited availability of ferrous scrap at dealers’ yards and many small yards still shut down. Exports have also been supportive as the bulk price to Turkey has rebounded by almost US$ 50 per tonne. Likewise, container exports to Asia have increased incrementally.
Markets appear to have found a temporary floor and ferrous scrap is in very limited supply, which will support price stability moving into May. Forward markets should be equally supported, although any return to the old norms will probably be slow and limited. With so many US citizens now out of work, demand should remain lethargic for some time.
While we remain optimistic for the future of the US ferrous scrap metals market, some level of uncertainty will remain as we have never dealt with this particular issue before. Like it or not, the future will be based on the path of COVID-19. Control of, and recovery from, the virus is key to an economic recovery. Missteps along the way will probably result in market setbacks. Although the road ahead will be challenging, we know that, at worst, ferrous scrap will remain a viable commodity.
SA Recycling (USA), Board Member of the BIR Ferrous Division