After the shutdown of US markets in April, the domestic scrap and steel industries have now seen a modest initial recovery. As US states began to reopen in May and June, scrap flows returned much faster than demand. After dropping by 50% and more during the initial April shutdown, US scrap intakes came back quickly and are now down only 10-15% on pre-COVID levels. As dealers reopened and businesses restarted, scrap flows quickly improved in all regions. Closures varied by state, with some scrap dealers never shutting their doors. The closing of other businesses initially inhibited flows, but these quickly returned as companies and industry reopened.
As the US economy reopened, the demand for steel did not return at an equal pace. US steel mill capacity utilization had hovered above 80% all of last year but dropped to the mid-50% range by mid-April 2020. It has not made much of a recovery since then and is currently just above this mid-50% range. Mills saw some initial restocking as US manufacturers reopened, and this was particularly evident in the automotive sector. Prices for hot-rolled coil (HRC) recovered modestly to above US$ 500 per ton. Scrap was initially tight and prices increased in May and June on supply constraints and slightly improved demand. The combination of some demand and tight scrap inventories benefitted scrap dealers as prices notched up small gains.
Unfortunately, the restocking was limited. Other sectors like energy and heavy equipment did not see any real recovery on continued low oil prices. After some initial strength in new steel prices, HRC saw a return to sub-US$ 500 levels, where it remains at the time of writing. In July, mills acknowledged that the limited market demand would not support higher new steel prices. In turn, several of the integrated mills that had closed in April are now reopening and competing with electric arc furnaces for a limited market share. That left mills with lower scrap prices as the only opportunity to recapture any margin. With an increased supply in the market, mills were successful in pushing down scrap prices in July.
The biggest hit on prices was in the prime scrap sector. With virtually no busheling generated during the shutdown, there was fierce competition for the limited supply, and the spread between busheling and shredded scrap was driven to almost US$ 70 per ton at the peak of the market. As manufacturing returned, the flow of prime scrap refilled the pipeline, allowing mills to cut that spread deeply in July. In most markets, that meant a drop of US$ 40 per ton on busheling, with shredded down US$ 10-20. With the spread now narrower, scrap prices appear to be more in line with the market. With limited demand, there also appears little room for prices to rise in the near term.
Claims for unemployment remain at the 18 million mark, three times higher than at the peak of the recession of 2009. These headwinds will weigh heavily on the market as the virus continues to escalate in the USA, causing more shutdowns and concern among consumers. While there was a modest recovery after the reopening of the US economy, current restrictions and continued high unemployment will provide headwinds for the balance of the year and potentially into 2021.
While a return to the low April levels is unlikely, any recovery at this time appears to be modest at best. While a floor appears to have been found for scrap and steel prices, the ceiling may also have been found for now. Exports may help scrap dealers in the long run, as other world economies come back on line and accommodative fiscal policies drive infrastructure investments. Here too, that recovery appears to be a slow process, with the traditional “summer doldrums” now upon us. While we expect continued long-term progress, a relatively soft market is anticipated for the summer.
SA Recycling (USA), Board Member of the BIR Ferrous Division