Quarterly Report – September/October 2020

US ferrous scrap markets continued their recovery over the summer months. After modest price increases in May and June, the market took a pause in July as prices dipped slightly. The earlier increases were based on scrap supply tightness, with low scrap inventories after markets shut down in early spring owing to the virus. With strength in recovering world markets by early summer, demand increased enough to trigger a series of price increases both in the USA and abroad. As both the Turkish and Taiwanese markets moved higher, US ferrous scrap export prices climbed in tandem. Those increases drew enough scrap offshore to force mills to become aggressive by August. A combination of still-tight scrap supplies and slowly increasing demand set in motion a series of price increases on both scrap and new steel. Mills were aggressive in securing tonnage ahead of the September market, and scrap dealers were the beneficiaries of that demand. 

Scrap prices moved up significantly in September on a combination of tight scrap availability and slowly increasing order levels driven primarily by the sheet mills, with shredded scrap the product most in demand. A restart of the automotive sector was the catalyst for the higher mill demand. Subsequently, mills have pushed the price of hot rolled coil (HRC) back over US$ 500; at the time of writing, some have established a base price of US$ 600 on HRC.

Whether the market can bear these levels remains to be seen, as there are still headwinds to come. Mill utilization rates have continued to improve on a weekly basis, surpassing 65% by mid-September. Despite this improvement, the rate is still more than 15 percentage points below the 80%-plus levels seen in February this year.

While steel mills have been enjoying a steady stream of price increases, the demand has been primarily automotive-driven. Price increases have incentivized service centres to conduct some restocking on previously low inventories. While the demand is positive, it is also limited in its breadth. Other steel-consuming sectors - such as energy, oil/gas and heavy equipment - are showing little sign of recovery on decreased demand for oil. The price of West Texas Intermediate (WTI) has languished around the US$ 40 per barrel level and there is little prospect of an improvement in the foreseeable future. This has taken the Baker Hughes Rig Count down almost 75% this year. With oil at these prices, there is little potential for fracking to return any time soon. Add in the potential for a slowdown in construction and it adds up to approaching headwinds.

For October, the scrap market looks solid as demand is still good. There have been several new mill furnaces coming on line to help on the demand side but exports appear to be taking a pause; scrap supplies are improving on increased seasonal activity. November and December may be softer as weaker seasonal demand and potentially thinner order books may not provide continued support to new steel and scrap prices.

While this does not appear to portend a collapse in the market, it does suggest a pause in pricing until the New Year gives us more clarity. If you add in a Presidential election and the potential for a virus vaccine, then the one certainty is some market volatility in the interim. In any case, prospects for both new steel and ferrous scrap still look good.