After an exceptionally strong US ferrous scrap market in January, February took back most of what dealers had secured in the first month of 2021. This set the scene for a market filled with price uncertainty as scrap supplies appeared to be in balance with demand. Contrary to their historical binding, ferrous scrap became decoupled from record-high new steel prices as mills recognized that long lead times alone could dictate new steel values, regardless of the direction of scrap. In the ensuing two months, the scrap market was dictated more by supply, seesawing up US$ 20-30 per ton in March and down by a similar range in April.
After an initial appearance of weakness going into May, mills and dealers realized that scrap availability was declining in a market that was beginning to show strength in export prices. After the Chinese government eliminated a 13% rebate on exports, new steel prices in Asia began to climb. In addition, all input costs of new steel also increased, including iron ore and metallurgical coal. With healthy demand both at home and abroad, US mills quickly scrapped trying to buy sideways in May, and the market once again saw an upward shift of US$ 20-30 per ton, with latecomers getting the largest increases.
With both iron ore and new steel prices now at record highs, the market continues to rise both in the USA and virtually all other international markets. This on-going rally to unprecedented levels is the result of: a depleted supply chain; low inventories of new steel; and continued delays in production caused by shortages in parts and components like computer chips.
US mill capacity utilization has continued to improve, peaking so far at 78.7%. More importantly, the delays caused by market shifts related to the pandemic continue to push lead times forward. Ford and other US auto manufacturers have just announced more extensions to plant shutdowns and reduced production owing to parts shortages. In turn, the production of prompt industrial prime scrap continues to lag demand, creating a premium of prime to shred of more than US$ 120 per ton compared to the historical norm of only around US$ 20. This has prompted mills to use more shredded scrap in order to lower costs, thus increasing demand in a market currently seeing a slowdown in shredded scrap availability.
The USA is not alone in facing this dilemma: virtually every country has similar issues of supply chain deficits, a backlogged transportation system and delays in new steel production that continue to force increases in new steel prices. In the USA, hot rolled coil (HRC) has surpassed US$ 1500 per ton and is showing no short-term signs of dropping. Expectations are that the price will exceed US$ 1600 per ton as lead times continue to stretch out on both supply and logistical challenges.
The question is when this market will correct. Expected timings issued by the banks last year of a price correction for HRC and other steel grades have long passed, but everyone knows that these levels are not sustainable in the long term. Assessment of the current relationship between steel and scrap is that mills have taken the lion’s share of the margin in the HRC price. With scrap now approaching US$ 500 per ton in the USA and abroad, scrap dealers have seen only a fraction of what the mills have been able to attain in terms of margin. When the correction does occur, scrap will still be needed in a market that is still healthy and demand-driven. While any correction in prices will affect scrap, the downside may be limited and smaller than the fall in new steel prices.
The good news is that the correction in prices (barring a Black Swan event) does not appear to be imminent. At this time, June appears set to be another “up” market for scrap on strong demand dictated by continued long lead times. This scenario should support scrap prices over the traditionally slower summer months.
SA Recycling (USA), Board Member of the BIR Ferrous Division