The US ferrous scrap market has shown great resilience over the last three months. After a slight downward correction in April, the market saw solid gains in both May and June. As scrap supply concerns started to surface, steel mills took scrap prices up by US$ 20-25 per ton in May to ensure flows continued to head into the domestic market rather than into exports. Mills were able to mitigate the upside as scrap dealers, who tried to show some resistance on such a small increase, did not have the leverage to go higher despite still rapidly-rising new steel prices.
By June, that tightness in scrap was much more pronounced. Mills eagerly gave back US$ 50 per ton to scrap dealers in lieu of upsetting flows and/or not having enough scrap on hand. This was in a market plagued by supply chain constraints that have continued to drive new steel prices higher, as evidenced by hot rolled coil surpassing US$ 1800 this month.
That set the stage for dealers to expect continued scrap price increases in July as new steel prices continued to rise. The difference in July was a slightly weaker export market, coupled with record scrap flows into dealers’ yards. The steam quickly evaporated as July trade got underway. Mills held shred and cut grades sideways in the Eastern US while increases of US$ 10-20 per ton were seen in the Western US based on higher export prices into Asia. Prime still demanded some upside in local/regional markets and saw increases on average of US$ 20 per ton. That further increased the spread between shred and busheling to record levels. It was the strong scrap flows in both the international and US domestic market, driven by higher scrap prices, that has taken the steam out of the current summer market.
Mill capacity utilization in the USA has continued to rise and, at the time of writing, is over 83%. That has been coupled with extended lead times, driven by a continuation of supply chain interruptions that have kept new steel supply lagging demand. Shortages of basic components like computer chips have stalled vehicle production, further exacerbating lead times in the market. With lead times for hot rolled coil stretched out to 10-12 weeks, mills have retained new steel pricing power, regardless of scrap prices. This “decoupling” of new steel and scrap prices has created a purely supply-driven market for scrap steel. Despite the continued run-up in new steel prices, mills can take scrap prices down if there is too much in the market.
That is the current concern among scrap dealers moving into August. With the USA in the lead in COVID vaccinations, more usual seasonal factors appear to be driving the domestic market. August is typically a slower month for demand, although scrap flows are also traditionally slower. With scrap prices at near-record highs and with the potential for reduced prices moving into August, scrap flows are currently very good for this time of year. The bigger question is what the supply/demand balance will look like moving into August. Dealers now see a slight imbalance weighted towards too much scrap supply, especially in the non-sheet mill grades of HMS and turnings. Exports also appear to be unsupportive as more traditional summer weakness is exacerbating a well-supplied US and international scrap market. With export prices into Turkey and Asia currently weakening, dealers are feeling less confident about August trade.
The US scrap market has rarely seen four consecutive months of scrap price gains. After increases in May, June and July, it is more than likely that this historical precedent will play out again in August. While no imminent collapse is likely in the ferrous scrap markets, there is little doubt that mills will capitalize on current scrap supply strength and move prices lower in August. The bigger question will be how much downside exists and whether the continued strength in the overall steel markets, long lead times owing to supply chain constraints and overall positive economics will buoy the markets in September and October, which are traditionally stronger demand months. The test will again be supply-side driven based on international scrap availability.
With current COVID shutdowns in countries such as Malaysia and Vietnam, the pandemic still has some cards to play in affecting the international scrap trade. It continues to push forward both lead times and supply chain interruptions. While there may continue to be surprises, the US market should continue to be healthy in the near term. The continuing question is when the supply chain will finally catch up with demand, with the subsequent fall in new steel prices. While it is inevitable, so far it has been a difficult question to answer. When it does happen, look for markets to finally adjust lower to more sustainable levels, albeit possibly at higher-than-historical averages.
SA Recycling (USA), Board Member of the BIR Ferrous Division