As the August market approached, the indications were that mills were poised to start taking back some money after three months (May to July) of scrap steel price increases in the US market. They did not disappoint. With adequate scrap supplies, a weaker export market and slightly weaker summer programmes, US mills easily took back an average of US$ 20 per gross ton on shred and cut grades, although prime held up a little better on still-tight supplies and strong prices for pig iron, the alternative to prime. The downside on prime in August was only US$ 10, thus further widening the spread between shred and prime to record levels.
That spread didn’t last long. Mills plan well in advance and ran up record imports of prime and prime alternatives into August. In addition, there was a rapid decline in iron ore prices - owing to the drop in the Chinese market - to a level that no longer supported the high price for prime busheling in the US marketplace. That was evident in September trading when mills slashed the price of prime scrap by US$ 50-70, whereas shredded scrap lost only US$ 20 in most markets.
As scrap prices dropped, ironically, the price of new steel continued to climb on strong lead times and limited availability. Hot rolled coil has now surpassed US$ 1960 per ton while other grades such as plate continue to rise to record levels. Mills remain in the driver’s seat when it comes to new steel pricing as they continue to make record profits on wide margins between scrap and new steel prices. Capacity utilization at the mills has continued to increase and is now averaging close to 85%. While that is an industry average, many mills are running above 90%, at full capacity, as demand for new steel continues to outstrip available supply. These conditions, started by the pandemic, show little sign of easing as a lack of components like computer chips and logistical logjams continue to push out lead times. That situation could run well into 2022, although new steel prices may be near the top as imports are beginning to become available at lower prices and to weigh on domestic pricing.
Logistics have been the curse of all scrap dealers and manufacturers. A shortage of almost all available transport options continues to weigh on all producers: containers, trucks and chassis, railcars, barges and a logjam of container ships in all ports are exacerbating the problem with little sign of any imminent relief. That should continue the current trend of high new steel prices, although scrap prices will be purely supply-driven: too much available scrap and prices will come down; not enough scrap and prices will rise. The decoupling of new steel and scrap prices was evident in August and September as stronger scrap supplies and weaker export prices took down US domestic scrap prices two months in a row, despite rising new steel values.
As the October market now takes shape, there has been a slight shift in favour of scrap dealers. After an extended decline in export prices into Turkey, that market has seen a slight recovery. In the Asian markets, containers into Taiwan have shown resilience and supported export prices on the West Coast. Steady export sales have reduced the availability of US scrap - especially shredded, which remains in high demand. Although much weaker, China has held up prices on new steel and billet on lower steel inventories as mills were forced to cut production. With export now somewhat supportive of US scrap prices, stockpiles of US scrap have also been reduced on multiple export sales and continued healthy US demand. That has added to a slight deficit of shredded scrap in the international marketplace, causing it to retain a higher-than-normal premium over HMS.
With winter just around the corner, US mills must weigh their current inventories against future sales and future scrap availability. That has firmed October’s US domestic scrap market. Most sales of shred and cut grades have been sideways, with a few deals done at a US$ 10 increase. Prime, on the other hand, was again weaker: although a deal was done at sideways pricing to an integrated mill entering the prime market for the first time, prime scrap in most regions has been down by US$ 20 on weaker pig iron prices and a good balance in mill inventories.
The US scrap market now appears somewhat range-bound, with expectations for comparable pricing as we finish the year. The unknowns will be the weather and the pandemic as both can still upset the delicate balance between supply and demand. With mills maintaining strong order books, they will not want to be caught short on scrap. In turn, too much scrap will allow mills to increase their already huge margins. They would not let that opportunity go by.
With export now on a slight recovery path and scrap a little tighter, and in the absence of a Black Swan or Gray Rhino event, the US scrap market can be expected to remain steady and range-bound through to the end of 2021 on continued logistical delays and steady new steel demand. Any bias would be towards a slight upside, especially for shredded.