After a weak summer of limited demand and softer US ferrous scrap prices, new steel buying was slow to return in September. That left additional downside for US scrap dealers as they saw their prices drop by US$ 20 on average for Shred and Cuts, and by US$ 50 for Prime in September.
This was the beginning of a normalization process between Shred and Prime for which, historically, there is a US$ 20 premium for the latter over the former. However, with hot rolled coil (HRC) prices reaching almost US$ 2000 per ton in September, that spread had increased to over US$ 150 by the end of the summer. As the price of HRC began to recede thereafter, so did the spread between these grades.
Despite a steady decline in HRC prices since September (now down below US$ 1500 per ton), mill demand for ferrous scrap exceeded availability in November. In what has been a supply-driven market, scrap dealers were able to recoup on average US$ 50 per gross ton on Shred and US$ 30 on Cuts in November. With HRC prices significantly lower, weaker sheet mill orders and lower pig iron prices allowed mills to limit the upside on Prime scrap to US$ 20 on average, thus reducing the Prime to Shred premium.
Shred continued to be in tight supply by early December; this helped to support scrap prices, with virtually no change from November to December. Mild weather in the final two months of 2021, along with higher scrap prices, brought a lot of ferrous scrap to the market. While scrap dealers were optimistic that new January mill orders would help to support the early-2022 market, this proved not to be the case.
By early January, the quantity of scrap in the market had become significant. Mills normally see a trend in new steel sales in early January that support scrap prices, but this did not materialize. While everyone had anticipated some downside in the January ferrous scrap market by then, mills went back to the drawing board to reconsider.
The scrap overhang was exacerbated by weaker export sales on both coasts in December. The Turkish market had dropped by over US$ 30 per tonne on poor demand and lira weakness. The Asian market had fallen by an equivalent amount on weaker orders and government cutbacks in the Chinese market. With a lack of new steel orders, no equivalent export options for dealers and the now-significant scrap supply, US mills were successful in dropping ferrous scrap prices by US$ 50-60 per gross ton in January.
The January weakness was exacerbated by a lack of labour owing to illness. With so many people at home with the Omicron virus, demand has waned and scrap flows have slowed. In addition, winter weather and storms have hit most of the country, and scrap flows have suffered as a result. In some areas, ferrous scrap intakes are now off as much as 30%. While lower scrap volumes would normally be supportive of prices, demand moving into the shorter February month is looking very similar to the weak demand seen in January. With orders still slow, most sheet mills should have adequate scrap available for their current needs.
With lower-priced imported steel now luring steel service centres, they are not eager to buy US steel as they see lower prices ahead; these centres are instead reducing higher-priced inventories. Until the new mill orders start to return, sheet mill programmes should remain small and scrap demand lacklustre.
These conditions have incentivized many scrap dealers to look to exports for better options. With strength in the Asian market, a strong Mexican market and steady demand from Turkey, more tons should leave the USA in February. However, this should not negate the efforts of some inland mills to try to drive down scrap prices again in February.
While some mills and dealers see a sideways market, others are more pessimistic in the short term. For now, mills may have the upper hand, but lower scrap intakes at dealer yards and the eventual return of orders for the mills should turn that equation around. The question is how soon this will take place.
As always, we continue to see a trend towards volatility in which the virus still plays a role in the outcome. While most agree that 2022 will be a good year overall for scrap and steel, it may still be a year of more change and surprises.