In early August, scrap dealers were debating whether the reduced flows of ferrous scrap were enough to stem the downward trajectory of prices. At best, dealers were looking for a floor on scrap prices after three consecutive months of decreases, but that did not happen. Mills on average recouped another US$ 20 on obsolete scrap and US$ 70 on Prime as the US ferrous scrap market continued its “Great Readjustment”. After record prices for Prime scrap and a US$ 160 premium for Busheling over Shred earlier in the year, ferrous scrap prices adjusted downwards again to more normal historical levels.
September brought no relief to that downward correction as scrap dealers were again subjected to another round of price drops. Mills were again successful in pushing the market down another US$ 20-30 on average, although their initial efforts to take it even lower were unsuccessful. Historically, pricing cycles for ferrous scrap have rarely seen more than three consecutive months of either increases or decreases, and yet September was the fifth month in a row of ferrous scrap price declines. After scrap prices and intakes at dealer yards peaked in March/April, the market has seen an historically long adjustment to the downside. While we began from historically high levels, this drop has been hard to swallow for scrap dealers who have also seen five consecutive months of declines in scrap intakes. That lower level of supply has been the premise for dealers’ expectations of establishing a scrap price floor and ending this extended cycle of decreases.
Unfortunately, US steel mills have also seen a steady fall in demand, reflected in the falling capacity utilization rate to 76.4% at present. That decreased running rate is the by-product of a lack of orders materializing primarily at the sheet mills. Demand drives pricing, and that demand has not resurfaced as consumers have faced the same headwinds as dealers and mills. In addition, the international market has experienced even greater weakness on rising interest rates, escalating energy costs and weaker global demand. Despite a brief rally in the bulk export market to Turkey, US pricing is currently not supported by those price levels. In turn, the Turkish rally was really the by-product of increased Indian scrap buying, not higher demand in Turkey or their export markets. With lower bulk rates, India purchased a substantial number of bulk cargoes in August and September, putting pressure on Turkey to pay higher prices to get the scrap it needed. Unfortunately, global fundamentals are even weaker than those faced by the USA and do not appear to show much support to the current US ferrous scrap market moving forward.
As we head into October, the dynamics of reduced demand are once again weighing on the market despite lower scrap availability both in the USA and abroad. US mills have found some stability in new steel prices although hot rolled coil is now below US$ 800 and mill orders are weak. Despite some attempted mill price increases on new steel, at best they have only been able to help support a price floor. That weakness in new steel may persist as the Federal Reserve continues to raise interest rates to stem inflation. In turn, most world banks are taking the same approach, further mitigating future consumer demand. Those headwinds should continue to weigh on new steel demand and, in turn, on US ferrous scrap prices.
After several quarters of record profits, US steel mills feel under pressure to keep those gains in their pockets. US scrap dealers are already preparing to fight back against mills looking to recoup more margin at their expense in October, which could bring a record sixth consecutive month of US ferrous scrap price decreases. Again, the question is when will decreased scrap flows make supply tightness outweigh reduced mill demand.
With winter around the corner, dealers are optimistic that we are near that inflection point. Winter will reduce intakes of obsolete scrap grades even more, further decreasing availability. While demand is expected to remain weak on international geo-economic headwinds, mills will still need scrap. Scrap dealers are confident that we are close to that point although economic headwinds will not recede in the short term. There will be many challenges as we end the year, but we can also recognize that current price levels and spreads between ferrous scrap grades are now more in line with historical levels.