Entering the fourth quarter of 2022, US ferrous scrap dealers had endured a gruelling seven months of down markets. Decreasing new steel prices, weak export markets and a more than adequate supply of ferrous scrap had caused a steady and unprecedented drop in ferrous scrap prices. Key factors were a reduction in sheet mill activity and falling hot rolled coil (HRC) prices. While the downside was long, it had started from historically high price levels for both scrap and new steel. Sheet mills drove the downside as demand for new steel was weak.
In December, mills ran down inventories for year-end accounting purposes, and seasonal orders were weak. While mills looked again to take out money from scrap, seven months of price declines had also dramatically decreased scrap inventories. Add to that some winter storms and a few polar vortexes, and scrap availability was even lower than the reduced seasonal demand. After flat scrap prices in November, dealers were able to demand the first increase in over seven months in December. Prime scrap, driven by sheet mill activity, saw the largest increase of US$ 30 per ton on average and Shred was not far behind with a gain of US$ 20 on average.
Dealers quickly recognized that scrap was again in tight supply, and January was expected to bring back some seasonal mill restocking that would increase demand, regardless of a supposedly weakening economy. Despite steady increases in interest rates and more to come from the Federal Reserve, US consumer demand and a growing jobs market were enough to bring back sufficient demand to accelerate price increases of both new steel and scrap. Dealers sold light programmes in December in anticipation of a rising market and were rewarded in January with a solid increase in scrap prices of US$ 30-50 per ton, with Prime again seeing the largest upside driven by sheet mill demand.
While initial indications were for even higher scrap prices in January, sheet mill orders did not materialize fast enough to support the high end of anticipated increases. Subsequently, new steel buyers started to place the expected orders and, with that increase in demand, mills were quick to target more upside in new steel prices. Sheet mills quickly joined the cause of HRC price increases, taking the index back above US$ 700 and quickly targeting US$ 800 to US$ 850. While new steel sales are still being done at lower levels, mills did enjoy enough new business at higher levels to support additional scrap price increases in February.
Dealers again recognized that scrap was still in tight supply, as a limited amount of new demand would drive February gains. This was exacerbated by ongoing bad weather in most parts of the country, including low temperatures, snow, ice storms and heavy rain. Supply constraints were again enough to warrant a third month of US ferrous scrap increases; that market is now settling with prices some US$ 20-30 higher. With a strong export market, rising new steel prices and a still-constrained availability of ferrous scrap, mills have now accepted those increases. Now the bigger question is where we go from here.
The US Federal Reserve continues to try to curtail demand by raising interest rates - as it did again at the start of February, albeit at a slower pace (25 basis points). Exports have seen a strong rally, although the earthquake in Turkey may temporarily stall that market. China had been on a New Year rally but demand remains weak in the aftermath. Lastly, spring is not far off and better weather should help to improve the flow of scrap in the USA.
Amid these headwinds, the good news is that the US consumer appears to be resilient and resistant to a market slowdown. Demand for automobiles, houses and appliances remains strong, and supply chain constraints continue to push the demand curve forward. Adding in the forthcoming demand effects of last year’s infrastructure bill, this should help to fuel US construction this year. All of that may be enough to keep the party going for a little while longer. Time will tell.