Ferrous Scrap Prices Poised for Sharp Downturn in February

A large Midwest based scrap company told us, “The domestic scrap market is poised for a sharp downward correction in February.  Lackluster demand from the mills, weaker export, and declining prices on ore-based metallics [such as pig iron & DRI] will overwhelm seasonal supply issues, likely resulting in a $30-$50/gross ton decline in scrap prices.  The trend will be less relevant as scrap selling prices varied significantly in January depending on the region and timing of sales.  It would not be surprising to see shredded pricing in the $290s and prime scrap in the low $300s, potentially even softer by March.  Scrap appears to finally be reverting to its historic mean relative to ore and global prices.  If dollar strength pervades, ferrous scrap could be range-bound in the $250-350/gt range for most of ’15.  While this reset of scrap prices will be “sticky”, it’s nonetheless inevitable.”

We followed up asking what the “historical mean relative to ore and global prices” means and we were told, “I believe prior to last year it tracked around 3.1 times (5 yr avg).  Last year it was closer to 4.5.  If one argues a reversion to mean, $70/mt ore puts scrap back into the mid $250s.  Oddly enough, an 18% increase in the dollar YOY equates to an $65+/gt decrease on scrap which points to a low $300/gt level as well.  It appears no market is immune to economic forces, with the possible exception of the railroads!”

One of our East Coast sources agreed sentiment was bearish amongst the scrap community, but calling for prices that begin with a “$2” handle vs. the $315-$360 levels we saw at the beginning of the month of January, may be a bit premature.

“…These washouts happen from time to time as you know.  And down $50/GT in February, if that is indeed what the market turns out to be, would have scrap prices starting with a “$2” in most if not all districts.  

“Now, I believe we are going to get to this level at some point in the next several months, and surely going into the spring.  We may get there in February too.  You can’t fight the market – it is what it is.

“But I think it would be an overreaction in the middle of winter and dealers who commit to selling a lot may find it very difficult to buy scrap against those orders.  Prime scrap may be plentiful these days, but I think the flow of obsolete grades will slow to a standstill at down $50 in February.  So if that is what the market turns out to be – and we won’t know for sure until trading actually begins – we could see a bounce in March and/or even April, only to continue the march lower after that.  That is the pattern of scrap we have seen numerous times over the last several years.  And I think for us to stay in the “starts with a $2” range for a sustained period of time, we will need to see the operating rate decline to the low 70% range and stay there for a while.”

One of our pig iron sources advised SMU that one of the mini mills bought Ukraine pig iron at $320 per metric ton CFR. The Brazilian suppliers are not able to compete with the Ukraine numbers. Offers out of Brazil are in the $365 per metric ton CFR range but are expected to drop in the coming days.

We should know more about where scrap begins to settle for the month of February by mid to late next week.