More Weakness in Ferrous Scrap Prices Expected

“Ferrous prices continued their moves lower this week.  Trading was largely regional and deals were found anywhere from sideways very early in the week to down $10-$15/GT by the end of the week.  

“From their peak in June this year (the “peak” being the height of prices in this new normal trading range we have been in since February this year), ferrous prices are down 20%-25% depending on the region and grade.  That has to do with three main factors from my vantage point: (1) the worsening economic and currency weakness in China, their exports of semi-finished steel to Turkey, and traders’ ability to spread the word about lower and lower offer prices of CIS and Chinese billet; (2) weakening U.S. domestic steel order books and no support for domestic steel prices, and (3) to date, as the summer draws to a close, enough scrap available for domestic steel mills to meet their slowing demand.  

“Tackling these factors in reverse order, we will probably sooner than later, see flows slow down into yards as summer clean up and demolition jobs are slowing down.  We typically see flows slow down toward the end of September and into October, especially if dealers see a market bottom forming.  But I am also starting to hear more and more that mill order books are weakening, and the data would suggest that is true.  The operating rate is lower, the low range of steel prices is moving lower, and lead times are a little shorter.  Your data indicates the same.  So mill demand for scrap was not very good in September, certainly not as good as was expected.  Add to that any inventory accumulation EAFs made in August to prepare for possible work stoppages at the integrated mills in September.  Once it became clear that there would be no work stoppages, mills knew they could reduce their buy.

“Finally, the global price of scrap is following the global price for semi-finished products, especially billet out of China which is now rumored to be trading for around $300/MT cif Black Sea ports.  While the volume of billets being delivered to Turkey (even with the rumored quality issues of some of that product) is not enough to completely displace scrap demand there, there is enough trading of the billet apparently to take the edge off of scrap demand and allow the Turkish mills to wait out the scrap merchants longer.  The price can’t keep going down forever, but I don’t think it’s finished yet.  So scrap price declines are not finished either.  

“I don’t expect a large drop in October as flows should have started to really slow by then.  But I have been wrong before (many times recently by the way).  It was a challenge to sell scrap in many areas of the country this week – especially the east, Ohio Valley, and down south.  Mid-west demand was a bit stronger.  So we could see come overhang of scrap coming into September.  I expect that over the next 6 – 12 months, we will continue to move lower but at a slower pace than we have this past eight months.  There is just no factor appearing on the horizon that is strong enough to support better demand for steel on a global scale (save, perhaps for the pending trade cases, but the potential success of those is suspect and the timing  still far too attenuated to have an impact on scrap demand any time soon).”