Tight Market for Secondary Steel

Secondary material typically sells for about two-thirds the cost of prime. Given the current market dynamics, the difference in some cases is now just 85-90 percent, Barnett estimates. “The differential between secondary and prime has really diminished as the market has stayed firm,” he said. “Margins have shrunken considerably as the market has tightened up.”

The market conditions have changed customer behavior. As prices go up, companies that normally buy prime steel consider secondary as a cheaper alternative. “Suddenly, the prime suppliers begin dabbling in the secondary market, and it really tightens things up. That has been happening for the last 3-4 months,” Barnett said. Likewise, buyers who typically opt for secondary may buy prime instead because the upcharge is not that significant.

For service centers that specialize in secondary steel, its higher cost raises the stakes. “The risk you take in continuing to buy secondary is of greater significance now because you have to pay a higher price to get the product,” Barnett said.

The potential for Section 232 trade action, restricting imports on the basis of national security, “is a huge elephant in the room that hasn’t decided who it wants to step on yet,” Barnett said. “If this 232 decision does restrict imports, we are going to see a significant increase in the price of prime, and it will drag secondary up with it.”

Lisa Goldenberg, president of Delaware Steel Co., Fort Washington, Pa., said her company is having a record year. Delaware specializes in secondary steel sales. “The July Fourth weekend was insane. You would have thought the holiday never occurred.”

Customers have been holding off on purchases as the price has gone up, causing inventories to get dangerously depleted. “When they finally get around to ordering steel, they need it now. They wait to the last second hoping they can buy it cheaper. And guess what, they can’t.”

Delaware Steel’s customers typically buy both prime and some secondary to average down their cost or fill a particular need. Secondary material is generally available except for certain products. “More specialized grades are becoming more limited,” Goldenberg said.

Mills distribute to a wider range of customers today, which adds to the competitive pressures. “The mills will sell to anybody now. If you can go on their website and qualify, you can buy,” she added.

An executive at a southern service center, who asked not to be identified, described the secondary market as stable, at least for the time being. Much like the prime steel markets, he said, purveyors of nonprime material are anxiously awaiting a decision on Section 232. He believes, given the makeup of the Trump administration, that a Section 232 ruling favoring the domestic steel industry is inevitable, although perhaps delayed by pushback from the nation’s steel users and threats of retaliation from international trading partners.

Mill offerings of secondary steel have been more limited than normal, he said, which he believes is an attempt by the mills to manipulate the market. “There’s an effort by the mills to limit how much secondary they are letting out to boost their prime pricing. It definitely seems like the offerings by the mills over the last two or three months have been abbreviated from where they are historically.”

He has seen some narrowing of the price differential between prime and secondary, but not as much as Barnett. It’s especially pronounced in commercial grades. “There are limited amounts of commercial steel anymore because the steelmakers are pushing out these exotic grades for automotive. In commercial grades, it’s a bidding war, and certain secondary products get pretty close to the prime price.”

What happens if imports are further restricted by Section 232 tariffs? “The market will immediately tighten. It could be 60 days of chaos, with prices up and supply restricted. You would see a lot of activity in the spot market at that point as people struggle to find steel to cover their needs. Some would look to secondary to pick up steel that might work for them,” said the southern executive.

The secondary market is seeing more advanced high-strength steels as AHSS represents a greater percentage of the mills’ output. The volume of high-strength secondary is growing every day as more automotive parts get re-engineered into AHSS, Barnett said. Given an auto industry that consumes roughly 30 million tons of steel each year, one-third of which is AHSS, there could be a million tons of high-strength secondary in the market today, he estimated.

The challenge for service centers and other sellers of secondary is finding customers that can utilize, or at least tolerate, the extra hardness and tough formability characteristics of high-strength material.

Carmakers pay a premium for prime AHSS, but it sells at a greater discount than commercial-quality products on the secondary market because of the difficulty of its reapplication. In other words, there is less demand for it because so few manufacturers and fabricators can use it. In fact, high-strength steel likely gets scrapped at a higher rate at the mill level because it can’t be absorbed by the secondary market. Finding alternative uses and users of high-strength secondary represents a growing opportunity in today’s market, sources agreed.