Secondary Steel’s Primary Problem? Plummeting Prices

Secondary steel includes coils that have been rejected for defects ranging from surface flaws to out-of-spec dimensions or chemistry. While not acceptable for their original use, they may still be suitable for a variety of other applications – and available for quick delivery at a discount.

Last year steel was in tight supply and prices rose week after week to record highs. If a defective coil showed up on the secondary market, it was quickly snapped up and sold to eager end-users who were willing to cut out bad sections and make do with imperfect material to keep their production lines running. This year, with steel in ample supply, buyers have become much pickier about the quality of the coils they will accept, sources tell Steel Market Update.

“Last year when we were product starved, people were cutting around the problems. Now they don’t have to do work arounds. They just tell us to take it back,” Gross said.

The downtrend in secondary prices is difficult to quantify because each coil has a different value depending on the degree of its defect and its usefulness to a particular buyer. As in the prime market, hot rolled prices have fallen faster than cold rolled and coated in secondary. Even the “plain vanilla” coils that are the most marketable because they have many alternative uses have dropped by 15% or more in the past couple months, sources estimate.

Gross describes secondary as an “all ahead stop” kind of market today. “Since Thanksgiving, there has been a hesitancy to commit. Last year if a deal fell through, you just sold it to somebody else. Today that could be a problem. You have to be more vigilant.”

Gross warns this hesitation may create “false positives,” or a temporary uptick in demand, if enough buyers jump back into the market at the same time. “We could be pumping air into the next false bubble,” he said. He expects volatility in the weeks and months ahead that may even see nonprime prices rise for short periods.

Beware the dead cat bounce, agreed another distributor of secondary in the Midwest. Prices may not decline in a straight line. Competition for desirable coils could bid prices up periodically. Don’t read too much into these temporary spikes, he said.

When to buy and at what price to sell are the two questions that challenge sellers of secondary every day. Inventory management in a declining market is about generating cash, not just margin. “You have to consider the opportunity cost of not selling an item when you have a chance to, not just the actual cost of that item,” said the service center exec.

The pressure on prices is only accelerated by the high number of players striving to reduce excess inventories and convert coils to cash, sometimes at very low prices. “I’d like to ask my competitors, ‘What are you doing? You are killing the market!’ On the other hand, we can buy steel very competitively now. It is a Catch-22,” he said.

Lisa Goldenberg, president of Delaware Steel Co. of Pennsylvania, said business is more stressful this year because there is so much more material available. “Before, it was about finding and financing the high-priced material. In this market, it’s more about not making a mistake and buying something too soon.”

Goldenberg is optimistic about prospects for the secondary market, noting that the economy will be strong and steel demand robust, at least for the first half of 2022. She estimates her business is up 10-15% year over year. “The customers who put off ordering in December are starting to call me in January. Even though you can buy it cheaper tomorrow, eventually tomorrow comes,” she said.

By Tim Triplett, Tim@SteelMarketUpdate.com