Advanced Steel Recovery

Overview: September’s Perceptions Bring October Deceptions

Scrap pricing plummeted in October, as September’s early and unrealistic sharp increases quickly moved downward, making scrap dealers and processors anxious to unload expensive inventory. A panic sell-off ensued in the first week of October only to stabilize by week two. The auto factory bundles took a dive, and on its way, took down the mills, the processors, the dealers and the export markets, all of which could not anticipate a bottom. Yet when you look at the market indicators, the US steel market appears stable: Steel pricing continues to be strong; the manufacturing sector saw new orders & production rise last month; and raw steel output has been inching its way up since mid-summer. Looming however, are inflationary fears, an ever-increasing trade deficit with China, the recent media focus on the possibility of a global steel glut and an overall fatigue from the volatility in raw material pricing, rising energy costs and its subsequent surcharges. As the end of the year approaches, most just want to get out unscathed by the fourth quarter. But with October’s rough start, we need to build confidence back into the marketplace by focusing on real numbers and not surrender to fears spawned by perception.

US: Scrap’s Deep October Dive Shows Signs of Resurfacing

Scrap dove by as much as $60 a ton in early October following the auto industry’s factory bundle average drop-off of $68 a ton and a slowdown in export demand. This decline coincides with September’s downward adjustment when prices fell $20 a ton on average for most grades of scrap during its second week. This decline also marks the end of a three-month run of price increases in the auto industry’s factory bundles, taking the AMM factory Bundles Index down $68 to $230 a ton for October. However, US steel pricing for the most part remains stable. Although flat-rolled steel remains higher than the rest of the world, inventories are sinking to low levels, imports remain low and steel buyers are anticipating price increases. So far, price changes in steel products have involved mills lowering surcharges in response to falling scrap costs while raising base prices to keep net prices stable. Nucor cut net prices on reinforcing bar, merchant bar and structural products by $20 a ton in October by cutting its scrap surcharge by $50 a ton and raising its book prices by $30 a ton bringing the company’s surcharge to $63 a ton for October.

With the US steel market stable, October’s fall reflects more of a short-term sell-off rather than a market free-fall. Since mid-summer, US steel mills have continued to produce at slow but steadily rising rates but September’s sharp increase in scrap pricing left many scrap processors laden with costly material and as the market began to retract around the second week of September, sellers began to panic, unloading material for fear that pricing would not gain back momentum before the year’s end, showing once again that in the face of today’s contradicting market forces, scrap pricing continues to favor emotional rather than practical outcomes. Other Q4 considerations include end-of-year down trends as mills focus on inventory reconciliation and scheduled maintenance shutdowns. Q4 also brings seasonal concerns and as winter approaches, mills in colder climates will need to build scrap inventories if they hope to avoid weather-related supply and transport problems. What the remainder of the year holds in store for scrap dealers and processors is still vague but for now it seems that the panic selling has stopped and the market has started to stabilize. November should recover a least a small part of October’s losses as mills will need to secure raw material to support the stable market steel market.

Economic Trends

US scrap exports, especially on the east coast slowed considerably into October. Turkish mills stopped purchasing after mid-Sept. and since have sourced lower priced material from the Black Sea ports. Exports to Asia have also slowed, affecting processors on the west coast. The slowdown in exports is considered a response to the jump in US scrap pricing in early September. Asian mills have chosen to pull out of the market and “wait and see” how far the downturn will go before securing more cargoes. In August, China’s share of US scrap metal exports reached 56 percent by value, making the US grand total for exports of scrap metal $505 million, with China accounting for $281 million. Ranking behind China for August US scrap metal purchases was Canada, South Korea, Mexico and Turkey which together with China accounted for more than 80 percent of the US scrap metal export total. The export monthly total for scrap steel, aluminum and copper has surpassed the $500 million mark three times this year; the highest monthly total in 2004 was $469 million. US manufacturing saw an increase in business in September despite Hurricane Katrina and the jump in energy prices according to the Institute for Supply Management’s Manufacturing Report On Business. Its monthly index jumped to 59.4% in September from 53.6% in August, a 13-month high. A reading above 50 indicates the manufacturing sector is expanding. The report showed improvements in new orders, production, employment, and exports outside the Gulf Region. However, purchasing managers are concerned as signs of inflation are imminent.

US raw steel production and capability utilization rates have been rising slowly but steadily in the last three months. According to the American Iron and Steel Institute, as of October 8th, (cont.)year-to-date, mills have produced around 79.6 million tons at an average capability utilization rate of 86.2 percent, down 6.1 percent from the same period last year.

International: High Scrap & Energy Costs Curb Overseas Demand

Although the global economy has slowed in 2005 from 2004, China continues its strong growth, driven by robust industrial production and capital investment. India and other emerging economies are also performing strongly. Therefore the global economy is expected to have sustainable growth over the next five years. But in the short-term, the risk of inflationary pressures may curb growth. Some predict global steel demand could fall by as much as 2% in 2006 due to high oil prices alone. According to the Posco Research Institute in Seoul, South Korea, demand will fall almost 1% if oil prices remain in the current range of $55 to $70 a barrel and profits and purchasing power fall in steel consuming industries. Steel demand will fall almost 2% if oil prices average $85 a barrel, an unlikely but possible scenario. In addition, pressures have been mounting on the Chinese government to allow the Yuan to float as the US experienced record trade deficit numbers with China in August hitting the $18.5 billion mark, up 4.5% from July’s $17.7 billion, according to the US Department of Commerce. The argument is nothing new: If China continues to manipulate its currency, the trade deficit will continue to widen, hurting US manufacturing, including the domestic steel industry. US Labor Department statistics show 14,000 manufacturing jobs were lost in August, resulting in a decline of 90,000 jobs since August 2004. Since January 2001, 2.8 million manufacturing workers have lost their jobs. While these figures cannot be solely blamed on our trade relations with China, if the Chinese keep its currency undervalued by continuing to accumulate hundreds of billions of dollars worth of US treasury bills, they will further the already ensuing competitive disadvantage for American producers and workers by continuing to reward companies that outsource US jobs. The Chinese Yuan effectively has a 40 percent advantage over the US Dollar while it remains pegged against it.

Local Market

Pricing on the west coast plummeted $30 a ton in response to weaker export markets, a huge drop-off in auto factory bundle numbers, and initial fears that November and December might not stabilize. We see November as flat or slightly increased and expect December to mirror November, as local mills will be slow due to end-of-year inventory reconciliation, scheduled maintenance, and fewer hours.