Advanced Steel Recovery

Overview: US Scrap Market—Bullish Or Crazy Like A Fox

February saw a short-lived buying spree for the US scrap metal market with prices surging between $10-35 dollars-a-ton depending on grade and region. But mills quickly began to pull back as soon as required inventory was secured. The sudden surge indicates a strong domestic steel market as mills continue to be busy, manufacturing indicators remain positive and export markets begin to resurge. The possible effects of steel imports remain on the US steel industry’s radar as do domestic scrap inventories as both the east and west coasts gather competition from scrap buyers abroad. New mechanisms in the steel industry are beginning to emerge indicating that both scrap and steel markets continue on a path towards sophistication and regulation. One such mechanism is the newly introduced global steel pricing index, launched this month, which aims to track information from more than 1,000 steel producers within a year. Another effort is being led by the United Steelworkers union, which is pleading with the Bush administration to enact and use new trade remedy tools to counter alleged currency manipulation by foreign governments. Trends abroad show the evolution of the steel industry as well as the China Certification & Inspection Group is taking new steps to ensure the quality of scrap shipments from the US to China.

US: Scrap Pricing Surge Short-lived?

US ferrous scrap pricing for February surged anywhere from $10 to $35-a-ton this month, reflecting an up-tick in February’s auto factory bundle pricing, a renewed interest from markets abroad and a continued overall strength in the manufacturing sector. Industrial scrap grades such as No. 1 bundles and No. 1 busheling rose by as much as $35-a-ton while shredded scrap and other obsolete grades gained up to $20-a-ton. US mills are running efficiently and are reported to have plenty of orders on their books for Q1-06. Auto factory bundles moved upward for the first time since November 2005 and combined sales by Chrysler and Ford boosted the AMM Factory Bundles Index to $280-a-ton, up $34 from January. Export demand has picked up on both coasts. Turkey has been actively booking scrap from the East coast, as scrap supplies from Black Sea exporters remain tight. China has re-emerged after its New Year holiday, and is actively placing scrap orders on the West coast. In response to the increase in scrap pricing, Nucor has announced a scrap surcharge increase of $25 effective March 1st. Nucor will offset its increase in scrap surcharges with a base price decrease of $25-a-ton, registering a zero net effect in total transaction pricing for March. The company states that orders are strong but it is keeping an eye on imports as a surge in overseas products may have a destabilizing effect. Nucor competitors are expected to be in-line with its pricing structure for March.

Economic Trends

US exports of scrap metal totaled $5.81 billion in 2005, up 29% from 2004. Although ferrous scrap was the most valuable commodity at $3.43 billion, it showed the flattest trend, climbing just 18%. Aluminum posted a huge increase of 81% to $1.31 billion, outpacing copper scrap which rose 20% to $1.06 billion. US scrap metal shipments to China exceeded 50% of total exports for several months during 2005, but the rate for the entire year was 47% compared with 40% in 2004, 43% in 2003 and 39% in 2002. China’s December share of US scrap metal exports was 49%, unchanged from November. The US Commerce Department also stated the US exports of No. 1 Heavy Melting scrap soared in November to reach its highest month level in over 10 years. US raw steel output registered its highest weekly total since the end of April 2004 totaling 2,118,000 tons during the second week of this month, operating at an average capability utilization rate of 88.9%.

Economic activity in the manufacturing sector grew in January for the 32nd consecutive month, while the overall economy grew for the 51st consecutive month, according to the latest Institute for Supply Management Report on Business. Both New Orders and production figures remain strong. Manufacturers surveyed were generally optimistic about the sector. The PMI for January registered 54.8, a 0.8 decrease from December. While a reading above 50 indicates the manufacturing sector is expanding, the rate for January did register a slower growth. A new index that will track steel pricing was launched this month. Titled the SteelBenchmarker, this new global price index will track hot-rolled band, cold-rolled coil, standard plate and reinforcing bar in the US, Europe, China and the world export market as well as the pricing of shredded scrap in the US east of the Mississippi River. The index aims to track information from more than 1,000 providers within a year and is predicted to become the basis for trading steel commodities and as well as an instrument for steel hedging.

China: Record Steel Output; Record Trade Imbalance

China drove the world raw steel production to record levels in 2005, offsetting production cutbacks in North America and elsewhere, according to the International Iron and Steel Institute. Global raw steel production totaled 1.129 billion tons, outpacing the 2004 record 1.066 billion tons by 5.9 percent. China produced 349.4 million tons in 2005, up 24.6 percent from 2004 totals and accounted for 30.9 percent of the world’s steel production vs. 26.3 percent in 2004. The effects of China’s increasing trend in steel output continue to deeply concern the US as we watch our trade deficit grow. In 2005, according to the US Commerce Department, the US trade deficit reached $725.8 billion, a 17.5 percent increase from the $617.6 billion record total in 2004. The US trade deficit with China alone reached $201.6 billion in 2005, up 24.5 percent from $161.9 billion in 2004. While US exports to China rose 20.5 percent to $41.8 billion in 2005 from the previous year, US imports from China rose 24% in 2005, to $234.4 billion. And even these figures might not tell the whole story as many US exports to China, such as steel, are assembled into final product form only to be exported right back into the US marketplace. These figures have incited the United Steelworkers (USW) union to add pressure to the Bush administration to take further actions against unfair trade practices. The USW claims that the loss of over 3 million US manufacturing jobs is just a precursor to what may eventually become a total collapse of the sector as manufacturers continue to lose the race driven by a Chinese currency that remains unfairly undervalued. In 2005, the US manufacturing deficit increased 9.5% illustrating that offshore production and competition is eating away America’s steel core.

Local Market

Local pricing is up $10-a-ton for February due to the strength in auto factory bundles pricing, an increase in New Orders, and a surge in scrap buying activity from Asia. While the trend is uncertain, we do not foresee a down market next month. If Asia, particularly China continues to pick up buying activity, we expect the local scrap market to continue to rise.