Advanced Steel Recovery

Overview: Running of the Bulls

Scrap pricing for July is up and while economic indicators support a surge, there remains an ‘out of the gate’ feel that leaves all participants questioning just how long this run will last and who will ultimately come out ahead. Domestic brokers, processors and mills are sprinting to secure seemingly scarce scrap, driving up prices to levels seen before May’s dip. And while export volumes have not reached previous peak levels, Asia is back in the market and as a result, Eastern mills are scrambling to secure scrap inventories before it sails off Western ports. The perceived absence of industrial scrap compounded by cyclical issues including the auto industry’s scheduled summer shutdowns, a shortage of railcars and an overall uncertainty of pricing trends has the US scrap market on edge. But two things remain certain— the need for raw materials abroad is great and economic indicators in the US remain strong. Even as the Chinese government sets limits to curb their growth rate, the level of raw materials needed to support conservative on-target expansion remains immense.

US: Here We Go Again

The US scrap market for July has soared anywhere from $20 to $100 a ton across the US and it seems like another feeding frenzy has begun. Prices paid for the auto industry’s factory bundles are up by an average of $60 a long ton taking the AMM Factory Bundles Index to a record $307 a ton for July. Analysts and industry sources cite tight supplies of industrial grade steel scrap, higher overseas demand, a shortage of railcars and auto factory summer shutdowns as factors driving the market up. Some dealers are demanding increases of $80 a ton for shredded & cut grades and upwards of $100 a ton for No. 1 dealer bundles & busheling. Mills are frustrated and see the run-up in scrap metal pricing as unreasonable, contending that the auto factory bundles pricing is irrational and should not be the benchmark of ferrous scrap value. Frustrations aside, the mills have been astute in offsetting these upticks in scrap pricing by continuing to carry out scrap surcharge strategies, insulating themselves from volatile market conditions. And while a few of the Eastern mills have consented to major scrap price hikes, the US mills find themselves in a position of strength once again as China rebounds. In addition, long products, rebar and wire rod prices are increasing and supply & demand factors continue to strengthen. So whether or not mills and dealers agree on the value of scrap, pricing in July has certainly exploded and forecasts and economic indicators remain strong. Raw steel output in the US totaled 2,010,000 tons in the week ending July 3rd as mills continued to operate at an average capability utilization rate of over 90%. In addition, the nation's supply executives in the latest Manufacturing ISM Report On Business® reported that economic activity in the manufacturing sector grew in June for the 13th consecutive month, while the overall economy grew for the 32nd consecutive month reflected in a PMI reading of 61.1% for the month of June.

ASIA: Back In the Race

July finds the Chinese back in the race for scrap and running along side them are other Asian contenders including Malaysia, Indonesia, and a strong South Korea. Several deals have been made in recent weeks on the West Coast reflecting an increasing overseas demand for higher grades of scrap. Even if Chinese authorities succeed at curbing its annual economic growth rate to that of around 7%, their production targets would still be enough to drive up US scrap export prices and limit the availability of finished steel import offers in the US for quite sometime. From software to cars, China is currently the hottest market in the world. Last year alone, China surpassed Germany to become the world’s third largest car market. And whereas a decade ago, owning a car was rare amongst the Chinese working-class, today, they account for three quarters of the Chinese car market. The figures are staggering. The latest statistics show that in May, China accounted for 24% of global steel production and, in the first five months of 2004, had increased steel output by 19.2m tons or 22.7% over the same period last year, eclipsing positive first five month year-on-year increases of 4.1% in Russia, 3.5% across the European Union, and 3.4% in the US. As consumption grows rapidly, global steel demand is expected to rise to 1.05bn tons in 2007, and 1.33bn tons by 2012. Broken down, this would reflect a growth in Chinese consumption of 5-7% long term, compared to a 1-2% increase for industrialized/post-industrial countries. On this basis, Chinese consumption could reach 40% of the world’s steel market by 2015. Given its lack of raw materials, the Chinese will remain pressured to find sufficient ore, scrap, and shipping capacity to enable them to reach forecasted consumption and production levels. Currently, the US is China’s biggest export market and with the US trade deficit with China hitting $124 billion last year, the US hope that China will work towards becoming a market economy which would mean trade-related changes including floating its currency, privatizing its banking system, strengthening workers’ wages and bargaining rights, and rolling back the role of government in the economy. Either way, China remains a huge factor in the US economy with the projected and actual figures showing an increasing trend in both scrap volume and pricing.

Local Market

Locally, scrap pricing is up $20 a long ton. But with the pickup in overseas buying and Midwest and East Coast scrap prices rising dramatically, we expect that pricing in the West will continue to push upwards.