Advanced Steel Recovery

Overview: Steel Participants Bullish on Recent Market Performances

US scrap pricing has slipped in September but overall, prime inventories remain tight, mills continue to run at high capacity and recent scrap purchases overseas indicate that, although still relatively quiet, the US export market may be stabilizing and ready for another up-tick. US steel buyers are seeing more purchasing opportunities as steel and scrap imports continue to rise. Ferrous scrap imported from Britain and northern Europe to the East Coast has caused some lower scrap grades to slide dramatically while finished steel imports from Asia continue to raise concern for the US manufacturing community as they find it increasingly difficult to compete on pricing enabled by an undervalued Chinese currency.

US: Olympic Gold Plentiful, Steel Still Scarce

The auto industry's factory bundles pricing dropped between $2 and $15 a long ton taking the AMM Factory Bundles Index down to $385 a ton for September, it’s first decline in four months. While most anticipated a much steeper drop, the latest auction indicates that industrial scrap supply remains tight at a time when the domestic steel industry is operating at or close to full capacity. So why the dip? The previous run-up in prices of factory bundles and dealer market industrial grades had also helped boost the price of lower grades like shred and No. 1 heavy melt, quickly causing a surplus in these grades as many scrap suppliers began unloading, hoping to sell at market highs. Now, lower grade scrap has dropped by as much as $75 a long ton while industrial grades are down a more modest $10 to $25 a ton. But despite the drops and the wide price gap between the scrap grades, the mills contend that demand for their products are now stable thus leading major companies like Nucor to sustain August pricing through September in both their base products and scrap surcharges. Industry leaders expect the market to remain strong through the first quarter of 2005 and while no one is looking to reduce inventories until demand softens, a recent surge in imports especially on the West Coast are giving buyers a few more options, thus calming both the rush for steel and the price paid for scrap.

US: Facts & Figures

US raw steel output rose 1.3% the last week of August totaling 2,023,000 tons as US mills operated at an average capability utilization rate of 91.4%. In the corresponding week last year, mills produced 1,740,000 tons at an average capability utilization rate of 74.5%.

While U.S. steel imports in the first half of 2004 are up, so is steel pricing as consumers continue to report shortages of finished steel mill products. Steel shipments by U.S. service centers rose 13.1% in July compared with the same month last year, pushing the 2004 year-to-date figure to 33.4 million tons, up 17.5% from the same period in 2003. Mills continue to see their profits soar as the price of steel continues to outrun the costs of raw materials such as coke, pig iron, iron ore and scrap. Nucor Corp recently raised its 3rd quarter estimates by over $1.00 per share, now expecting to make at least $350m in profits for Q3.

Economic activity in the manufacturing sector remains strong as August marks the 15th consecutive month of growth, indicted by a PMI reading of 59%. Although August did register the slowest rate in 10 months, the sector remains positive as both new orders and production remain at high levels. A reading above 50% indicates economic expansion.

As for US export activity, No. 1 heavy melt exports for the first six months of 2004 fell just 0.8% below the first half of 2003 totals. Recent price volatility in the scrap metal markets have left overseas buyers uncertain and more inclined to wait for the next dip or sign of stability before concluding any deals. U.S. exports of No. 1 heavy melting steel scrap slid 10% in June from the previous month as South Korea and China reduced their intakes. The Koreans cut their intake by more than 52% to 31,555 tons while China trimmed deliveries from U.S. suppliers by 39% to 28,891 ton. However, a steep rise in shipments of cut scrap to India helped to offset June’s declines. More recently, Turkey is back in the scrap market after a long summer absence and is now trying to book material form the Black Sea, the US and Europe at prices around $250 a ton. Analysts expect prices to keep rising in Turkey as demand is strong and inventories at Turkish mills are low.

The China Contingency

The Chinese government remains focused on targeting overcapacity, lack of raw materials, poor plant layouts and structural imbalances in a continued effort to slow investments and reduce the risk of a crash. China's State Development and Reform Commission continues to halt construction of new iron and steel projects that have not obtained government approval. As a result lower prices and a downturn in local steel demand have spurred domestic steelmakers to boost exports. Total Chinese steel exports reached 1.75m tons in July, 263% higher year-on- year (y-o-y) and the highest level ever recorded. The latest statistics show that investment in China’s steel industry grew by 44% y-o-y in the first seven months of 2004. This compares to a growth rate of 90% y-o-y in the first four months, and 170% y-o-y in the first two months of 2004. At present rates, Chinese consumption for 2004 is unlikely to exceed 280m tons, falling well below the forecasted 300-320m tons made earlier this year. Nonetheless, the numbers remain staggering and China is soon expected to overtake Turkey as the world's largest ferrous scrap importer. According to Chinese sources, China's scrap imports in 2005 will grow to around 15-20 million tons. But for now, it remains quiet as they continue to sort out electrical supply and cost issues, currency pressures and continued credit tightening. Just recently, a US coalition filed trade action against China citing that the Chinese government undervalues its currency by about 40% enabling Chinese manufacturers to flood the US with products that US domestic prices could never match. Economists state that China would have to let its currency rise against the dollar by a large amount for it to have any significant effect on the bilateral trade imbalance between the US and China, which hit a record deficit of $14 billion in June. The US led China Currency Coalition is urging President Bush to take action against China for keeping the value of its currency pegged to the dollar. As for scrap pricing, the Asian scrap market is showing signs of interest but they are far from the feeding frenzy we have come to expect. Dongkuk Steel's July 29th purchase of 30,000t of ferrous scrap at $307.50 per ton for HMS No. 1 was quickly followed by Posco’s September 2 purchase for 35,000-40,000 tons at $282 a ton for bonus grade and $277 for shredded.

Local Market

Locally, scrap pricing has dipped $25 a long ton for September. An increase in steel imports, especially on the West Coast, adds a bit of uncertainty as to which way local scrap pricing will move in October but global and domestic indicators suggest the scrap market overall will continue to show strength through the Fall.