Recycling Today reported that given the huge declines in US construction and auto manufacturing over the past year, the recent rise in steel scrap prices may lead many to scratch their heads with surprise.
According to the American Iron & Steel Institute, domestic raw steel production hit its weekly high for 2008 in the last week of July at 2.14 million tons at a capacity utilization rate of 89.9%. Meanwhile, production reached its nadir the first week of 2009, with production standing at 87,000 tonnes and a capacity utilization rate of 36.3%. Despite a recovery to 1.50 million tonnes of production and capacity utilization of 62.8% in the last week of November 2009, the US steel industry is far from the healthy production levels it enjoyed two summers ago.
According to World Steel Dynamics, there are a number of reasons for the anomalies
1. The sharp drop in 2009 auto production and reduced overall manufacturing activity had shrunk the supply of prime industrial scrap. As indicated in WSD's index of prime industrial scrap, generation for the United States is down from a peak of 21 million tonnes annualized in the summer of 2008 to only about 13 million tonnes on an annual basis in November 2009
2. The unprecedented price spikes in steel and steel scrap in 2008 encouraged the aggressive harvesting of obsolete scrap, and brought in much of the available low hanging fruit. This had once been an easy to access inventory for dealers to draw on during price cycle highs. However, 2008’s scrap price explosion has drawn heavily upon these pockets of inventory and forced dealers to seek more expensive sources of supply. Prices may have to rise even more before it becomes economical to bring in this more difficult to harvest scrap
3. The drop in non-residential construction and the sharp drop in capital expenditures have lessened the need for building demolitions, and the subsequent decline in the supply of obsolete scrap
4. The US Dollar has weakened this year. The USD Euro traded below 1.26 in February 2009 and reached a high of 1.51 in November. The US is the world’s largest exporter of steel scrap, and a weaker dollar has made US steel scrap and all US dollar denominated goods even more attractive to foreign buyers
5. The surge in Chinese steel production this past year has driven up the price of pig iron and has boosted China’s scrap imports in its wake
WSD believes that steel scrap prices have traditionally been a leading indicator of future steel prices and, also a good barometer of imminent changes in economic activity. Steel scrap’s seemingly counter intuitive price behavior demonstrates why it has become the wildcard in forecasting finished steel prices. We see steel scrap, along with pig iron and DRI, as part of a global bathtub, and unlike finished steel with its strong regional influences, the price of this scrap pig DRI bathtub behaves like a truly global commodity. As the world’s largest steel scrap exporter, US scrap prices impact the price of finished steel around the world.
Meanwhile, the World Steel Exchange, a JV between WSD and the Chicago Climate Futures Exchange, expects to launch screen traded futures contracts for USA #1 busheling scrap, USA shredded scrap and USA Hot Rolled Band in the first quarter of 2010.