Steel Market Update (SMU) had an extended dialogue with a number of our scrap sources over this past week. Many of the dealers spoke to the “price volatility” which exists in the scrap markets.; Prices have been “fluid” and moved higher over the course of the week.
By the end of this past week and into the weekend SMU was collecting scrap prices in the following ranges:
In the Midwest and South we have reports with Heavy Melt Steel (HMS) at $380-390/gross ton, Shred at $410-420/gross ton, #1 Busheling at $445-$460/gross ton - all delivered to the mill pricing.
On the East Coast, #1 HMS is around $350 - $370/gross ton, the higher being a springboard price for the docks (exports). Shred on the East Coast settled in the mid-to high $390s, and 5' Plate and Structural at $375. Prime scrap (Busheling) is in the mid-$430s, but not much is moving at that level.
We also learned new pig iron offers are at $483 per metric ton NOLA (Port of New Orleans) for spot barges. One of the domestic mills was reported to have purchased pig iron at $465 per metric ton the week prior. So this puts pig iron up $18 over the past week.
We asked one of our scrap dealers to discuss why prices have become so volatile during the past year (or longer) and has the practice of one price for scrap for the month died? Here is what one of our sources had to say on the subject:
“Market volatility is really the result, in my opinion, of domestic and overseas mill buying patterns, which are an extension of the buying patterns of their customers. To some degree, and at various time of the year, the larger scrap companies mess around with inventory for accounting reasons, which also has an effect. As another scrap dealer… put it, the mills and their buyers are still hung over from the end of 2008 when they got caught with expensive inventory. Now, they don’t want more scrap inventory on the ground than they know they will need for the foreseeable future (and service centers are the same with finished product), so they let their inventory levels get very low.
I’m not suggesting it’s their “fault” so to speak; it’s just the way they want to run their businesses. Truth is that Wall Street and investors want cash and not much inventory on the balance sheets at the end of the quarter, and with demand for finished product inconsistent, their scrap needs change from month to month. Their way of doing business certainly has merit. It just makes scrap market pricing volatile.
When the market turns like it did over the last few weeks, mills get caught without enough scrap and the dealers know it. The fact that it’s December and the end of a decent year for scrap processors exacerbates the problem for the mills because dealers know that the market typically rises in January, the private dealers don’t mind holding some inventory into the end of the year, and most dealers don’t need the cash from the sale in December and January. In this environment, dealers might hold some scrap back for January sales (don’t know how much exactly as the markets are still pretty good and flows have not been great over the last few months). The “December effect” is particularly acute right now. More typically, and it certainly varies from dealer to dealer, dealers speculate on what markets will do the following month and gauge their sales in the current month accordingly. But they run the risk that unforeseen market changes will occur from month to month, there will be transportation issues getting the scrap out the door, etc., so they have to sell scrap with some consistency throughout the year. It’s not possible, nor do most dealers want the risk, of trying to perfectly time the market.
My guess at this point for January is it will certainly be stronger. I am willing to say at least up $20 and maybe up as much as up $50 again depending on how order books for February look and what weather is like for the balance of December. But I don’t think mills were able to buy all they need for December and January over the last week and no dealer in his right mind is going to keep selling at early-December numbers into next week and the following week.
The crazy thing about this market increase we’re seeing now is how telegraphed it was and how short scrap the mills still turned out to be (I was surprised at just how low their inventories actually were). I bet almost any finished steel market watcher or participant you spoke with over the last month or so would have told you that come at least mid-December and into January, order books would improve. On top of that finished inventory levels were low (2.2 – 2.3 months), so when the finished product buying began, there was bound to be a good volume of it. This scrap market increase we’re seeing now is driven almost entirely by domestic mills. Turkish business for rebar and billet is pretty good, but they have not bought the volume of scrap yet they typically do in November and December. So in hindsight, if the domestic mills had bought just a little extra back in September, October, and early-November, my guess is that we would not see the increase in December to the degree we are seeing it. But they didn’t want to take the risk.
I’m not sure what you mean by “one price for the month” but if you are suggesting that mills come into the market on the first or second day of the month and buy what they need and then the dealer delivers it over the balance of the month, that’s still generally the case for most mills, except when markets get crazy like they are now and no one knows where the top it and mills aren’t getting enough scrap. Some mills will buy weekly and others will add or adjust delivery schedules as needed.”