February 2022 US steel mill scrap purchases recorded by Pittsburgh-based MSA Inc.’s Raw Material Data Aggregation System (RMDAS) show that scrap traded in an unusually tight range this month.
The difference between the value of fast scrap grades and obsolete grades (shredded and heavy melting steel #1 [HMS]) shrank in February after fast scrap lost $30 in value, while obsolete grades largely held their January values.
A look at the price curves of the three RMDAS grades shows that the sizable value gap that has characterized much of the last three years began to close in October 2021 and has been closing ever since.
The national average paid for fast scrap is now only $47 per ton compared to what is paid for shredded scrap, although there remains a difference of $101 between the value of fast scrap and that of HMS No. 1.
Across the three RMDAS regions (North-Central/East, North-Midwest, and South), fast industrial composite quality of service averaged $522 or $523 per ton. For some months in 2021, factories in northern regions paid $15 or even $19 more per ton than factories in the south for fast scrap.
Some regional differences in the prices of obsolete grades continued in February, notably with mills in the northern Midwest able to find HMS No. 1 for $22 a ton less than their compatriots in the central north / east region. . Factories in the three regions paid for their shredded waste in the range of $471 to $482.
On the demand side, prices in the North/Central East region were likely boosted by export demand. The Davis Index was reporting higher bids in early and mid-February from buyers in Bangladesh, India and Pakistan, although prices began to stabilize in the third week of February.
Despite lower prices in early 2022, the market as a whole is generating exploitable margins for both sellers and buyers. In the United States, steel producers reported profitable results for 2021, with most also saying they were encouraging about their outlook for 2022. Broader economic indicators, however, may cause concern in some corners.
Looking to the year just ended, concerns about inflation or a potential conflict in Ukraine were not taken into account in profit and loss calculations for steelmakers and listed scrap metal.
Economists looking for vaccine dividends need look no further than record 2021 profits for electric arc furnace (EAF) steelmakers such as Nucor Corp. and Steel Dynamics Inc.
Even steelmakers with the remaining Blast Furnace/Basic Oxygen Furnace (BOF) technology in the United States reported black ink in 2021. In late January, US Steel President and CEO David B Burritt said the Pittsburgh-based company’s “balance sheet has been transformed.” after his net profit over $1 billion in the fourth quarter of 2021.
Cleveland-Cliffs, which now operates blast furnace/BOF plants previously owned by AK Steel and ArcelorMittal, also feels low to the ground. In mid-February, the company and its CEO Laurenco Goncalves announcement what they called record full year and fourth quarter results for 2021.
The Cleveland-based company has its roots in the mining, processing and shipping of iron ore. Goncalves described his dip in the steel business saying, “Our revenues have grown more than 10-fold, from $2 billion in 2019 to over $20 billion in 2021. All of this growth has been profitable growth, generating $5.3 billion in adjusted EBITDA. [earnings before interest, taxes, depreciation and amortization] and $3 billion in net income last year.
The wide margins in the steel industry may not have been so important in the scrap processing business, but steelmakers with scrap subsidiaries and publicly traded scrap businesses also reported profitable conditions in 2021.
What could spoil the party? Experienced processors and traders have seen plenty of black swans in their time, and the problems don’t always come from US borders.
The threat of a Russian invasion of Ukraine has caused unease in Europe. How a conflict in this region would affect global metals markets is uncertain, but at least one analysis sees rising steel prices as a potential impact.
In late January, S&P Global Platts quoted an ING Economics commodity analyst as saying, “Commodity prices could soar if the Russia-Ukraine crisis escalates.” Warren Patterson, Head of Commodity Strategy at ING, also comments: “As tensions between Russia and Ukraine increase, the risk of it spilling over into global commodity markets also increases. Russia is a powerhouse of raw materials, being a key supplier of [metals].”
The opacity regarding economic circumstances in the People’s Republic of China also leads to guessing games regarding global iron and steel markets.
Chinese economics skeptic Gordon G. Chang wrote a book titled “China’s Coming Collapse” 20 years ago, but he did not relent in his prediction that a day of reckoning linked to debt and property value is inevitable for the nation.
In a February contribution to the Newsweek website, Chang wrote, “Total sales for the nation’s top 100 developers plunged 39.6% year-over-year in value” in January. This drop despite Chang’s allegation that government officials in some “Chinese cities refuse to register transactions at prices below government-set levels.”
It may primarily use blast furnace/BOF technology requiring less scrap, but China still produces half of the world’s steel. If his era of high-rise apartment building came to a halt and local government spending went to existing debt rather than new projects, it would have a huge impact in a country where the housing market accounts for about 25% of the GDP.
U.S. steelmakers and scrap processors may end up grateful that the two countries’ steel sectors have largely decoupled in recent years. Even after the trade disputes, however, some 172,000 metric tons of scrap metal headed from the United States to China and Hong Kong in the first 11 months of last year, according to the US Census Bureau.
West Coast exporters may worry less about the Chinese real estate market if their scrap buyers in Malaysia, Vietnam, Taiwan, Bangladesh, Pakistan, India and Thailand (all major destinations in 2021) maintain their active smelting workshops.