2020 PREVIEW: More stability looming for US ferrous scrap market?

The ferrous scrap market in the United States might be calmer in 2020, with metals recyclers potentially facing less volatility and price declines than in 2019, which could present a unique set of opportunities for buyers and sellers.

Market participants do not expect the steep decline in prices that characterized the market in 2019 to reoccur due to the extent of that drop. Fastmarkets’ assessment of steel scrap No1 busheling, consumer buying price, delivered mill Chicago was $270 per gross ton in December, down by 33.3% from $405 per ton in January 2019.

While it seems doubtful that prices could return to January 2019 levels – an increase partially fueled by Section 232 tariffs and stronger demand for energy products – there could be modest and manageable price swings next year unlike the $40-per-ton drop in ferrous scrap prices during the October and November 2019 trades, according to a scrap executive in the Midwest.

The following themes are expected to affect the ferrous scrap market in 2020:

Consolidation will be a prevalent theme in the ferrous scrap market next year, be it acquisitions by vertically integrated steel mills or mid-to-large-sized scrap processors deepening their territorial footprint, according to a scrap metal broker in the South.

A full year of repeated price declines has taken a toll on scrap dealers, making it impossible for them to recoup losses on inventory and at the same time squeezing margins, a shredder source in the South said. 

Scrap operations that are less financially sound are looking for opportunities to exit the industry, triggering a wave of mergers and acquisitions not seen since 2016, according to scrap executives in the Midwest and Southeast. 

Steel and scrap prices recorded a stellar year in 2018. Those who wish to sell their companies are seeking a purchase price based on their performance that year – which does not sit well with many buyers.

“We are a buyer right now but we are seeking 2016-type asset-based sales. I think there are a lot of people who would like to sell but the biggest challenge for consolidation in 2020 is the divide between buyers and sellers,” a Southern processor source said. 

Alter Trading Corp’s purchase of Schneider’s Iron & Metal in mid-2019 and Allmetal Recycling’s buy of Glickman Recycling’s assets in late October, among others, have sparked more mergers and acquisitions across the US.

In mid-December, Alter Trading purchased the assets of United Milwaukee Scrap’s six locations in Wisconsin and Minnesota.

Several major scrap operations in various regions are also said to be looking at selling their assets to vertically integrated mills in their areas.

One area that is a potential hotbed for acquisitions is Texas, where a major electric-arc furnace (EAF) steelmaker is allegedly seeking scrap-related assets to secure the raw material pipeline for a new mill.

“I hear they are looking in Houston but Dallas is also a good option because there is a lot more prime scrap available there,” the Southern processor said.

While Pittsburgh-based U.S. Steel Corp is not expected to begin commercial production at its Fairfield Works until the end of 2020, the steelmaker plans to start buying and holding 35,000 tons of scrap per month as early as April in anticipation of the opening.

The furnace will have capacity of 1.6 million tons per year and is expected to buy 100,000 tons per month of good material because the facility will make rounds for seamless tubular products. Its mix is said to be No1 busheling and No1 bundles, plate and structural scrap, shredded scrap and alternative irons.

US Heartland
Charlotte, North Carolina-based Nucor Corp has opened a steel reinforcing bar micro-mill in Sedalia, Missouri. In addition to an on-site shredder that is expected to have processing capacity of 180,000 tpy, it is assumed that the mill will be supplied by Nucor scrap subsidiary David J Joseph Co (DJJ).

DJJ owns Advantage Metal Recycling (AMR), which has 11 scrapyards in the Kansas City area that could feed the micro-mill. Smaller yards that sell to AMR facilities will have more opportunities with the new mill.

Ohio Valley
AMR will also be busier now that Nucor Steel Gallatin has started operating its new hot-rolled coil galvanizing line, boosting the mill’s  capacity by an additional 500,000 tpy per year. 

This mill is mostly self-sufficient on shredded scrap after DJJ’s River Metals Recycling LLC subsidiary acquired Louisville, Kentucky-based Industrial Services of America Inc in August, but it might have to reach outside of the Cincinnati/Middletown market in order to fill its prime scrap needs.

“As they expand production and demand for scrap, their first choice will likely be the Chicago market or places to the west of Chicago,” an Ohio Valley processor said.

Even though scrap is readily available in Cleveland and Pittsburgh, until demand improves for mills in that region prices remain higher in these two cities than in Chicago. This makes the Ohio Valley less attractive as a source for scrap on a consistent basis, the Ohio Valley processor noted.

Fastmarkets’ assessment for steel scrap No1 busheling, consumer buying price, delivered mill Chicago was at $270 per gross ton in December, $20 per ton lower than the price for No1 busheling, consumer buying price, delivered mill Cleveland at $290 per ton.

The good news for scrap sellers is that this represents the first phase of expansion at the Gallatin mill. Nucor also plans to increase hot-band capacity at the mill by mid-2021 – an effort that will almost double its production to about 3 million tpy from 1.6 million tpy.

While Nucor Gallatin’s need for additional raw materials is a positive for Midwestern dealers, 2020 could be a challenging year for the Chicago scrap market due to the closure of the Illinois River, scheduled for July 1-October 31.

The river system is a key part of the Chicago market, without which it is difficult to move any excess scrap generated in Chicago to the river mills in Arkansas and Tennessee. But if steel demand improves and the Chicago mills get busier, it could make up for the tons usually sold on the river.

“There was a period of five years when we didn’t ship anything by barge. It could be a squeeze trying to ship all our material if we cannot get enough rail cars but if things get back to a normal melt at the local mills we can easily place everything by rail or truck,” a Midwest processor said.

Shipping by rail incurs higher freight cost but if the river mills are in desperate need of material it is possible to ship out of Chicago via rail. This is not the preferred option, however, because Texas is more cost-effective for remote shipments by rail.

“It all depends on mill demand. Nobody knows what mill demand is going to be like in 2020. If market conditions are poor, then the river closure will exacerbate the situation. But if the market is good, there won’t be too much of an impact on the market,” the Midwest processor said.

Wild cards
Two factors that could potentially cause the market to rise or fall too quickly are exports and the government, with 2020 being a presidential election year. Businesses are therefore cautious since it is unclear who the next head of the country will be, and the upside of the Section 232 tariffs has run its course.

Exports are another unknown since the US often exports 20-25% of its ferrous scrap to other countries. If Turkey, for instance, exits the market, the effects of oversupply will quickly be felt in the US.