BIR 2021: Steelmaking margins, prime scrap premiums to remain high in short term

Mammoth steel-scrap margins and high-grade premiums prevalent in recent months are likely to persist in the short term but should fall away by the end of the year, panelists at the ferrous session of this week’s Bureau of International Recycling (BIR) Convention said.

Steel prices have risen more sharply than those for ferrous scrap so far in 2021, leading to huge steelmaking margins for producers in countries such as the United States, Vietnam and Turkey.

“We’ve watched hot-rolled coil prices increase fourfold since last summer [and] at the same time, scrap has virtually doubled in price. There has been a decoupling of [finished] steel prices to scrap that historically we have not seen,” Tom Knippel, the commercial vice president of ferrous sales at California’s SA Recycling, said at the BIR event on Tuesday June 1.

“At this point, with prices on the [finished] steel side driven by forward demand in a supply chain that’s still empty, it allows mills to dictate new prices regardless of scrap. Scrap has become purely a supply-driven market – if there’s enough [scrap] out there, [mills] can technically take the price down,” he said.

Bank analysts expect a lot of downside on finished steel at some point this year but until there is a greater supply of steel products, that may take some time to emerge, he added.

The difference between for Fastmarkets’ steel hot-rolled coil index, fob mill US and its steel scrap No1 busheling, index, delivered Midwest mill was $1,131 per metric tonne on May 10.

That is up dramatically from a year-to-date average margin of $928 per tonne and even higher than an average of $443 per tonne since 2015.

Prime scrap premium ‘not healthy’
At the same time, automakers and other manufacturing companies have been struggling to obtain enough semi-conductors this year, which restrains the production of their respective end products, and in turn, the generation of prime scrap at factories.

“There are huge issues with new arisings due to problems in the auto industry. Some big European manufacturers are even stopping completely until the end of June,” Denis Reuter, the chief operating officer of Germany-based TSR Recycling, told the panel on Tuesday.

“Generation of prime scrap is low in Europe and on the other hand, demand is pretty high – this is what leads to these high prices. I expect the situation to normalize in the third quarter and we will probably see [prime scrap] prices coming down a bit. The situation right now is not healthy either,” he said.

Carmaker Ford’s shutdown of several US production units in early May means that the curtailed prime scrap generation will persist until the chip shortage starts to ease, SA Recycling’s Knippel said.

“The spread between prime scrap and shredded right now is too high,” he said.

US mills did move to buy more shredded scrap in the last few months simply to reduce cost, so the market has probably “stretched the bubble as far as it can go.” But the high premiums will likely stay until most countries come out of pandemic mode and the global supply chain for products such as semi-conductors fills up, Knippel added.

In the US in April, Fastmarkets assessed steel scrap No1 busheling, consumer buying price, delivered mill Chicago at $550 per gross ton and shredded scrap consumer buying price in Chicago at $430 per ton, putting the spread between the two grades at $120 per ton.

The gap in the US fell to $100 per ton in May after shredded gained $20 per ton while busheling remained flat, but that is still above the $93-per-ton gap for prime versus shredded on a cost-yield basis.

In Japan, a key exporter in Asia, Fastmarkets’ price assessment for steel scrap Shindachi, export, fob main port Japan averaged ¥54,000 ($491) per tonne in May, while the average price for Fastmarkets’ price assessment for steel scrap H2 export, fob main port Japan was ¥47,938 per tonne.

That put the average premium for Shindachi busheling over H2 scrap at ¥6,062 per tonne in May, up from a year-to-date average of ¥5,298 per tonne and a 2020 average of ¥2,996 per tonne.

Greg Schnitzer, the president of the BIR Ferrous Board and vice president of global trade at Sims Metal Management, said that before premiums in local markets fall, he expected to see the wider premiums carry over into ferrous scrap export markets.

“We’ve seen it in containers to Taiwan but where we have not seen it very much is in bulk and I think we will see those spreads increase as well to reflect demand for higher-grade materials,” Schnitzer said.

In May, a South Korean steelmaker booked its first deep-sea scrap cargo in several years. It paid $543 per tonne cfr for shredded and $548 per tonne cfr for plate and structural (P&S).

Sources said the mill opted to book such a cargo, which is said to have had a significant volume of P&S, due to high flat steel premiums in South Korea.