COMMENT: US scrap demand up at home and abroad, but Turkish mills still set price trends

After a strong first quarter of 2018, when more ferrous scrap produced in the United States was bought both at home and abroad, it appeared that the country’s scrap sellers were well placed to fend off buyers’ attempts to push market prices downward.

Price increases in the US domestic scrap market, combined with increasing mill capacity utilization rates and an 80% bounce in US scrap export volumes to Turkey in the first quarter of the year, created a favorable environment for US scrap vendors.

But despite these factors, the fact that US sellers eventually agreed to a price decrease for Turkish buying mills in mid-April ultimately demonstrated the continuing reliance of US scrap exporters on the world’s largest scrap importer.

With the Turkish import scrap market suffering from low demand, Metal Bulletin Research (MBR) believes that this dependency may be a problem for US sellers over the coming months, unless there is a sharp rise in domestic consumption or a considerable offtake of material into other import markets.

A lull in bookings
The reliance of US sellers on Turkish buyers was put to the test when there were no deep-sea scrap deals reported in the entire month of March from the US to Turkey.

Then, during April, just 153,000 tonnes of US-origin scrap was booked in the deep-sea markets by Turkey, according to Metal Bulletin calculations.

In contrast, merchants in continental Europe and the Baltic Sea region were heard to sell 1.02 million tonnes of deep-sea scrap to Turkey in April alone, compared with just 262,000 tonnes heard booked in the corresponding month one year ago.

As is shown by the volume of European sales, Turkish mills were in the market to buy scrap in April. But they did not purchase from the US until the second half of the month for price reasons.

In March and April, US domestic scrap prices continued to rise despite decreases in other key export markets such as the UK, where April prices dropped by £15-20 ($20-27) per tonne. This led to US exporters’ prices becoming uncompetitive compared with their European counterparts when offering material to Turkey.

So to conclude deals with Turkey in mid-April, US exporters ultimately had to accept the price drop desired by Turkish buyers, and a US East Coast exporter sold a cargo of HMS 1&2 (80:20) at $356 per tonne cfr. This was down by $29 per tonne compared with US offer prices for similar material at $385 per tonne cfr Turkey in mid-March.

So far in May, US domestic scrap prices have performed better than expected, with prices for material such as No1 busheling settling at unchanged prices in areas such as Chicago due to persistently strong steel prices.

But in the East Coast city of Philadelphia, where the scrap trade is particularly dependent on exports to Turkey, buying contracts for prime scrap bucked the nationwide trend and were concluded at a discount of $10 per short ton from the prices heard in April, due to low demand. Cut grades such as HMS were sold at prices down by $20 per short ton.

And although trade has picked up between the two countries since being slow in March and April, more testing times between US sellers and Turkish buyers are on the way. Turkish scrap demand is again being stifled – this time by the slowdown created by the Islamic holy month of Ramadan, the persistent weakness of the Turkish lira, and the political uncertainty over the country’s snap presidential election called for June.

Replacing Turkey
US exporters were able to shift a larger number of tonnes to countries such as Mexico and Vietnam during April to help offset the lack of Turkish buying activity, trading sources told MBR.

On a year-on-year basis, US exporters reduced their reliance on Turkish buyers as a percentage of overall export trade over the past three years. Turkey’s share of US scrap exports fell to 26% in 2016-17 from 32% in 2015.

But in the first quarter of 2018, trade patterns turned around, with volumes surging by 80% year on year to 979,468 tonnes compared with 542,707 tonnes over the same period last year.

While Turkey’s dependence on the US has increased, the reverse is also true. Other than Turkey, the largest buyers of US scrap, according to data from the International Steel Statistics Bureau (ISSB) for January-March, were Mexico (equivalent to 12% of total US scrap exports), Taiwan (11%) and China (6%). But none of these markets grew at remotely the same speed as the Turkish market. In fact, volumes to China went down by 15% year on year in the first quarter.

But although the aforementioned countries are generally buying much more US-origin scrap, container tonnages to markets such as India and Taiwan are far smaller than those for bulk shipment, so replacing some Turkish trade with deals to these countries is a tough proposition.

US domestic market
Another place where more US-origin scrap is being consumed is in the US domestic market amid rises in steel output.

According to MBR, US scrap demand increased by 355,000 tonnes in the first four months of 2018 on a year-on-year basis. US raw steel output inched up by 1.7% to 33.25 million short tons from January until May 12, lagging behind MBR’s relatively bullish 2018 forecast of a 3.47% rise.

The only US steel production forecasts that were more bullish than those of MBR came from Hatch, World Steel Dynamics and the outlier CRU, which predicted a 10% rise, according to a survey by UK business newspaper Financial Times in January.

But shipping scrap from coastal areas to inland mills is no easy matter. For US East Coast exporters, sending scrap inland to buyers in high-demand areas such as the Midwest would cost the same – or even more – than shipping a cargo to Turkey, one merchant told MBR.

So this option would only be considered at a time when local prices are strongly outperforming those for export, which will be the case over the coming month with Turkish HMS import prices heading downward and US prices for material such as rebar still increasing.

The growth of new export markets and the market changes caused by the Section 232 trade investigation give US scrap suppliers more options than they would have had in 2015, when local demand was receding and dependence on Turkey was comparatively high. Despite this, we believe that a reduction in Turkish demand, as recorded in April, would be enough on its own to limit the rises in US scrap prices.

If US crude steel output ultimately matches our expectations of a 3.47% rise in 2018, and yearly ferrous scrap consumption in the country increases by around 2 million tonnes, the effects of a weak Turkish market could be avoided. To achieve this, it would be particularly helpful if Mexico, Taiwan and India continue to buy more scrap. China is less of an influence because it is already buying less US scrap.

But US steel output was disappointing in the first five months of the year, so this scenario looks unlikely.

So, if there is no sudden surge in US production in the second half of the year, it looks likely that US scrap merchants will continue to rely on Turkey for a large portion of their scrap trade and will remain heavily exposed to swings in Turkish buying activity and pricing.

Alistair Ramsay and Alona Yunda, both in London, contributed to this article.

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[This article was updated on Tuesday May 22 to correct US scrap export figures.]