Opportunity for a scrap pricing supercycle

Growing steel demand presents an opportunity for a scrap pricing supercycle in the next decade, writes Bill Beck, reporting on the Fastmarkets virtual Scrap, DRI, and Mini-Mills conference in mid-April.

The recent surge in North American ferrous scrap prices amid strong global steel markets and supply shortages, particularly for prime grades, could be just the start of a demand supercycle for high-quality scrap units and alternatives, according to several panelists at Fastmarkets’ virtual Scrap, DRI and Mini-Mills conference, which ran from April 13-15, 2021.

“You think scrap is expensive right now? The scarcity of scrap has just started to show. Scrap in the long-run will be extremely expensive,” Cleveland-Cliffs chief executive officer Lourenco Goncalves said.

In an extensive online interview with Fastmarkets’ Lisa Gordon, Goncalves noted that an additional 10 million tonnes of flat-rolled steel capacity is slated to come on stream in North America by 2023.

The extra capacity will require additional raw material feedstock. That, coupled with China’s recent move to double its electric-arc furnace (EAF) capacity to 200 million tonnes per year in response to global environmental pressure, is likely to lead to shortages of prime grades of scrap.

“China should be flush with scrap. But having scrap and having a scrap collection system like here in the [United States] are two very different things. China is very good at getting what it needs from the international market,” Goncalves said, noting that the quality of scrap deteriorates over time and this could spark demand for additional ore-based metallic units – pig iron, direct-reduced iron (DRI) and hot-briquetted iron (HBI) in the US.

Alan Kestenbaum, CEO of Canadian steelmaker Stelco, agreed and noted that the market was likely on the verge of a paradigm shift with the world’s scrap supply becoming depleted. “The scrap reservoir is finite and not infinite,” he said, noting that the industry could see more acute shortages in a year or two.

US steel mills are on pace to add more than 5 million short tons of flat-rolled steelmaking capacity by the end of this year, according to Fastmarkets’ research team. The lion’s share of that will be concentrated in the Southeast and Gulf Coast regions, which could squeeze regional scrap markets and create additional demand for alternatives.

Another 6 million short tons will be added in announced mill projects during 2022-23. This additional capacity could squeeze the raw material supply pipeline. Industry observers point out, for example, that when the Nucor Gallatin expansion in Kentucky is at full capacity, it might require somewhere in the region of 150,000 tonnes per month of additional scrap; that could put pressure on supply flows in the Ohio Valley.

Steel Dynamics Inc’s (SDI) new Sinton mill near Corpus Christi, Texas, might also need about 250,000 tonnes per month of scrap when it is up to full capacity, and it will likely source locally along the Lower Mississippi River and Mexico.

The uptick in demand and dwindling supplies pushed the price of No1 busheling in the key region of Chicago up by $170 per gross ton in the first quarter, to currently sit at $550 per ton after trading sideways in the monthly April trade.

Russell Egge, founding partner at Egge & Anderson Associates, meanwhile, said that a global battle for scrap is starting to take shape while European steel mills are also on the hunt for additional material to feed their growing EAF capacity. He told conference attendees that when additional European EAF capacity comes online – potentially 12-14 million tonnes over the next several years – mills will be in desperate need of raw materials.

Egge & Anderson Associates estimates that 5.2 million tonnes of European scrap imports might be required in 2022 to keep EAF mills running, up from 412,646 tonnes in 2020.

The China conundrum
Panelists also noted that China and other areas of the world are looking for higher-quality scrap while steel mills attempt to meet various obligations to reduce carbon dioxide emissions, with the supply of alternatives – like pig iron and HBI – limited globally. This demand was helping to justify the higher premiums being seen in the market for quality materials.

Philip Bell, president of the Steel Manufacturers Association in Washington, DC, said the environmental advantage of steel produced in EAFs is big – and growing. Due to the US continuing to grow EAF-based production, carbon dioxide emissions will fall, he told conference attendees, noting that the nation enjoys very sustainable steel production in its EAFs.

Sean Daoud, vice president at PNW Metal Recycling, said that demand for high-quality scrap to feed those EAFs was robust, not only in the US but also in countries like China, Indonesia, Malaysia, Bangladesh, India and Pakistan.

“Demand ebbs and flows. But from our own perspective we see countries all over the world looking for higher-quality scrap to meet their climate obligations,” he said.

Another panelist, Paolo Stagnoli, commercial director at Tenovo, said that from a European and global perspective, there will not be enough scrap in the world to meet even 50% of steel demand between now and the year 2050. “With 700 million tonnes of scrap a year, you cannot produce 2 billion tonnes of steel,” he said.

Some of that scrap will find its way into the charging chambers of China’s EAFs. The world’s largest steelmaking nation has long relied on imported natural iron ore to feed its blast furnaces. But supply disruptions in Brazil in recent years and a global environmental movement against greenhouse gases has forced the Chinese government to consider converting more of its steel production to EAFs.

Cleveland-Cliffs’ Goncalves said that in recognition of those environmental pressures and economic realities, China several years ago pledged to double its EAF production to 200 million tonnes by 2025. Recently, the country said it will meet those goals by the end of 2021.

“They [the Chinese] know they need scrap to support that 200 million tonnes,” Goncalves said. “They are going to be a big player in the international market.” Earlier this year, China announced it as nixing import restrictions and tariffs on certain grades of ferrous scrap.

US Census Bureau figures show that in 2020 the country exported slightly less than 16.9 million tonnes of scrap; Chinese consumers purchased 44,789 tonnes of that. In 2011, the US exported 24.3 million tonnes of scrap, with 4.2 million tonnes of that going to China.

The latest export figures, for January and February this year, show that China imported just 7,621 tonnes of scrap from the US, up by 30.52% from 5,839 tonnes in the same two-month period of 2020.

Goncalves noted that in the long run Chinese involvement in EAF production means that scrap prices will increase in the international market. “That is the most important, most relevant trend out there today,” he said.

The increase in demand for quality scrap units globally could ignite a wave of consolidation in the scrap industry, since those companies unable to afford the capital investment in technology to sort the material and guarantee certain qualities could be snapped up by bigger players in the market, according to Jeffrey Lorch, partner at McKinsey & Co.

“Scrap will also travel longer distances as its value rises,” he said, noting that will include inland and overseas.

Allan Goldstein, CEO of AMG Resources, noted that demand for higher-quality scrap units was increasing investment in new technologies to help pinpoint this material, along with aiding in the blending of lower-grade scrap.

Role of ore-based metallics
That growing shortage of ferrous scrap is opening the door for increased usage of ore-based metallics in EAF steelmaking.

John Atherton, secretary general of the International Iron Metallics Association, told conference attendees that ore-based metallics – principally pig iron, DRI and HBI – are likely to become more prominent in EAF steelmaking in the years ahead.

“You’re probably going to see a lot more ore-based metallics,” he said.

Atherton said he does not see ore-based metallic competing with ferrous scrap, noting that steelmakers will want virgin ore products because it gives them more quality control over the raw materials they feed into the furnace.

We see ore-based metallics “as a supplement or complement to scrap,” he said.

But panelists warned that planning and building of ore-based metallics facilities needs careful thought. James Moss, a partner in First River Consulting, said pig iron, DRI and HBI production facilities are the product of a “fairly rare set of circumstances.”

He noted that greenfield plants require a source of cheap, abundant natural gas and access to a supply of enriched iron pellets. These days, he noted, such plants are generally built for internal consumption.

Cleveland-Cliffs began commercial operation of its $2-billion greenfield HBI plant on Lake Erie at the Port of Toledo, Ohio, this year. Originally scheduled to begin production last summer, the 2-million-tpy facility is fed by enriched iron pellets mined and milled at Cliffs’ properties on Minnesota’s Mesabi Range.
Cleveland-Cliffs will be the first producer of high-grade, ore-based metallics in the US Great Lakes region, home to a growing amount of EAF steelmaking production.

Goncalves revealed at the Fastmarkets conference that since acquiring AK Steel and the US steelmaking assets of ArcelorMittal in 2020, Cliffs will use about half of the annual output of the Toledo HBI plant to feed company EAFs in nearby Ohio and Pennsylvania. “It’s a great thing from our internal usage,” he said. “We changed between groundbreaking and commercial operation. We became a steelmaker ourselves.” 

Cliffs is not the only steelmaker to increase its reliance on ore-based metallics at a time of growing shortages of premium scrap grades. Dean Kanelos, automotive market development and product application manager at Nucor, said at the conference that some of the steelmaker’s mills – especially those with barge access to the nation’s inland waterway system – are using as much as 50% of the annual charge for their EAFs. “It’s an interesting market,” he said, “and we have learned how to adjust our inputs.”

Nucor has been making DRI at a company owned plant in St James Parish, Louisiana, since 2012.

Madhu Ranade, vice president and general manager of SDI, said the Fort Wayne, Indiana-based steelmaker feels there is room for more merchant HBI production in the US. 

SDI, which is building a greenfield EAF mill in Sinton, Texas, near Corpus Christi, will source scrap from Texas and neighboring Mexico, he said.

“Most of the scrap generated in Texas is sold outside of Texas,” Ranade said, noting that SDI’s Sinton mill is within 15 miles of a merchant HBI production facility, operated by European steelmaker Voestalpine AG, and that SDI metallurgists are adept at adjusting the raw material recipe for company EAFs.

This was first published in the May 2021 issue of Metal Market Magazine.

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