Steel scrap and the big squeeze

US sustainable steelmaking will need at least 10.4 million short tons of scrap per year by 2024. With supply tightening, could a new commodity supercycle be on the horizon?

Commodity supercycles are extended periods of high prices and robust demand. The recent surge in steel scrap prices in the United States, coupled with a global push for decarbonization, could be an indication that a supercycle for high-quality steel scrap is emerging.

What are some of the core drivers causing this tightening of the domestic scrap market, particularly for prime grades? Fastmarkets’ US steel and scrap market experts explore the forces pressuring the market.

Growth of EAF steelmaking capacity in North America

Traditional blast furnace (BF) steelmaking capacity has been dwindling for decades thanks to new production technologies, changing consumer demands and government regulations.

Electric-arc furnace (EAF) capacity now represents more than 70% of US steel production – a market share that is set to increase. These EAFs, also known as mini mills, have been vertically integrating to secure access to the raw material supplies they need to feed their meltshops.

The dominance of EAF steel production makes the US one of the greenest steelmaking markets in the world. New mill developments, mill restarts and planned mergers across the country are helping to advance green steel production by adding an additional 12-15 million short tons per year of sustainable EAF capacity into the market by 2024.

If these new mills were to run at 85% capacity, their demand for raw materials could rise by 10.5 million tons by 2024. This additional feedstock required by US mills – coupled with China’s target to increase its steel scrap usage to 320 million tonnes by 2025 from 260 million tonnes in 2020 — could lead to further shortages of prime grades of steel scrap.

Mill’s new strategy favors domestic scrap

During the commodity supercycle of 2007-2008, demand for steel scrap was high, pushing up prices. This pushed domestic steelmakers to snap up as many scrap assets as they could in defence.

The two largest acquisitions that took place at that time included:

  • Steel Dynamics Inc’s (SDI’s) acquisition of OmniSource for $1 billion in 2007 
  • Nucor Corp’s purchase of The David J Joseph Co (DJJ) for $1.44 billion in 2008 

Since then, US steelmakers have shown an increased interest in controlling raw materials near the mills they own and operate.

Producers are building mills around their scrap assets and are seeking scrap assets around their mills. For example, SDI divested OmniSource Southeast assets to CMC in 2017 because it did not feed SDI mills. SDI stated in its full-year 2020 earnings report that it had shipped 4.6 million gross tons of steel scrap, of which about 30% went to external customers.

In comparison, SDI shipped 5.6 million tons of steel scrap in 2012, with nearly half of those tons shipped elsewhere. SDI now processes 1 million tons fewer but consumes 20% more of its steel scrap internally.

This strategic shift has come at a time of high scrap prices, led by robust demand and tight supply — especially for prime scrap grades. Fastmarkets’ steel scrap No1 busheling, consumer buying price, delivered mill Chicago, rose to $760 per gross ton in April, its highest since $850 per gross ton in August 2008.

Although the market has since fallen – hitting $475 per gross ton in July and possibly dropping again in August – we expect demand for steel scrap to remain high long-term versus historical averages.

Growing EAF mill capacity may cause the US to struggle to secure enough prime scrap to meet its requirements — and it may have to look to foreign suppliers to fill the void. The global push to reduce emissions will continue to bolster demand for low-carbon raw materials such as prime scrap, supporting prolonged high prices and a fight to secure available supply.

Prime scrap supply to shrink further

Prime scrap supply has been shrinking for 50 years to around 13 million tons per year from more than 40 million tons per year in the early 1970s, according to a recent Cleveland-Cliffs investor presentation.

The fragility of the prime scrap market worsened in March 2022 when Russia invaded Ukraine. Steelmakers use pig iron to “sweeten” lower quality scrap, including obsolete scrap such as shredded or heavy melting scrap, and therefore had to scramble to cover the pig iron shortfall with higher-quality scrap such as busheling. As a result, No1 busheling Chicago prices rose an unprecedented $190 to $685 per gross ton in March from $495 per gross ton in February.

Supplies of pig iron from Russia and Ukraine accounted for around 61% of total US pig iron imports last year.

Cliffs forecast the scrap deficit to worsen, noting that new steel capacity coming online will require an additional 9 million tons of prime scrap by 2025.

Busheling prices have remained higher than pig iron prices since March, which is a historical anomaly. On top of increasing demand from EAFs and disruptions from the Ukraine war, another factor behind tight supply in the busheling market is the automotive sector. This sector is the leading producer of prime scrap but it has also been adversely affected by the silicon chip shortage.

Based on the latest output forecasts, we do not expect automotive production to return to pre-Covid levels until 2023 at the earliest.

Can US steelmakers combat the prime deficit?

Domestic steelmakers have addressed the busheling shortage mainly in three ways:
  1. Purchasing recycling assets
  2. Securing scrap buyback agreements with customers
  3. Developing their own alternative-iron operations

For example:

  • Nucor owns direct-reduced iron (DRI) facilities in Louisiana and Trinidad & Tobago as well as brokerage and recycling firm DJJ.
  • SDI has buyback agreements; owns recycler OmniSource; and internally sources liquid pig iron from subsidiary Iron Dynamics Inc (IDI), a liquid ironmaking facility situated on its Butler, Indiana, campus.
  • US Steel is working to produce pig iron at its works in Gary, Indiana.
  • ArcelorMittal purchased a majority interest in an HBI facility in Texas from Voestalpine in April to feed its EAF in Calvert, Alabama.

Surging prime scrap prices, particularly in comparison with shredded scrap prices, also have led some domestic steelmakers to consider increasing their consumption of low-copper shredded scrap

Market outlook

So far, market conditions seem to fit the profile of the early stages of a supercycle for high-quality steel scrap grades — but that’s not the whole story.

In the coming months, Fastmarkets expects prime scrap prices to ease due to increasing automotive output that will lead to improved prime scrap generation. But over the longer term we predict that prices for US prime scrap and metallics, including pig iron, will remain firm at historically high levels.

Global volatility and decarbonization will continue to pressure the steel scrap market, creating the conditions for a new scrap supercycle in the mid-to-long term.

US Ferrous Scrap Team

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