Where will the US steel market get its prime scrap?
Broken trade flows, inflated steel prices and the pull of decarbonization targets are changing the way US steelmakers think, plan and run their day-to-day operations. Is the US steel scrap industry coming to an end of globalization and entering a new era of domestic sovereignty?
Challenging times for the US steel scrap industry
The impact of the war in Ukraine has shone a spotlight on supply shortages of prime scrap in the United States steel raw material market. Disruptions in the global export market coupled with rising inflation and the pull of decarbonization are forcing US steelmakers to seek long-term solutions to protect their supply chains.
Tight metallics supply contributed to a surge in US steel prices, with hot-rolled coil (HRC) steel prices up by 15% on the month in March to $1,393 per ton.
At the beginning of the year, HRC steel prices in the US were declining from record highs, with buyers destocking to maintain inventory values. Last year’s peak was the highest price Fastmarkets has recorded since we started tracking US HRC in 1960.
However, after the start of the Ukraine war at the end of February, costs for steel raw materials including busheling steel scrap, merchant pig iron (MPI) and steel slab surged on the back of supply chain disruptions.
With raw material costs spiking, steel producers limited offers for flat-rolled spot tons and slowed order intakes to prevent buyers from stocking up at lower prices — so they could have enough time to pass through the higher costs to customers. At this time, US steelmakers could maintain margin stability on value-added products like cold-rolled coil (CRC) and hot-dipped galvanized (HDG). Plate prices remained stable.
Over the next four quarters through March 2023, the outlook for steel prices including HRC prices should soften, as the market rebalances and potentially returns to levels last seen at the end of 2020.
Could local be the new global?
In 2021, Russia and Ukraine exported approx. 62% of MPI to the US. The invasion of Ukraine by Russia effectively led to the removal of two of the primary merchant metallics suppliers to the country, triggering panic buying among US steel producers, seeking scrap as a substitute iron unit.
However, some large producers are investing in technology to produce higher quality shredded scrap as prime scrap becomes more costly and harder to acquire. The spread between No1 busheling and shredded scrap makes shred an even more economical choice.
At the same time, steel producers sought more pig iron from China, Brazil and India as unable to source material from Ukraine due to the war.
For example, pig iron makes up about 10% of Nucor’s raw materials, with half coming from Ukraine and Russia before the war. To make up the shortfall, the steelmaker reduced the amount of pig iron in its melting mix by increasing the amount of prime scrap. Nucor’s ownership of two direct-reduced iron (DRI) plants aided this agile response. In addition, Nucor has an increased focus on producing low-copper shredded scrap which will allow for the use of less pig iron.
The consolidation of the US steel market is gaining momentum, with many large steelmakers investing in or owning alternative iron assets, for example:
- ArcelorMittal Calvert just bought Voestalpine in Texas
- Steel Dynamics owns Iron Dynamics
- US Steel is building a pig iron operation in Gary, Indiana
- Nucor owns two DRI plants in Louisiana and Trinidad and Tobago
- Cleveland Cliffs own a Hot Briquetted Iron (HBI) plant in Toledo, Ohio
Margin pressures and resource scarcity are top of mind for US steel producers. Many large players will continue to seek more local, reliable raw material access, including vertical integration, to maintain healthy production margins.
What is the outlook for the US steel scrap market?
US domestic prime scrap prices have surged resulting in the benchmark Chicago busheling scrap settlement rising by $190 per long ton in March and $75 per long ton in April. The tightened merchant metallics supply and firm prime scrap prices also encouraged an increase in shredded scrap in March, with the Chicago shredded scrap price rising by $135 to $615 per long ton delivered.
The rise in prime scrap prices also indicates that the semiconductor chip supply issue experienced over the last year still looms. Automotive production – a key generator of prime scrap – appears to be less positive than anticipated for 2022. US monthly car production average at 8% less over January and February than in the fourth quarter of 2021.
The firmness in steel scrap was outpaced by a far greater surge in MPI, with US demand being the key driver of prices, given its position as the global leader in MPI imports. MPI arrivals from Russia and Ukraine to the US last year accounted for 34% and 28% of total imports respectively.
With the conflict in Ukraine ongoing, Brazil is now the primary MPI supplier to the US with shipments from Brazil to the US market jumping by 130% on the month to 195,000 tonnes.
But can the Brazilian export market keep up with the US steel industry’s growing demand? Possibly not.
Brazil’s capacity is way too small to meet US requirements on its own. For example, in April 2020, Brazil exported 278,000 tonnes of MPI which was its highest ever April. The US steel market monthly import requirements over Q2 2017-21 averaged 483,000 tonnes.
So even if Brazil repeated its record-breaking month, and the US was to take only 85% of this volume, the US would receive around 237,000 tonnes of Brazilian MPI — leaving a shortfall of nearly 50%.
The US steel industry stands at a precipice overlooking both future successes and failures. Yes, Buy American is a bold statement of policy and intent, but it must be followed up with real actions and firm commitments, all of which come with business-altering costs, trade-offs, and new existential risks.
Rethinking and rebuilding supply chains to be more local, efficient, and resilient are noble ambitions but will require many billions in capital investments, more waves of consolidation and integration as well as the reworking of supplier networks, which will lead to painful sourcing disruptions and pricing volatility. Those who identify and mitigate those risks will emerge as the winners in this transformational phase for the global economy.
It’s not business-as-usual and will be no short-cuts but with thoughtful and committed leadership the industry can emerge stronger, more sustainable, and resolute but the path forward is undeniably perilous.