Plenty at play in ’22 for US ferrous scrap: 2022 preview

Fastmarkets looks at some of the dynamics that could come into play in 2022 for the US ferrous scrap market

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New steel capacity

In the flat-rolled steel sector, the combination of two major expansions and a greenfield project is expected to increase demand for ferrous scrap by more than 440,000 tons per month.

Steel Dynamics Inc is building a 3-million-tons-per-year mill in Sinton, Texas, and expects to produce 2-2.3 million tons in 2022.

Nucor Corp’s mill in Gallatin, Kentucky, is increasing its capacity to 3 million tpy from 1.6 million tpy and NorthStar BlueScope in Delta, Ohio, is increasing its capacity to 3.1 million tpy with an additional 900,000 tpy.

While kinks are still being worked out, all three investments should be fully ramped up by the end of the second quarter.

The three combined could increase scrap demand by more than 440,000 tons per month - creating upside in the second half of the year.

“This will put upward pressure on raw material prices throughout next year, but it will be interesting to see what it does to the steel price picture. Will the material be readily absorbed, or will it put downward pressure on [steel] pricing?” one scrap and alternative iron broker said.

Finished steel prices

The price increases in 2021 will be one for the record books and the question remains how far those for hot-rolled coil will fall after peaking at $1,965 per ton on September 20. On December 17, the price dipped under $80 per hundredweight to settle at $79.05 per cwt ($1,581 per short ton), with sources saying it could hit as low as $1,100 per ton in 2022.

“The party will end quickly and dramatically,” one busheling supplier into Midwest mills said.

A coil buyer source disagreed though.

“Even if HRC hits $1,100 per ton, it would still be a great and historically high price for coil and still offer a great margin on scrap,” he said.

Scrap dealers are quick to point out the wide margins between busheling and HRC are testaments that they did not do nearly as well as the market escalated. As a result, they do not expect to see scrap prices drop as dramatically as HRC finds its new comfort level.

“You have to ask yourself where the price of new steel will go. It’s not always a complete science, but if steel trends lower after a record year then you have to expect some effect on scrap,” one Ohio Valley scrap dealer said.

“But scrap didn’t rise as sharply as HRC this year, and there was a large spread between the two. Therefore, scrap prices shouldn’t correct as sharply,” he added.

Another potential negative will be the US Department of Commerce’s shift from Section 232 tariffs of 25% to tariff-rate quotas (TRQs) for material from the European Union, which is expected to put some downward pressure on domestic steel prices that have been largely insulated.

In total, 3,331,829 tonnes of tariff-free steel will be permitted to enter the US from the EU annually after which the 25% tariff kicks in.

Automotive, oil and gas, machinery

Two steel intensive industries - automotive and oil and gas - are expected to do well in 2022.

Automotive has a lot of catching up to do once the semiconductor chip shortage eases and mills also have a tremendous amount of coil capacity locked up in contract sales, versus spot tons, so they will remain busy, the coil buyer source noted.

“I do expect demand to remain strong between the infrastructure [bill], general improvement in the supply chain, and more reshoring/onshoring of production to protect against some of the issues we have been facing going forward,” the scrap and alternative iron broker noted.

Higher oil and gas prices also translate to more demand for tubular goods and the rig count was up by 76% in the US in early December.

“During the last recession, the petroleum industry helped pull us out of the doldrums. With the price for petroleum rising, it does usually correlate and should help demand for tubular products, which usually means more scrap consumption,” the dealer in the Ohio Valley said.

The backlog on big machinery has some scrap dealers suggesting, however, that they have lead times of 6-9 months to receive a new crane or shear, which is hampering businesses’ ramp-up.

A large backlog will keep machinery makers busy playing catch-up. “I ordered a shear eight months ago and it is still not here,” a Midwest recycler said.

A scrap dealer in the south echoed the sentiment that lingering supply chain headwinds will carry over into next year, adding that labor and truck driver shortages also continue to plague the industry and are unlikely to be resolved anytime soon.

Exports

Turkey, traditionally the biggest buyer of US ferrous scrap, has become fairly inactive in the market as the country faces renewed currency woes. Whenever Turkey exits the US market, it results in an oversupply of scrap metal. Turkey remains a wild card as it is unclear whether its government will stop its currency from freefalling.

In 2020, the US exported 16.9 million tonnes of scrap, with more than 25% of it - 4,031,578 tonnes - going to Turkey.

The latest figures also show that for the 2021, the US shipped 2.87 million tonnes of scrap to Turkey up till October, down by 18.12% on the 3.5 million tonnes delivered over the same period a year earlier.

The importance of Turkey was epitomized in the December ferrous scrap trade. Turkey could not buy from the US because its currency made US scrap too expensive. The excess shred went inland instead of offshore and essentially dampened any upside in the market.

On the flip side, 10 cargo sales mostly to Turkey off the East Coast in October turned the November trade into a free-for-all, with every mill aggressively chasing tons.

Futures market

The persistent backwardation in the CME busheling futures forward curve in 2021 points to softer sentiment for prime scrap prices in 2022.

Busheling futures can be used as a hedging tool for scrap market participants and take their cue from the physical market, acting as an accurate barometer of trends in each monthly ferrous trade.

“Futures markets can be very responsive to market information. For example, if the upcoming month is expected to rise or fall drastically, trades along the curve will reflect this change in sentiment. Curves can change throughout the day as buyers and sellers of the futures contracts book transactions,” Freight Investor Services futures broker Josh Toney told Fastmarkets.

The current bid/offer spread for the front-month January CME busheling contract is $580-600 per gross ton.

Current bids of around $580 per ton support the assertion of some physical market sources that prices could fall by $20 per ton or more in January’s ferrous trade in comparison with December, while offers of around $600 per ton broadly support others’ assertions that the market could be firmer over the period.

CME busheling futures are settled against Fastmarkets’ steel scrap No1 busheling, index, delivered Midwest mill, which was calculated at $603.81 per ton on December 10, up by a marginal 0.30% from $602.02 per ton a day earlier following December’s broadly sideways ferrous trade.

An anticipated drop in HRC prices going into 2022 - which is influencing physical market attitudes toward prime scrap prices - has been similarly represented by a backwardation in HRC futures over the course of the year.

“An interesting component of the busheling futures market is that the curve has not been nearly as steep as HRC even with steel prices rising to all-time highs over the past year. Busheling futures comparatively have remained stable,” Toney said of the relationship between the two.

The price spread between HRC and prime scrap in the US domestic market continues to trend at over $1,000 per gross ton.

“Taking into consideration the mill spread or mill margin [between HRC and prime scrap] we can see variability in the expected amount of melt margin going into 2022 with the anticipation of compression being the name of the game. At present, this appears mostly driven by expected lower HRC prices more so than substantially lower busheling prices,” Toney said.

Fastmarkets’ daily steel hot-rolled coil index, fob mill US was calculated at $78.74 per hundredweight on December 27, down from $79.75 per cwt a week earlier. Before this month, HRC prices were last below $80 per cwt in May.

Consolidation

Attempts to secure shredded and prime scrap grades kicked into high gear in 2021. Major acquisitions altered the industry’s landscape, with steel mills assuming control of dominant entities. More consolidation is likely in 2022, leaving smaller scrap dealers to wonder how they will be affected.

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