Steelmakers in North America are enjoying healthy industry conditions, which helped keep ferrous scrap prices relatively strong and stable throughout the first eight months of 2018 despite a slight dip in August.
Demolition contractors who want those prices to stay in their current range ($330 to $400 per ton paid by the mill) may need to look at global trading patterns to determine whether their expectations can be met through the end of the year.
The United States’ status as a net scrap iron and steel exporter usually means enough scrap has to flow offshore each month for overall demand to meet supply. The current combined domestic and export demand has provided the underpinnings for strong pricing.
If some combination of tariffs, an overly strong U.S. dollar and offshore economic woes in nations such as Turkey and Taiwan spoils the global market for U.S. scrap, steelmakers in the U.S., even if healthy, will be happy to pay less for the secondary raw material.
Prosperity at home
Late July and early August saw a succession of U.S.-based steelmakers announce earnings reports that demonstrated they operated on healthy profit margins from April through June.
Charlotte, North Carolina-based steelmaker Nucor Corp. reported record profits in its second quarter results. The electric arc furnace (EAF) steelmaker, which predominantly melts scrap to make its steel, reported in late July what it referred to as “record-setting second quarter profits” and a first half that yielded $1 billion in net income.
John Ferriola, the company’s chairman, CEO and president, says, “We have increased our workforce by 18 percent and invested $8 billion since the last cyclical peak in 2008. Now, against the backdrop of a strong market and economy, we are capitalizing on those investments to move up the value chain and profitably grow our company.”
About one week later, another EAF steelmaker, Fort Wayne, Indiana-based Steel Dynamics Inc. (SDI), reported second quarter net sales of $3.1 billion and net income of $362 million. Those figures topped its first quarter net income of $228 million, representing a 59 percent boost in profits.
Mark Millet, SDI’s president and CEO, characterized the U.S. steel market by saying, “Domestic steel demand remained strong from the automotive, construction and energy sectors, while general industrial demand continued to grow.”
The combination of stable scrap iron prices and a U.S. economy that has stayed on a growth track since its dismal 2009 performance also has helped the demolition sector generate scrap.
Ventura, California-based Standard Industries engages in both demolition work and scrap processing and shipping activities. From his vantage point in Southern California, the company’s trading manager Martin Berkowitz says 2018 has been an active year on the demolition front.
“Demo activity is up significantly,” Berkowitz says. He cites a combination of heavy industrial and commercial tear-down work (in preparation for new construction), as well as government-related work, for keeping Standard’s demolition business unit busy. Unfortunately, additional work in his part of the country has come in the form of “wildfire recovery,” Berkowitz says.
In Winona, Minnesota, Willie Miller of Wm. Miller Scrap Iron and Metal, says his smaller market region is not seeing widespread demolition activity (although a major bridge project over the Mississippi River between Winona and neighboring Wisconsin is one exception). Regarding the stable scrap pricing, Miller says, “If people have a big project that needs to get done, I don't think the [current] scrap pricing would stop them from doing [it].”
The plate and structural (P&S) grade of scrap often harvested from demo work can track closely with the benchmark heavy melting steel (HMS) grades of obsolete scrap.
On the West Coast, Berkowitz says P&S pricing saw “a nice steady increase earlier this year, but that seems to have hit a brick wall—or perhaps—a steel wall.” He says, “The spread between HMS versus P&S has typically been $10 to $15 per metric ton, but current spreads are running in the $15 to $20 range.”
The positive financial results from U.S.-based steelmakers provide optimism to demolition contractors that scrap iron and steel prices can avoid taking any sudden plunges. However, contractors and recyclers may need to keep their eyes on several other data points to figure out where the market will head toward the end of 2018.
What’s free and what’s fair?
Speaking at a ferrous scrap-related session at the Bureau of International Recycling (BIR) convention in Barcelona in May, Jason Schenker of Austin, Texas-based Prestige Economics pointed to potential damage from Trump administration tariffs as having the ability to cause disruptions in the global steel and ferrous scrap markets. “Tariffs are like cockroaches, there’s never just one,” Schenker said in the session.
Speaking at the same session, George Adams of Orange, California-based SA Recycling LLCcommented upon economic concerns in Turkey, saying, “New steel exports from Turkey decreased in the month of March by more than 15 percent, creating less demand for U.S. scrap.” Turkish steelmakers have been “hit hard” by the Section 232 tariffs on imported steel imposed by the Trump administration, according to Adams.
Turkish mills are the largest overseas buyers each year for U.S. ferrous scrap, so the status of the Turkish economy can be an outsized factor in ferrous scrap pricing (compared to most other aspects of the U.S. economy).
The Turkish economy is not providing especially good news for scrap generators, such as demolition contractors, in 2018. Re-elected Turkish President Recep Erdoan is consolidating his power for the long term in the opinions of many observers and, in the process, is enacting policies and making appointments of concern to economic analysts.
In early July, Erdoan replaced an established and experienced chief economic advisor with his son-in-law. The appointment drew a hostile reaction from investors and currency traders, sending both the nation’s stock market index and its currency value sharply downward. As of early August, the Turkish lira had dropped 27 percent in value in 2018 against the U.S. dollar.
Media reports began circulating in July that Turkish mills were increasing their scrap buying from domestic sources and from Russia. If the Turkish lira continues to slide against the dollar, it could further disrupt Turkey’s purchasing habits in the United States.
The negative sentiment in Turkey could be one reason domestic steel mills in the U.S. tried to offer lower bids for scrap in early July and again in early August. If Turkey’s economy hits a rough patch, processors on the East Coast will quickly turn inward to domestic mills if they need to sell their scrap, which would create a supply surplus.
Striking a balance between free and fair trade has been a core issue for the Trump administration. Schenker’s prediction about tariffs emerging like cockroaches has proven accurate, particularly in regard to China. China has issued counter-tariffs on scrap materials, including copper and aluminum, which is not especially good news for demolition contractors who yield those materials.
China is not, however, an especially big buyer of ferrous scrap from the U.S. “We haven’t shipped ferrous scrap to the PRC [People’s Republic of China] in many years,” Berkowitz says.
Summarizing the rest of the West Coast export market, Berkowitz says, “Taiwan and Vietnam are regular buyers, and there is increased demand from India, Bangladesh, Malaysia and Indonesia.”
Reading the tea leaves
Where ferrous scrap prices head in the closing months of 2018 will depend on how the aforementioned domestic and global economic (and industry-specific) trade winds blow.
The profits made by scrap-melting steelmakers like Nucor and SDI show their margins are very much intact. Both steelmakers also reported increases in tons produced in the first half of 2018 compared to the first half of 2017.
In SDI’s case, there may not be much room for immediate growth. SDI says its mills operated at 99 percent of capacity in the second quarter of 2018, up from 94 percent in the first quarter and 92 percent (on average) in 2017.
The Washington-based American Iron and Steel Institute (AISI) measures overall steel output in the United States on a weekly basis. As of early August, AISI reported year-to-date steel output in the U.S. of 55.4 million tons, produced at a mill capacity rate of 76.8 percent.
That output figure is up by 3.5 percent compared to the 53.5 million tons made during the same period in 2017 when the mill capacity rate was 74.4 percent.
AISI also maintains figures on steel imports into the U.S., which seem to be showing that the 2 million tons of increased U.S. output is indeed, as the Trump administration intended, being countered by a decrease in steel imports.
In late July, AISI reported that its review of U.S. Census Bureau data showed that the U.S. imported a total of 2.48 million tons of steel in June, down 15.5 percent compared to the month before.
In the first half of 2018, total and finished steel imports checked in at 17.87 million tons, down 9.3 percent, or 1.8 million tons, compared to the first half of 2017.
The price of iron and steel scrap, however, may not change greatly based on where steel is produced, but rather, on total global steel output.
Again, as of early August, the data points were encouraging. Figures collected by the Brussels-based World Steel Association (WorldSteel) show global steelmakers produced 5.8 percent more steel (an additional 39 million metric tons) in the first six months of 2018 compared to the first half of 2017.
In terms of the global economy, there could be a gray cloud on the horizon regarding how steelmakers in Turkey fare in the second half of 2018. The status of the Chinese economy is also a concern. Although China does not import great amounts of scrap, it does produce nearly one-half of the world’s steel.
Should the Chinese economy, which has been growing steadily and, often, rapidly for about three decades finally see a large scaling back of spending on infrastructure and high-rise buildings, a glut of finished and semifinished steel will inevitably hit the global market.
In the U.S., although passenger car sales declined in July, the sale of metals-intensive pickup trucks and sport utility vehicles continued pace—good news for steelmakers.
In terms of the U.S. construction sector, demolition contractors will be among the first to be able to gauge how that industry is faring based on the number of project bids in the pipeline. When construction and demolition activity declines, the sale of steel beams and the price of scrap iron at the scale tend to drop with it.