Ferrous Price Spike Predicted

Peter Marcus of World Steel Dynamics, Englewood Cliffs, N.J., has forecast a steelmaking metallics shortage before, and he’s doing it again.

Speaking at the Institute of Scrap Recycling Industries Inc. (ISRI) Commodity Roundtables, Marcus presented his forecast through 2010 that shows a growing shortfall of ferrous scrap and other steelmaking feedstocks. The Ferrous Roundtable, held Thursday in Rosemont, Ill., featured an array of opinions on where the ferrous scrap market will be heading in the short term.

Randolph Ehret of steelmaker Timken Co., Canton, Ohio, remarked that commodity prices have been rising as an overall trend, although he sees current ferrous scrap prices as currently being at the high end of a historic trading range that moves in a roughly $50 band.

Vicki Roche, a scrap buyer for steelmaker Gerdau AmeriSteel Corp., Tampa, Fla., said she has seen scrap prices averaging about $3 per ton higher thus far in September. She noted that offshore demand for ferrous scrap is likely to continue and that pig iron out of Brazil is sold out through January of 2004, causing further demand strain on the market.

According to Roche, though, some of the other “perfect storm” factors that drove scrap prices up are alleviating. She noted that the labor situation that restricted DRI production in Venezuela has eased and that the Russian 30-euros tax on exported scrap could be lifted sometime soon.

Industry analyst Marcus, though, believes there are still overall supply constraints that, coupled with a booming Chinese steel industry, will make for a lack of steel furnace feedstock relative to global demand.

Marcus said that even though much of the new Chinese capacity consists of blast furnaces, a shortage of iron ore capacity will cause buyers at these mills to seek more scrap from an obsolete scrap reservoir that is already straining to feed the world’s electric arc furnace (EAF) mills.

That shortage is already showing this year, by Marcus’ calculations, with a theoretical shortfall of 36 million metric tons of obsolete scrap in the market in his “most likely” scenario, followed by shortages of 40 million metric tons next year, 45 million metric tons in 2005 and 50 million tons by 2010.

Marcus sees higher pricing for both steel and scrap continuing through the decade. “World Steel Dynamics places the odds at 65:35 that steel shortage conditions will recur by early 2004,” he stated. “And, if there is a shortage, steel prices may rise ‘volcanically.’ Steel buyers may fear ongoing metallics shortages.”

Marcus did not provide a dollars-per-ton figure on where ferrous scrap price averages might head, but did note that ferrous grades currently being exported to China for as much as $189 per ton could go even higher. “I could imagine a temporary spike to $220 per metric ton for #1 heavy melting steel” delivered there, he remarked.

Marcus admitted that World Steel Dynamics also predicted such a shortfall for the late 1990s, which did not come to be. “We missed,” he acknowledged, citing several factors that forestalled the shortage, including the outpouring of scrap from the former Soviet bloc nations and the Chinese preference for blast furnaces over EAF capacity in its new steelmaking capacity.

In another presentation, Tony Taccone of First River Consulting, Pittsburgh, took a closer look at the North American steel industry. A key issue affecting demand for domestic EAF operators, says Taccone, will be the vitality of the manufacturing sector in  the U.S.

Taccone noted that the U.S. economy’s “steel intensity,” measured by the amount of steel produced for each $1 billion of GDP, is trending down. For both steelmakers and scrap dealers, however, the export market could be the saving grace, as China’s “steel intensity curve” is much higher as that nation continues to develop a modern infrastructure for its 1 billion people.

Also speaking was Frank Cozzi of Metal Management Inc., Chicago, who advocated for steelmakers and scrap dealers and brokers to explore longer-term contract arrangements as a way to foster a relationship based on guaranteed shipments of quality product.