Changes on both the supply and demand sides of the global steel industry are boosting steel and ferrous scrap prices, attendees of the Ferrous Spotlight session at the Institute of Scrap Recycling Industries Inc. (ISRI) Annual Convention learned.
Securities analyst Mark Parr of KeyBanc Capital Markets, Cleveland, noted that in addition to the unprecedented global demand for steel, the supply side in North America has also become better managed in recent years. Parr said that the demise of “non-profit” companies such as LTV and Bethlehem Steel, who were “just trying to raise cash to foot their pension funds,” has helped steelmakers compete more sensibly.
The consolidation that absorbed these firms has given the industry greater pricing power, according to Parr—“something the market did not have until 2004.”
The industry’s ability to tweak its production rates has helped better match supply with demand. And while scrap sellers may worry that steelmaking consolidation gives the steel industry too much leverage, Parr notes that even recent market troughs in pricing “are higher than earlier market peaks.”
Overseas, China may also be sorting out its steel market to better match production with demand, says Parr. During March, the price of Chinese steel was closer to prices being paid in North America, rather than being consistently lower. “At trough prices, nobody in China was making any money,” says Parr.
Scrap shippers may have growing outlets in Europe, according to Christian Rubach of BDSV, a German scrap recycling trade association.
According to Rubach, an anticipated year of economic growth in Europe in 2006 should provide “a much better year for steel consumption,” which is good news for the scrap industry since a healthy percentage of Europe’s steel is made in electric arc furnaces (EAFs). “I think we will see quite a strong market in Europe in 2006,” said Rubach.
Research by BDSV and Eurofer (a European steelmaking trade association) shows that “through 2013, steel scrap consumption will increase worldwide by 20 percent,” said Rubach.
The return of steel profitability is clear to see when looking at charts from the past couple of years, according to Karlis Kirsis of consulting firm World Steel Dynamics, New York.
Kirsis says, though, that EAF steelmakers have lost the profitability advantage they once enjoyed versus integrated producers, who can now calculate predictable feedstock prices while EAF steelmakers contend with fluctuating feedstock prices.
Kirsis says scrap supplies will remain tight in the foreseeable future. “The global supply [of scrap] may not be adequate at a reasonable price [throughout] the next decade.”
Regarding the near-term, Kirsis predicts mills will pay from $225 to $270 per ton for #1 heavy melt this year, barring an unlikely “industry shakeout” scenario. Peak pricing may be occurring in the first two-thirds of the year, “possibly heading downward after the summer,” he remarked.
John Carter, the CEO of Schnitzer Steel Industries Inc., Portland, Ore., also addressed attendees, and remarked that the scrap industry has been benefiting from “an unorganized market” in terms of pricing.
Carter sees demand for steel remaining strong in developing markets such as China and India, but cautions, “Whenever a product gets overpriced in the market, there is a desire to find substitutes.” However, most other metals as well as plastics are also rising in price, Carter noted.
Rising energy costs also pose a threat, said Carter, who noted that steelmaking is on the rise in the Middle East because that is a place where energy can be procured cheaply.
The ISRI Annual Convention was held in the first week of April at the Mandalay Bay Resort in Las Vegas.