Ferrous market hits pocket of consistency

February 2022 United States steel mill purchases of ferrous scrap logged by the Raw Material Data Aggregation System (RMDAS) of Pittsburgh-based MSA Inc. show scrap has traded in an uncharacteristically narrow range this month.

The difference between the value of prompt scrap grades and obsolete grades (shredded and No. 1 heavy melting steel [HMS]) narrowed in February after prompt scrap lost $30 in value, while the obsolete grades largely retained their January values.

A look at the price curves of all three RMDAS grades shows the sizable gap in value that has characterized much of the past three years began closing in October 2021 and has been steadily narrowing ever since.

The national average paid for prompt scrap is now just $47 per ton more than what is being paid for shredded scrap,lthough a $101 difference remains between the value of prompt scrap and No. 1 HMS.

In all three RMDAS regions (North Central/East, North Midwest and South), the service’s prompt industrial composite grade averaged either $522 or $523 per ton. During some months in 2021, mills in the northern regions paid $15 or even $19 more per ton than mills in the South for prompt scrap.

Some regional differences in obsolete grade pricing held on into February, most notably with North Midwest mills able to find No. 1 HMS for $22 per ton less than their compatriots in the North Central/East region. Mills in all three regions paid for their shredded scrap in a range from $471 to $482.

On the demand side, pricing in the North/Central East region likely was boosted by export demand. Davis Index was reporting in early and mid-February higher bids being made by buyers in Bangladesh, India and Pakistan, though prices started flattening out in the third week of February.

Despite pricing declines in early 2022, the market overall is yielding workable margins for sellers and buyers. In the U.S., steel producers have been reporting profitable 2021 results, with most of them also professing encouragement regarding their prospects for 2022. Wider economic indicators may be causing uneasiness in some corners, however.

Regarding the year just completed, concerns about inflation or potential conflict in Ukraine did not enter into the profit and loss calculations of steelmakers and publicly traded scrap processing firms alike.

Economists searching for vaccine dividends need look no further than the record 2021 profits for electric arc furnace (EAF) steelmakers such as Nucor Corp. and Steel Dynamics Inc.

Even steelmakers with the remaining blast furnace/basic oxygen furnace (BOF) technology in the U.S. reported black ink in 2021. In late January, U. S. Steel President and CEO David B. Burritt declared that Pittsburgh-based firm’s “balance sheet has been transformed” after its net earnings of more than $1 billion in the fourth quarter of 2021.

Also feeling flush is Cleveland-Cliffs, which now operates blast furnace/BOF mills formerly owned by AK Steel and ArcelorMittal. In mid-February, the company and its CEO Lourenco Goncalves announced what they called record full-year and fourth-quarter results for 2021.

The Cleveland-based firm has its roots in iron ore mining, processing and shipping. Goncalves described its plunge into steelmaking by stating, “Our revenues grew more than 10 times from $2 billion in 2019 to over $20 billion in 2021. All this growth was profitable growth, generating $5.3 billion of adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and $3 billion of net income this past year.”

The wide margins in steelmaking may not have been quite as expansive in the scrap processing sector, but steelmakers with scrap subsidiaries and publicly traded scrap firms also have reported profitable conditions in 2021.

What could spoil the party? Experienced processors and traders have seen plenty of black swans in their time, and the trouble doesn’t always come from within U.S. borders.

The threat of a Russian invasion of Ukraine has caused unease in Europe. How a conflict in that region would affect global metals markets is an uncertainty, but at least one analysis sees higher steel prices as a potential impact.

In late January, S&P Global Platts quoted a commodities analyst with ING Economics as saying, “Commodity prices could soar if the Russia-Ukraine crisis escalates.” Warren Patterson, head of commodities strategy at ING, also comments, “As tensions between Russia and Ukraine grow, so does the risk that it spills over into global commodity markets. Russia is a commodities powerhouse, with it being a key supplier of [metals].”

Opaqueness regarding economic circumstances in the People’s Republic of China also leads to guessing games when it comes to global iron and steel markets.

Chinese economy skeptic Gordon G. Chang wrote a book titled The Coming Collapse of China a full 20 years ago, but he has not relented in his prediction that a day of debt- and property value-related reckoning is inevitable for the nation.

In a February contribution to the Newsweek website, Chang writes, “Total sales of the country’s top 100 developers plunged 39.6 percent year on year by value” this January. That drop despite Chang’s allegation that government officials in some “Chinese cities are refusing to register transactions at prices below government-set levels.”

It uses mostly blast furnace/BOF technology requiring less scrap, but China still makes half the world’s steel. If its era of apartment tower construction grinds to a halt and local government spending goes toward existing debts rather than new projects, it would have an enormous impact in a nation where the property market comprises an estimated 25 percent of gross domestic product.

American steelmakers and scrap processors may end up being thankful the two nations’ steel sectors have largely decoupled in the past several years. Even after the trade disputes, however, some 172,000 metric tons of ferrous scrap headed from the U.S. to China and Hong Kong in the first 11 months of last year, according to U.S. Census Bureau.

West Coast exporters can be worried less about China’s property market if their scrap buyers in Malaysia, Vietnam, Taiwan, Bangladesh, Pakistan, India and Thailand (all larger destinations in 2021) keep their melt shops active.