The turning tide in scrap demand
Should the US steel industry be concerned with the effect global demand for US-produced scrap has on domestic scrap prices?
As the world becomes exponentially connected with each passing year, many long-standing industries have not transitioned into the global marketplace as easily as others. The US steel industry, overall, has been significantly reduced in the wake of a massive influx of imported steel and the loss of many manufacturing sectors to overseas operations. Nevertheless, the leaner, more efficient, and still-profitable steel industry of today has found ways to thrive in a worldwide community that is moving more toward collaboration than competition.
The road to adaptation, however, is not always smooth. One development that currently concerns some in the US steel industry—and has intensified within the last decade—is the growing appetite for US-produced steel scrap around the world. Scrap exports have spiked tremendously, from a total of 5.4 million metric tons exported in 2000 to 21.8 million metric tons exported in 2011 (January through November), according to US Commerce Department data. As for sources, Turkey has sharply increased its consumption of US scrap—the US did not export any steel scrap to the country in 2000, whereas year-to-date totals for 2011 reached over 5 million metric tons. Asian destinations such as China, South Korea and Taiwan have also boosted their US scrap imports over the decade, with Taiwan showing the most dramatic increase (just under 300,000 metric tons in 2000 compared to 3.2 million metric tons in 2011).
Steel output in these countries surged in 2011, and forecasts point to further increases this year. Of the world’s top 10 steel producing countries, Turkey’s crude steel output improved the most year-over-year in 2011, totaling 34.1 million metric tons (up 17 percent). South Korea improved 16.2 percent to 68.5 million metric tons, while Taiwan increased its output by 15.7 percent to 22.7 million metric tons and worldwide frontrunner China produced 8.9 percent more steel for the year at 695.5 million metric tons. For 2012, the World Steel Association (worldsteel) expects global apparent steel use will increase by 5.4 percent for the year—not as much of an increase as 2011’s 6.8 percent growth, but continued growth nonetheless. Furthermore, quickly-emerging economies such as those in Asia and elsewhere will not likely be able to generate enough scrap for their own domestic consumption in the near future, which means global demand for US scrap will undoubtedly continue to surge for years to come.
While increased steel output and demand seem to be unquestionably positive trends, many in the US steel industry are not so quick to agree, especially when it comes to the effect US export scrap has on US domestic scrap prices. Aside from seasonal supply issues, US mill demand used to be the primary driver of US scrap prices—but export scrap dynamics have gradually assumed that role. Whether this is good or bad for the US steel industry depends on who’s talking, as the following supply chain perspectives illustrate.
In his presentation during the 3rd Annual SteelOrbis Rebar and Wire Rod conference in January 2012, David Cheek, CEO of wire rod mill Keystone Consolidated Industries, lamented what he called the “decoupling” of US domestic scrap prices and US mill demand. While this might not mean much in a strong economy—high raw material prices are favorable when demand can support high steel product prices—the US is still recovering from the worst economic crisis in generations. End-use sectors are still dragging in activity, as a general sense of uncertainty pervades the marketplace.
Export-driven low scrap prices are also a concern for mills. According to Cheek, when mill demand is slow-to-steady but export demand drops off temporarily (foreign holiday, slump in foreign demand, etc.), scrap processors often choose to hold inventory until the export market turns around. This in turn causes transaction prices to fall, “which can lead to a freeze as everyone waits for the bottom of the market,” said Cheek. Low purchasing activity due to low scrap prices is not an issue when domestic demand is also low, but when steadiness in the market is wiped out on account of outside forces, US mills likely suffer.
In the question and answer portion of his presentation, Cheek acknowledged one way in which mills could once again have the upper hand in the US scrap market: government-implemented export tariffs. Already, China charges a 40 percent export tax on the relatively small amount generated within its borders, and Russia and Ukraine also use taxes to restrict scrap exports. Cheek said such tariffs give steel mills in those countries an unfair advantage in the world market, and wondered aloud why the US doesn’t protect its own mills the same way. However, many attending the conference stated that an export scrap tax was highly unrealistic, if not mostly unnecessary.
Sympathy for steel mills doesn’t extend much further down the supply chain—representatives from both steel distributors and service centers claim that mills aren’t truly concerned with “decoupled” high or low prices, because whichever way the price trend winds blow, all raw material cost movements just get passed down the line. “Of course, at this level, we don’t have much control over prices,” said one East Coast distributor, “but there will always be fluctuations in pricing, and whether it’s based on export scrap prices or just mill greed, there’s no point in worrying about it.”
In fact, many independent companies in the sector are more concerned with the generous discounts afforded to mill-affiliated distributors and service centers than they are with what price Turkish mills will pay for US scrap. This significant discounting in the market might be more prevalent when export scrap prices are high and US domestic demand is low, but the causes are not as important as the general unfairness of the situation. “Mills can blame high prices on scrap exports and low prices on steel imports until they’re blue in the face,” the distributor continued, “but if they were really concerned about maintaining some stability or control in the market, they’d compensate for major fluctuations out of their own pocket.”
Straddled between steel producers and steel consumers, many on the distributor/service center level welcome the growing globalization of the steel market. Lower export scrap prices that translate into lower imported steel prices are always an advantage to distributors, and even high export scrap prices that translate into high US domestic steel prices aren’t exactly a disadvantage, as their customers—end users—tend to keep comfortable inventories regardless of temporary market shifts (plus, distributors tend to see a flurry of buying activity ahead of announced increases).
Of course, those on the very end of the supply chain—end users—feel the brunt of high steel prices, especially when they are “decoupled” with demand. Those involved in the construction sector, for example, have felt a definite impact from high scrap prices (which nearly always translate directly into high steel prices). Brendan Wall, President and owner of Madison, Wisconsin-based Hatch Building Supply, said that contractors are beginning to look twice at steel costs when developing new projects, and are shopping harder for deals—a situation that tends to edge out smaller companies that can’t dip into already-slim margins for products such as rebar. Because inflation for other construction projects has been kept in check, Wall said that overall construction costs have not surged to the point that projects are being put on hold; but that could change soon if construction demand doesn’t pick up.
And so far, the outlook for US construction doesn’t exactly look bright. A recent report from the American Institute of Architects expects only a 2.1 percent growth in non-residential construction spending for 2012, while the Architectural Billings Index—which forecasts non-residential construction spending nine to 12 months out—remained neutral from November to December 2011. Residential construction, on the other hand, has a rosier outlook—Reed Construction Data predicts a 6.3 percent increase in spending for this year—but it depends wholly on the US economy strengthening via robust hiring and a boost in consumer confidence. If those factors fail to materialize, a solid recovery in US construction activity will be put off until 2013.
Despite concern over the effect export scrap demand has on US domestic steel prices, Wall said that overall conditions are still cyclical enough to keep the export influence from spiraling out of control. Export demand might cut into domestic supply more significantly at certain times of the year, but there are still other supply-side factors, such as seasonal flow into yards, that the steel industry can count on—unless global warming ruins that as well.
As would be expected, US scrap producers are relatively unconcerned with the growing trend of export influence in the market. According to many in the sector, the average processor sends twice as much scrap abroad than it sells to domestic mills, and aside from general growth in global steel consumption, other factors nearly ensure that the ratio will increase in the coming years. One East Coast scrap producer particularly attributes the rise of containerization to the export explosion in the US—intermodal containers mean that even the smallest “mom and pop” processor can contribute to the global market, not just the large-scale nationwide companies with access to breakbulk transportation.
And of course, the scrap behemoths are constantly upgrading their transportation infrastructure to better handle export scrap’s rising demand. Schnitzer Steel, which exported 74 percent of its ferrous scrap in the first quarter of fiscal 2012, announced in its quarterly conference call that it has completed recent investments to its seven deep water ports, which will give them operational flexibility to shift operations where demand is greatest.
But even as US scrap producers welcome the global marketplace at their doors, they don’t believe the US steel industry has that much to worry about. According to sources, US steel mills should only be concerned when the prices of export scrap drops dramatically, which could result in lower-priced steel products abroad being imported into the US to compete with domestics. Of course, this only affects US-based steel mills, said one scrap processor, who believes that the number of foreign-connected mills in the US (such as ArcelorMittal, Severstal and Evraz) will only continue to increase—a situation that will have a balancing effect on domestic and import competition.
OTHER TRENDS SHIFTING THE TIDE
Whether or not there is actual cause for concern about the rapidly rising global demand for US-produced scrap, there are other trends on the horizon that might make the argument moot in the decades to come. Chiefly among them is the question of China’s eventual scrap neutrality—if the world’s largest steel producing and steel consuming country will at some point generate enough scrap to fulfill its own needs. Many in the scrap industry think this might be possible for certain grades of scrap, such as busheling, as China’s manufacturing base continues to grow. But as for obsolete scrap, others do not think it is realistic to expect an emerging economy to cycle through enough old appliances, cars, etc. to match its own consumption until it at least reaches “developed nation” status. Plus, “America is the most wasteful country in the world,” according to a Midwest distributor, which means no other nation will be able to match its tremendous output of scrap steel. Flows of obsolete scrap traditionally slow down in poor economic conditions, but as soon as the economy picks up, obsolete scrap availability will certainly increase, as people dump their old consumer goods and buy new versions. And with most US steel mills still operating at roughly 25 percent below full capacity, this means there will be only more scrap available for the export market.
Another trend that will inevitably neutralize mills’ concern with the export market is vertical integration—more and more US mills are working toward stabilizing their raw material costs by acquiring scrap processors (and in some cases, developing entire scrap divisions that in many ways operate as a separate entity). In this way, mills eliminate competition with the export market while at the same time taking advantage of export demand by selling whatever they don’t need in the global market. It’s a win-win situation that’s quickly gaining steam in the US steel industry, and one scrap processor predicted that every major US steel mill will have its own scrap division within the decade. Combined with the trend of all those independent scrap producers (estimated to be approximately 50 percent of the US market) getting snapped up by larger scrap companies, and it seems as if soon there will not be a single ton of exported scrap that isn’t sold by a US mill (or subsidiary). That should soothe US mills’ concern about the future of export scrap—if, in fact, they really have anything to worry about.