At SteelOrbis' Steel Scene conference in Houston, Texas on May 8, Adam Mervis, President and CEO of Mervis Industries, explained that volatility in scrap prices has been virtually driven out over the past 24 months, and major swings have been far less common than in years past. In the market for prime scrap grades, No.1 bundles and busheling prices are set based on what mills can sell scrap for--busheling cannot maintain less than a $200/ton gap with hot rolled coil prices. Prime scrap grades should always trade about 5 to 7 percent higher than shredded scrap, but in May, busheling prices fell below shredded in St. Louis, although he said the trend should not last. Prime scrap cannot fall much lower because of already low flat rolled steel prices; and although shredded prices could still fall, there isn't too much downward potential.
On the obsolete scrap side, Mervis explained that much has changed over the years, and in 2004, the backlog of scrap was extremely high, but more recently, the demand for US scrap from other sources such as Turkey and India has been growing. Further, individuals are holding on to cars much longer, and while construction activity has been slowly improving, fewer buildings are being demolished.
Overall, Mervis concluded that scrap is expected to remain in a very tight margin for the foreseeable future. Scrap is also no longer driving steel--alternately, steel prices are putting a cap on scrap prices. Another factor that will prevent scrap prices from increasing too substantially is the price of iron ore, which continues to hover around $140/mt.
During the question-and-answer portion of the session, Mervis discussed the recent phenomenon of mills switching scrap grades because of the extremely narrow range between prime and obsolete material. But the trend has not yet become particularly widespread because many longs mills are not in areas where a substantial amount of prime scrap is produced, grade-switching is bound to happen, he explained. "[Mills] will have to make more money" and while that may not necessarily drive shredded prices down, it could push busheling prices higher.