Does the scrap trend foretell another price bubble?
Scrap prices are on the upswing again, and steel prices should soon follow. But what about demand?
Ferrous scrap prices in most global markets began to rise steadily in the fourth quarter of last year and this trend has continued into the first month of the New Year. Steel producers have had no choice but to pass along - or at least try to pass along - their increased input costs to customers by raising their steel prices. However, with the economy still struggling, steel demand remains sluggish and steel buyers are still cautious in their approach. Therefore, despite the rising prices in many markets, steel orders, on the whole, remain light, as do inventories.
Some steel markets which have seen a decent recovery in demand since the onset of the recession, such as the US flat rolled market, seem to be absorbing the raw material-based price hikes of recent months, with prices for these products registering a rather impressive recovery during this period. Meanwhile, other markets, such as longs, have been slower to absorb the hikes, due largely to weaker end-markets such as construction. With the latest round of scrap cost increases that have taken place in January, producers of both long and flat products are expected to make a big push to raise prices for February. But despite the rising trend for raw materials, many in the steel industry are wary of the latest price developments, fearing that without strong demand to support them, the markets could turn around again in an instant.
Some think that further attempts of steelmakers to raise prices could make buyers even more wary than they already are, as the price bubble of 2008 is still fresh in their memories. Others hope that an improvement in demand will eventually follow the scrap price hikes this spring as the economy improves and more new projects get underway, and that this will help sustain the Q1 steel price increases. Then there are fears that the scrap market could turn around later in the first quarter once winter ends and scrap collection picks up again, which would also threaten to throw a wrench in steel's price recovery.
It is hard to say which scenario will take place, but it is safe to say that buyers' cautious attitudes should help prevent another price bubble and subsequent burst of it which caused a massive inventory overhang and rapid price drops in the steel markets in late 2008/early 2009.
Furthermore, despite the rising raw material prices, steel producers in most markets are still operating at significantly reduced capacities, which has allowed them to maintain a good degree of price control and prevented the market from being flooded again. So, while both raw material costs and demand will continue to be the primary drivers of the global steel markets, the guarded approach of both buyers and producers should help prevent any extreme price shifts in the near-term.