US scrap market cautiously optimistic on tariff changes

US ferrous scrap market participants approached a flurry of tariff-related news today with cautious optimism that the changes could help sliding domestic prices gain a foothold.

Over the last 24 hours, the US reduced tariffs on imported Turkish steel from 50pc to 25pc and removed tariffs on steel imports from Canada and Mexico. The latter move did not include quotas as widely expected.

US scrap market participants were still digesting the developments today, but initial reactions were generally bullish. While it remains too early to tell if domestic prices will see an increase as a result, the news has fueled more expectations that US prices are at or nearing a bottom.

"I think the Turkish news will stimulate export and create a clear floor in the scrap market," a US broker said. "It may very well stimulate US domestic order books, but we still need automotive to improve."

Dropping the tariff on Turkish imports to 25pc reopens the US market to Turkish rebar, while supporting steel production and scrap consumption in that country.

The move had an immediate impact on scrap price in Turkey, with offers rising to $300-310/t cfr today for US-quality HMS 1/2 80:20, a day after a US exporter sold a cargo at $294/t cfr.

That should support an increase in export flows of scrap from the US east coast to Turkey and minimize the chances for those tons to be offered into a domestic market that has spent most of the year in decline.

"This news has also reinvigorated the June market just as it seemed to be heading towards a third consecutive decline," a US mill buyer said.

US scrap exports to Turkey have declined since the US imposed tariffs initially at 25pc in March 2018 and doubled them in August. The US exported 825,000t of scrap to Turkey in the first quarter, down by 16pc from the same period in 2018. Exports for the six month period ending March 2019 were down by 23pc year over year at 1.6mn t.

The US removal of tariffs on North American trading partners could have a longer term effect. One major US scrap dealer regarded the move as a "net-negative" that, while likely supportive of scrap prices because of steadier demand in Canada and Mexico, would potentially hurt domestic US mill prices that have already been under steady pressure.

That lines up with the view from Mexico, where rebar shipments to the US are likely to pick up.

"Mexican rebar exporters will be foaming at the mouth, and it will affect rebar pricing from US mills possibly," a Mexico market participant said.

Even with the tariff changes, there remain fundamental factors that will impact the June domestic scrap market. Supply remains ample across the country, while domestic mill demand has been lower in recent months, despite largely consistent steel mill operating rates.

"The question becomes will the domestic mills need the scrap," a broker said. "It does not appear they will need it."

But at minimum, the tariff changes upended the prevailing narrative dominating the US market for much of 2019.

"Who knows how this all shakes out in a few weeks," the mill buyer said. "But it has made mid-month a lot more exciting."