Weak ferrous scrap, zorba prices weigh on shredders

US shredders enter the summer with margins squeezed by persistent declines in ferrous and nonferrous scrap prices, resulting in lower scale buying prices and reduced inbound flows.

Shredders surveyed by Argus this week have seen varying degrees of supply constriction after lowering shredder feed buying prices by $10-30/gt from May levels in response to further price deterioration in domestic ferrous scrap prices in June and persistent declines in domestic and offshore zorba prices.

National average ferrous scrap shredded prices delivered to the consumer fell to a 2.5-year low in June, dropping by $28/gt to $267/gt delivered mill, the lowest since December 2016 and marking a $97/gt decline since the beginning of 2019. Steady decreases in US domestic steel prices and reduced mill demand have pressured prices.

The drops have brought the average shredder feed price in the US to levels around $100/gt, below which flows begin to slow considerably, market participants said.

"We are holding at $100/gt, but realistically we should be at $60-70/gt to make our desired margin…which means we are tightening margins over the scale just to keep flows coming," one US shredder said.

Profitability is being further squeezed on the nonferrous side as persistent declines in zorba prices further whittle away at shredder margins.

US prices for 95/2 quality, commodity-grade zorba have been on the decline since late April, when Indian and Chinese import prices began to slide. Less competition from Asian imports allowed US twitch producers and secondary smelters to bid zorba down while still buying adequate volumes.

Average Chinese import prices for non-ferrous shred zorba prices hit a 3.5 year low last week after dropping to 47.5¢/lb on a cif basis, the lowest level since December 2015. However, continued pressure on the market is expected to drive prices even further downward.

Deterioration in both nonferrous and ferrous prices has left shredders struggling to pass through the impact of declines.

"[We moved] shredded feed down $30/nt but that doesn't cover the drop in zorba," a west coast shredder said. "It should be more but it's hard to keep material flowing if you take any more out."

Shrinking volumes

Some shredders' efforts to lower feed prices are being met with growing resistance from scrap peddlers, dealers and auto wreckers.

"Our volume has dropped significantly this month. The peddler volume is only down slightly but the larger volume customers are drying up," a Midwest shredder said. "Some of the auto crushers are telling me they can't buy cars at these levels."

Price sensitive suppliers are cautiously maintaining inventory levels and holding back on selling at lower levels.

"The auto wreckers are very price-sensitive and that supply base says it will stockpile," another shredder said. "A lot of the supply base thinks this could be the bottom of the market so they are holding back a bit."

As shredders attempt to work down average shredder feed prices, there is growing concern that flow could dramatically dry up further if July prices fall further.

Shredders surveyed by Argus reported varying levels of impacts to inbound flows so far this month with some market participants reporting drops more than 25pc compared to prior month, while others saw little-to-no change.

Rural shredders reported sharper drops in flows, while supply in scrap-rich cities has remained steadier. Other factors impacting flows have been weather, downstream capabilities and on-hand inventory.

"I've not seen a drop yet. This month is consistent with last month but a lot of it is due to good weather," a fifth US shredder said.

Demand rise potential

Mill demand for shredded scrap may rise heading into the summer months as a seasonal lull in manufacturing activity through July and August slows industrial scrap flows.

Prime flows are expected to be down 30-40pc during this time, according to market participants.

A scheduled 60-day maintenance outage at Nucor's Louisiana DRI plant toward the middle or end of August will put additional pressure on the prime market.

As availability of prime scrap tightens, mills may turn to shredded scrap as it has a higher yield than other obsolete grades.

"Plant shutdowns will slow the flow of primes, so naturally the mills will want more shred because they can't buy prime," a sixth US shredder said.

Still, early expectations for July scrap prices are generally weak, which, if realized, could lead to a greater number of shredders dropping scale prices and a more widespread decrease in inbound shedder feed flows.

"Any further drop and, I think, we will pass on all of the decrease in our buying prices," an east coast shredder said. "If this occurs, I would expect this to reduce the flow significantly."