Viewpoint: Midwest, Ohio Valley scrap to hold

US ferrous scrap prices in the midwest and Ohio Valley are expected to trade near current levels for the rest of the year, with a potential upside for obsolete grades.

Market participants in both regions expect month-to-month price movements of between $10-20/gt in the second half of 2017, barring any significant action in a Section 232 investigation launched by the US in April.

Prime grade prices rose in the first half of the year as a slowdown in automotive sales and an increase in mill consumption squeezed supply.

Demand for prime grades has been particularly strong this year because of increased demand from producers of hot rolled coil and other steel grades that require scrap with lower residual content.

The national average capacity utilization rate increased to 73.8pc through mid-July 2017 from 72.3pc a year earlier, while electric arc furnace capacity utilization rates are in the 85-95pc range, according to market participants. The increase in EAF production has spurred demand for primes and with it, prime scrap prices.

Price increases for #1 busheling have been significant in Detroit, where prices rose by $50/gross ton (gt) in the first half of the year. In the same period, US automotive sales fell by 2.2pc from a year earlier to 8.4mn new light vehicles, according to the National Automobile Dealers Association (NADA).

In Chicago, prime scrap prices rose by $30/gt during the same period after its mills lowered buying programs and used more home scrap in place of buying prime grades. Some producers also opted to lower crude steel production in favor of rolling the slabs they imported to meet higher demand.

Automotive demand for the second-half of 2017 is expected to trend below 2016 levels, which could offset some of the increases in other sectors. One service center expects car sales to deteriorate over the next 24 months. Dealer inventories remain high and the price of new vehicles hinders buying, he said. Nafta light-vehicle production during the second half of 2017 is expected to be drop by 3pc from 2016 and by approximately 5pc from the first half of 2017, according to KeyBanc.

Such market conditions could strangle prime scrap supply. But some scrap dealers said that there may have been fewer automotive maintenance outages this summer than in prior years which to them suggests that auto production could be stabilizing.

Tight prime supply is not expected to be offset by growing imports of metallics. International suppliers have increased pig iron and scrap prices because of high US demand and pig iron supply is expected to tighten amid lower output in Brazil and a drop in availability of Russian supply after a domestic plants begins consuming more of the supply.

Strong prime demand and higher prices drew Canadian scrap into the US, and imports from Canada rose by 33pc in the first five months of 2017, according to the US Census Bureau.

But a weakening US dollar may reduce imports of prime grades from Canada further tightening supply, market participants said. The US dollar has been on a downward trajectory against the Canadian dollar since May, and has weakened to 1.25 in mid-July from 1.34 in early January.

Meanwhile, obsolete scrap prices are expected to find some support from a rising scrap export market after an increase in international billet and rebar prices lifted the market.

Supply of obsolete grades has increased by 10-20pc from a year earlier and is expected to stay healthy because suppliers see little chance of big price increases and are not holding back supply.

Demand for obsoletes has fallen because of lower demand from mills that are less strict on residual specification like long steel product makers. Mills that are able to substitute a certain percentage of obsolete grades in place of primes have already done so and are unable to substitute more.

But international demand for obsolete scrap may force mills in the midwest and Ohio Valley to raise prices to prevent too much scrap from heading to the east coast for export.

Prices for HMS 1/2 (80:20) cfr Turkey are up by $13.50/metric tonne (t) in July from the beginning of 2017 while prices for Chinese billet cfr Turkey have risen by $48.70/t.

The biggest uncertainty for price direction in the second half of 2017 is the section 232 investigation which may impact imports of foreign steel and in turn lift US output.

Should the investigation result in tariffs or quotas on steel imports, ferrous scrap prices for obsolete and prime grades are expected to rise as steel prices soar. Steel capacity utilization rates may rise to 80pc or more following an affirmative decision, market participants said.

Still, any increase in scrap prices may be short lived if the decision substantially increases domestic steel prices and puts pressure on demand from end users. Many market participants expect prices to return to typical 2017 levels by anywhere from 60-180 days following an affirmative decision.