Viewpoint: US ferrous scrap poised for strong 1Q

The US domestic ferrous scrap market enters 2020 with upward momentum amid slower flows, limited inventories and steady underlying steel demand, but expectations of slower growth could mitigate longer-term momentum.

Market participants are optimistic that ferrous scrap prices will see continued upside after consecutive monthly increases in November and December early next year, fueled by supply-demand imbalances.

Driving the expected increases in prices is the combination of limited obsolete scrap availability and lean inventories at dealer yards and mills. Persistently low collection prices in 2019 stifled inbound flows of obsolete scrap into shredders, a trend that is expected to be exacerbated early in 2020 as colder weather slows down flows.

The shortage of obsolete scrap has prices rising faster in the end of 2019 than prime grades, with the average national premium between #1 busheling and shredded scrap shrinking to $8.04/gt, the lowest since January 2017.

Some shredders throughout the Midwest, south and northeast have already begun increasing prices for infeed in excess of gains recorded in December, suggesting that they are pulling forward expected increases in January to get ahead of seasonally slower flows.

On the demand side, a pickup in finished steel demand could also fuel increased scrap consumption in the first quarter. US steelmakers produced more steel in the fourth quarter 2019 through the first three weeks of Decembercompared to 2018 at 22.2mn t of steel in 2019 versus 20.8mn t in 2018, according to the American Iron and Steel Institute.

Hot-rolled coil prices reached a multi-month high on 17 December at $590/st ex-works Midwest with lead times extending out to seven weeks, nearly through the duration of January.

Electric arc capacity start-ups are estimated to bring online roughly 2.5mn t/yr of new steel capacity through 2020 in the form of rebar, merchant bars, wire rod, squares, flats, angels and channel products.

The additions will continue to highlight a broader shift in steel production as southern US electric arc steelmaking capacity grows and takes a larger overall percentage of total US production.

Slower growth could dampen long-term outlook

Slowing global growth could stymie a recovery in finished steel demand and raw material consumption through the latter part of the year.

While broader concerns of recession in the US and global economy have mostly subsided, growth rates are expected to be slower in 2020 than levels witnessed in 2019 as US manufacturing activity has contracted for four months and uncertainty over the US-China trade war negatively impacts investment.

The US economy is estimated to have slowed to a 1.6pc annualized pace of growth in the fourth quarter, according to the St Louis Federal Reserve. That compares with 3pc in the first quarter, slowing to 2pc in the second and third quarters.

The impacts of slower growth will be mixed regionally with some mills in some area more exposed then others.

Capacity utilization rates for energy market steel suppliers are vulnerable to remaining under pressure if the oil and gas sector weakens.

The growth rate of US oil production has slowed amid a decline in drilling rigs over the past year, a trend which the US Energy Information Administration expects to continue in 2020. The US drilling rig count had been hovering at 799 in early December, the lowest level since mid-March 2017, until early this week with the rig count jumping by 14 to 813, according to Baker Hughes.

Most of the mills in the Ohio Valley region concentrate production heavily on oil country tubular goods (OCTG), so the bearish outlook on energy production could negatively impact energy-related steel consumption next year.

By Brad MacAulay and Will Ehrhardt