US prime scrap supply tight heading into summer

A severe shortage of prime industrial grades of ferrous scrap from Covid-19-related shutdowns of US auto and other manufacturing plants may take at least two months before beginning to ease, according to market participants surveyed by Argus.

Market participants widely expect tightness in prime scrap supply to persist at current low levels for the next 45-60 days due to lags in the supply chain between manufacturing activity, industrial scrap generation and finished steel demand.

"With automotive guys coming up...think it is a good 45 to 60 days for a full trickle-down effect to be realized in terms of increased mill demand hence scrap," one Ohio Valley supplier said.

Tight supply strained steelmakers in the May domestic ferrous scrap trade with US national average #1 busheling prices registering an $36/gt increase to $304/gt delivered mill in May from April.

But a full recovery to prime scrap flows could take until the second half of 2020 depending on the new adjusted capacity levels of auto production and the pace and robustness of the recovery in manufacturing activity.

"You can't just flip a switch on and suddenly get scrap. It's going to take probably two months to get prime scrap to market and even then, you have to think about what the capacity levels of auto production are going be," one east supplier said.

Covid-19 containment measures crippled manufacturing activity over the last two months with a measure of US factory output falling in April to its lowest in at least 72 years, according to the Institute for Supply Management, while the production index registered its largest one-month decline since January 1984, falling by 20.2 percentage points to 27.5.

A gradual re-opening of states throughout the US and restart of manufacturing activity in some regions over the last few weeks is the first step in the long road to recovery with many suppliers erring on more conservative timelines for returning to a supply-demand equilibrium.

"It will definitely be a slow ramp up," one Detroit supplier said. "My bet is that June will only be 50-60pc of normal flows of busheling, which will keep this commodity tight again heading into July."

The automotive industry through North America has begun to gradually restart production with Honda and Toyota resuming operation at their plants this week, while the Big 3 US-based automakers - Fiat- Chrysler, Ford and General Motors – are slated to start up 18 May.

Even with the restart of major auto plants in the coming week, the pace of restarts has been drastically scaled back with some plants adding an additional shift each week through the first week of June, assuming there are no glitches.

"Prime is very tight and the sheet mills are the ones who are running, and they need it," one southeast supplier said. "With auto starting back but at only 20-25pc the flow of prime will be a trickle, but demand will not be great either."

The prolonged tight supply picture of prime scrap supply has prompted steelmakers to look for alternative iron units including ferrous scrap and iron metallic imports like pig iron, direct reduced iron (DRI) and hot briquetted iron (HBI) to offset the thin domestic supplies of prime scrap.

US seaborne imports of pig iron and ferrous scrap are poised to hit a four-month high in May at approximately 600,000t according to an Argus analysis of vessel tracking data based on load port, destination and ship size.

Still, the window for substitutes to hit for the June melting is rapidly closing when factoring multi-week lead times, the seaborne voyage and the domestic transportation time to get material from the port to the mills.

By Brad MacAulay