Viewpoint: US ferrous scrap enters 1Q with tailwinds

The US domestic ferrous scrap market heads into 2021 supported by strengthening tailwinds consisting of a surge in global ferrous scrap demand, gains in finished steel prices and supply/demand imbalance.

Scrap market participants surveyed by Argus are unanimously bullish that ferrous prices will register steep gains again in January, equaling or exceeding increases achieved in December and extending a three-month upward trend in pricing.

The upward momentum stems from a "perfect storm" of factors that could send prices potentially even higher through the first quarter.

At the root of the gains is an undersupplied finished steel market, with a scarcity of steel products exacerbated by gradual increases in manufacturing activity and increased demand as the US economy has partly recovered from the Covid-19-induced slump in the first half of the year. That has sent US and global steel prices soaring in the fourth quarter even as spiking Covid cases and renewed pandemic containment measures risk rolling back the economic recovery.

The Argus weekly domestic US HRC index hit $977/short ton (st) st ex-works Midwest on 22 December, more than double the price recorded in mid-August, when HRC spot prices hit a yearly low of $450/st.

The spread between #1 busheling scrap delivered US Midwest mills and HRC selling prices at $640/st, starkly higher than the $348/st of a year ago,suggest that scrap prices have ample room to move higher while allowing steelmakers to maintain healthy margins.

The trend of finished steel demand outpacing supply has been mirrored in other major steel producing economies throughout Latin America, Europe, Asia and the Middle East and North Africa simultaneously returning to the seaborne market for containerized and deep-sea bulk scrap.

The Argus daily HMS 1/2 80:20 cfr Turkey steel scrap assessment reached $472.70/t cfr Turkey on 24 December, up by $115.20/t since 1 December and up $183.20/t since 1 October.

US west coast bulk and containerized scrap markets have also witnessed price run-ups of a similar magnitude with the Argus daily Taiwanese containerized HMS 1/2 80:20 ferrous scrap import price at $442/t cfr Taiwan on 24 December, up by $125/t since 1 December and up $172/t since 1 October.

The jump in seaborne scrap prices for bulk and containerized material will force domestic mills to compete with exporters into the first quarter, as US suppliers weigh the differential between delivered mill and shipping point prices to export docks.

Despite the steep increases in domestic and seaborne scrap prices throughout the fourth quarter, obsolete scrap availability has continually lagged demand and led to a supply crunch in December.

Major US auto wreckers surveyed by Argus said that inbound car volumes have not registered significant improvements even after sizeable increases in prices with flows down around 15pc from levels witnessed last year.

Even though higher scrap prices will likely bring out more flows, the effect could be tempered by wintry weather through the first quarter, which could leave scrap supplies in a deficit.

Beyond the first quarter, scrap prices will be further supported by new electric arc furnace (EAF) capacity start-ups through the southern US with additions slated to bring online roughly 8.1mn t/yr of new steel capacity from October 2020 through 2021.

By Brad MacAulay