Ferrous scrap pricing: a case of supply & demand.

If the price composite chart shown in Fig. 1 represented the results from the New York Stock Exchange, the whole world would be rejoicing. But since it actually represents the composite price of shredded steel scrap for the last 2.5 years, only worldwide scrap suppliers have any right to be happy. Steel consumers such as the U.S.' more than 800 iron and steel metalcasters are trying to find ways to overcome this raw material pricing that has doubled in the last year and tripled in the last two.

[FIGURE 1 OMITTED]

A look at the chart in Fig. 1 and the data in Table illustrate the growth of ferrous scrap and raw material pricing since January 2000. The result for many iron and steel metalcasters has been close to a doubling of the cost of the raw materials that make up (in some cases) close to 60-65% of the charge for their melts.

But what has lead to this drastic rise in scrap and raw material pricing? Is it as simple as a greater level of exported scrap from the U.S. going to China, thus reducing the supply and increasing the pricing here? while this is a factor, there are others. This article explores those factors and provides a glimpse into what metalcasters believe the short-term future may hold.

Why the Skyrocketing Increase?

According to Tim Hogan, vice president, National Material Trading, in a speech presented at the Ryan's Notes 2003 Ferroalloys Conference, "A range of factors coincided with a very short period (end of 2002 through 2003) to push scrap prices to their current crazy-high levels." Eight of these factors (in no particular order) were:

1. Overall, scrap exports from the U.S. have doubled from 6.3 million tons in 2000 to 12 million tons in 2003.

2. The assessment of an export scrap tariff by Russia and Ukraine kept scrap from being readily exported to scrap-needy countries such as China, Korea and Turkey, forcing them to look elsewhere for their requirements.

3. High oil prices and war caused freight prices to rise 15-50% worldwide.

4. China's rapid growth with an intense expansion with its addition of 18-20 million tons of new steelmaking capacity increased demand in a country that already had insufficient scrap to supply the previous capacity. At the same time, the Chinese government was subsidizing its steel industry so that buyers of scrap could afford to pay the needed price while maintaining protection at home for their price of steel. The U.S. became the logical resource with Russia and the Ukraine as a decreasing option. According to U.S. Dept. of Commerce statistics, China purchased more than 3.3 million tons of U.S. scrap in 2003 (30% of all U.S. exported scrap in 2003).

5. Following China's lead, South Korea (2.5 million tons purchased in 2003 from the U.S.) and Turkey also turned to the U.S. for scrap;

6. At the beginning of 2003, iron ore prices rose 9-10% worldwide.

7. The U.S. dollar was weakening, making U,S. scrap more attractive for foreign buyers.

8. The U.S. economy started to turn around, and its internal demand for scrap started (and continues) to grow. However, the reduction in the steelmaking industry and overall manufacturing in the U.S. that forced many plants out of business and/or sent business offshore also reduced the number of scrap generators in the U.S. (less domestic supply). So, as domestic scrap needs grew, less domestic supply existed.

This is a true economic study in supply and demand, and the skyrocketing price of scrap has been the result.

Relief for some metalcasters was to turn to pig iron as an alternative to scrap. However, most available units of pig iron (which generally comes from Russia, Ukraine and Brazil) were already sold three to six months out. In addition, a major Russian producer of pig iron had an outage that limited its supply, politics in Brazil limited its shipments and China turned from an exporter of pig iron to a net importer. As a result, pig iron supplies continue to be tight to this day and prices, as reflected in Fig. 1, are high.

However, the current price differential between scrap and pig iron is greater than normal. During "normal" times when supply and demand are in balance, the price of pig iron is generally $20-30/ton higher than the price of prime scrap. In addition, pig iron production has limits--environmentally in Brazil and economically at integrated steel mill producers who would rather make hot metal for steelmaking than for pig casting. These limits on pig iron make scrap all the more in demand, pushing its prices through the roof.

Overvalued Scrap?

A common belief among scrap users is that today's price of scrap is high and overvalued. But when dealing with the laws of supply and demand, can this ever be true? If someone is willing to pay the price, can it be considered overvalued? On the flip side, if someone is willing to sell a product at a price, can it be considered undervalued?

"Most people in the metalcasting industry will tell you that when scrap was at $118/ton, it was way undervalued. But they weren't going to complain." said one ferrous raw material supplier. "Now, it is slightly overvalued and they have to buy it. The problem is that we (metalcasters) are the rail of the dog and consume only 10-15% of the scrap in the U.S. The big steel makers consume the vast quantities and dictate the price ... Nobody can say what the right price should be but It shouldn't have been $100/ton."

Said Dan Torzewski, Indianapolis Casting Corp., "Scrap people will say the prices were undervalued two years ago. Users said it is about time they got down there. My guess is that it falls somewhere in between."

According to the experts, the perspective that scrap consumers need to keep in mind is that these price are never properly valued when a their lowest and never properly valued when at their highest. The truth is that there may never be proper value when dealing with supply and demand economics, and this is what happens when buying and selling global commodities such as scrap.

The Future

According to the experts MODERN CASTING spoke to, the near-term and long-term future for scrap prices are anyone's guess. No one wants to try to prognosticate because they have learned their lessons.

As an example, in 2001, the prevailing thought of metalcasters that MODERN CASTING polled was that U.S. scrap prices would remain stable for the near future because there didn't appear to be a lack of domestic supply. As we have seen, this wasn't nearly the case as the prices started their upward climb in the second half of 2002.

When MODERN CASTING asked for the current thoughts of metalcasting experts on what today's future might hold for scrap prices, responses included:

* "The market is telling us that there is a light at the end of the tunnel for scrap pricing," said Torzewski. "Scrap exporters believe there will be some leveling off in the next few months."

* "Most people in the know believe there will be some relief to the scrap prices before June, but it is all guessing at best," said one ferrous raw material supplier.

* "I'm hearing there is a softening coming in the Spring," said Dan Pflaum, Gamma-Tech LLC. "The market seems to be stabilizing as supply and demand are coming more into balance. The general consensus is that we hit the ceiling."

Is this just healthy optimism of prognostication based in fact? The truth will reveal itself in the next few months as the economics of supply and demand play themselves out.

Said Todd Heavin, Intermet Corp., "Every time we have projected where this market is going, it went higher ... Ride it out, that's all you can really do."

Inside This Story:

* The skyrocketing price of steel scrap has placed steel consuming industries such as metalcasting in a pickle.

* The reasons for the increased demand and high prices are examined.

* Thoughts for the future are shared, but true prognostication is left up to the laws of supply and demand.

Table 1. Common Scrap & Raw Material Pricing 1990-2004 (courtesy
American Metal Market)

                            Basic Pig     #1 Dealer
                  Auto      Iron (FOB       Scrap         #1 Heavy
                 Bundles    Brazil, $/   Bundles ($/       Melting
                  (bid)    metric ton)   gross ton)    ($/gross ton)

2000 January     $148.63     $132.00      $150.90         $122.67
2001 January     $106.60     $105.00      $105.40          $86.00
2002 January      $87.50     $100.00       $89.70          $71.33
2003 January     $128.50     $126.00      $136.20         $107.67
     February    $138.50     $156.00      $143.20         $116.50
     March       $141.50     $165.00      $146.00         $120.67
     April       $141.50     $160.00      $146.00         $119.67
     May         $141.50     $158.00      $142.00         $107.67
     June        $137.50     $153.00      $142.00         $106.00
     July        $139.50     $155.00      $148.80         $112.00
     August      $152.00     $158.00      $157.20         $123.67
     September   $157.00     $162.00      $162.60         $128.67
     October     $158.00     $162.00      $162.60         $130.67
     November    $174.00     $171.00      $181.80         $144.50
     December    $192.00     $190.00      $201.20         $161.00
2004 January     $217.00     $194.00      $231.20         $179.67
     February    $255.00     $198.00      $276.00         $231.50
     March       $300.00     $200.00           --              --

For More Information

Ferrous Scrap Guide, American Foundry Society, Inc., Des Plaines, IL (2003). American Metal Market at www.amm.com.