August Scrap Market Conditions
In most years we would be talking about the negative effects of the “summer doldrums” on the ferrous and non-ferrous scrap markets during July and August. Instead, in this crazy year, the August ferrous scrap market has firmed up with intakes down 15-25% around the country, strong export market off both Coasts, and a gradual increase in demand for scrap from our domestic steel mills as idled furnaces come back online. Non-ferrous scrap prices continue to show strength completely ignoring the historical summer slowdown in activity.
Going into the last two weeks in July, domestic ferrous scrap prices were expected to settle slightly down for shredded and cut grades with steel mills trying to further reduce the price of prime scrap by $30GT for August. That expectation changed when mills realized that the excess scrap inventories in various regions around the country had been consumed and scrap intakes had dropped off dramatically. Last Tuesday, the Detroit market settled quickly at down $20GT for prime and sideways for shredded and cut grades. Scrap prices in the Midwest were mixed with prime settling sideway and up $10GT on shredded and cut grades. Prices on the East Coast, Southeast, and West Coast settled up $15-$20GT on most grades driven by the continued strength of the export markets.
In trying to make sense of today's ferrous scrap market, we have to look towards China and Turkey. China is responsible for over 50% of the world’s steel production and is projected to produce a record of over 1,100,000,000 tons in 2020. Thankfully, almost all of that tonnage is being consumed domestically to support government infrastructure and construction projects. China is also importing billets and other semi-finished steel products because their steel mills have have not been able to produce enough steel to keep up with domestic demand even though their steel mill utilization rate is now over 90%. Additionally, China is the largest importer of iron ore used to make hot metal. Iron ore prices have been above $100MT for the last several months and have risen to a 2020 high of $121.40MT today with the expectation that the 4th quarter contract price will settle well above $100MT. High iron ore prices make ferrous scrap a very attractive commodity to both EAF and blast furnace mills. Turkey's economy is also getting stronger with their PMI registering a very high 56.9 for July (the U.S., EU, China, and other major economies PMI's are all above 50). Demand for Turkish rebar and other finished steel, both domestically and export, is strong and will continue to support higher scrap prices. Turning to our domestic steel market, production has continued to slowly improve over the last 4 months but last week's utilization rate only rose to just below 60%, well below 2019's average of 82%. The automotive sector of our economy continues to recover, construction remains strong, but there is still weak demand for new steel from the oil and gas industry. We expect finished steel prices to gradually increase assisted by higher scrap prices and improved down-stream demand for steel products.
The joy continues in the non-ferrous world with terminal markets in aluminum, nickel, and copper (until today) all supporting higher scrap prices for most grades of scrap. LME aluminum and nickel reached their highest level in the three month. Copper prices were closing in on $3.00 lb. before taking a $0.09 lb. drop today. There continues to be strong demand overseas for non-ferrous scrap especially aluminum and copper.
The scrap aluminum market continues its recovery with prices for low copper alloys rising along with the LME hitting a 3 month high of 1780 today. The Midwest Premium inched up another 1/4 to 11 3/4 this week. Demand for primary grades continues to improve as automotive production ramps up. The aerospace industry is dead with no short term prospects for improvement in the near future. The secondary scrap aluminum market continues to see a good, slow, but steady demand both overseas and domestically with prices gradually increasing for most grades with the exception of the 2000 and 7000 series alloys which are tied to the aerospace industry.
August looks like a repeat of July for the 300 series stainless steel scrap market. 300 series scrap prices have moved up $0.03 to $0.04 lb. as the LME nickel price rose to $6.50 lb. this week. Supply and demand seem to be in relative balance with stainless steel mills cautiously optimistic about their order books during the normally slower summer months.
Copper scrap prices took a hit on Friday with the LME dropping $0.09 lb. but have recovered 2/3 of that drop this morning. Last month we though that with copper approaching the $3.00 lb. level, copper prices "may be headed for a correction in the near future". Whether Friday's drop was the beginning of a correction, or a one day swing, remains to be seen. Global supply and demand for scrap copper units seems to be in a good balance. The same holds true for red and yellow brass scrap. In any event, we believe that the market fundamentals will limit the size of a major correction at this time.
Finally a word of caution on the state of our economy's recovery. At the Federal Reserve Board meeting held during the last week of July, the Fed acknowledged that the Covid-19 pandemic "will weigh heavily on economic activity, employment, and inflation". They also stated that "the path of the economy will depend significantly on the course of the virus". The takeaway is that the Fed believes a full recovery will be governed by the confidence level of people believing "that it is safe to engage in a broad range of activities". As we stated last month, we believe that "our recovery, and the recovery of most countries around the world, will be gradual and extend well into 2021.