February Market Conditions
As expected, the ferrous scrap market has officially entered the correction phase following the steep run up in November-January scrap prices. Once again, the Detroit market set the tone by being able to buy shredded scrap down $60GT, cut grades at down $50GT, and prime scrap at sideways. The rest of the country has followed suit with most geographical regions settling at down $50GT-$60GT for shredded/cut grades and sideways for prime. The exceptions were the East Coast and West Coast where suppliers are more dependent on export markets where prices have dropped even lower. So, what can we expect going forward? Historically, whenever prices have gone up too high and too quickly, they tend to over-correct when the market sentiment turns negative before bouncing back up to an equilibrium. Imagine a giant spring that has been compressed too far and is released. It will spring back up and gradually find equilibrium. We anticipate that the ferrous scrap market is likely to follow this path going into March. There are several additional factors that caused February scrap prices to fall. The main culprit is heavy scrap flows not only domestically but around the world. So far, we have had a very mild winter that has allowed the collection of scrap to continue unabated during a period when scrap flows normally slow way down in the Midwestern and Eastern regions of the country due to extremely cold weather. Another primary culprit is the annual Chinese or Lunar New Year celebration that lasts a week and begins on February 11th. Most business activity stops throughout Asia during this celebration which means no delivery of scrap and the only buying of ferrous or non-ferrous scrap is done by bottom feeders accommodating desperate sellers. Additionally, the Chinese economy is slowing down as they are dealing with a new breakout of the coronavirus and is reflected in their PMI dropping from 53.0 in December to 51.5 in January. Any reading over 50 indicates expansion while any reading under 50 indicates contraction. Furthermore, the price of iron ore has fallen over $20MT since the 17 year high reached in December and the price of steel billets sold into Southeast Asia has also weakened. Finally, the February domestic scrap market didn't get any support from a weak export market that has dropped between $60GT and 100GT since the beginning of the year. There are, however, several positive factors that will support scrap prices this spring. The economic data is still positive. Although our domestic PMI dropped slightly in January to 58.7, it represents the 8th consecutive month of growth in the manufacturing sector of our economy. Our steel mills utilization rate continues to increase, reaching 76.1% last week. New steel prices remain strong with lead times stretching into March and April. Interest rates are low, another stimulus package is imminent, and we can expect the new administration to supports numerous infrastructure projects. As we discussed last month, China has begun to dip their toes in the ferrous scrap market, buying a few small cargoes from Japan. There are reports that China will need to import 10,000,000 tons of ferrous scrap this year in furtherance of their 5 year steel master plan. If indeed this happens, even a tonnage somewhat less than 10,000,000 tons, it will be a major positive factor in the ferrous scrap arena.
In the non-ferrous world, non-ferrous scrap prices have, for the most part, taken a breather from their strong performance over the last several months. A combination of slightly lower terminal market prices plus softer demand for scrap as we approach the start of the Chinese New Year on February 11th is the primary culprit here. The macroeconomic news is still positive for non-ferrous commodities and we expect a resumption of strong prices for copper, aluminum, and stainless steel after the New Year celebrations ends later this month. Scrap copper prices have softened a bit as LME copper dropped $0.20 lb. over the last few weeks but continues to trade within a relatively narrow range. Demand for high grade copper scrap remains extremely strong in both domestic and Asia markets. Brass prices continue to be in very strong demand in China (yellow and red brasses) and Europe (red brasses).
The aluminum market is still strong although LME aluminum had dropped just below $2000MT last week before recovering to $2027MT Monday morning. Demand for extrusions and segregated alloys remains extremely good with limited supplies available in the marketplace. Prices for some segregated alloys had drifted down a few cents following the drop in the LME. Secondary aluminum prices have weakened for the first time in several months due to the recent $200MT drop in the ADC 12 secondary ingot price. However, demand is still strong and secondary prices are expected to rebound after the New Year celebration week.
The upward trajectory of stainless prices has temporarily slowed down with LME nickel prices trading in a narrow range around $18000MT and February ferrous scrap steel prices dropping $50-60GT. However, demand for stainless steel scrap remains strong from domestic and Asian mills. On a positive note, as more and more electric vehicles are being built, the increased demand for nickel should have a positive effect on 300 series stainless prices.