Ferrous scrap looking relatively healthy
Ferrous markets outlook upbeat compared to some commodities
Heading into 2018, China's proposed scrap import restrictions, widespread transportation bottlenecks, and fluctuating foreign exchange rates were key concerns for most scrap recyclers even as the major developed economies entered a period of synchronized economic growth.
More recently, renewed volatility in the equity and bond markets has been added to that list of concerns. But for ferrous market participants, the 2018 market outlook has been significantly more upbeat as compared to other commodities, due in part to the sector's relatively limited dependence on Chinese ferrous scrap import demand, expectations for relief from subsidized steel imports, rising domestic steel output, improving business sentiment, and elevated price levels across the ferrous supply chain.
In early February, Scrap Price Bulletin reported composite U.S. prices for No. 1 heavy melt and shredded scrap increased around 25 percent year-on-year to $323.50 per gross ton and $342.83 per gross ton, respectively. At the same time, American Metal Market reported their U.S. hot-rolled coil index level was up nearly 22 percent year-on-year in mid-February to $743.40 per short ton ($37.17/cwt). The price gains came on top of healthy North American steel consumption and production figures. Preliminary estimates from the World Steel Association indicate crude steel production in the NAFTA region increased 5 percent year-on-year in 2017 to more than 115 million metric tons. As has been the case, the health of the North American steel and scrap industries remain closely interconnected.
Overseas demand also continues to be a key determinant for ferrous scrap flows, market sentiment and, by extension, pricing. In 2017, U.S. ferrous scrap exports (excluding stainless steel and alloy steel scrap) had their best annual performance since 2014, climbing 23 percent higher year-on-year by volume to 13.8 million metric tons, valued at over $4.1 billion last year. U.S. ferrous scrap exports to Turkey rose to more than 3.6 million metric tons, an increase of nearly 16 percent as compared to 2016. Improved ferrous scrap import demand from Vietnam (+93 percent), China (+60 percent), Pakistan (+65 percent), Bangladesh (+111 percent), Mexico (+12 percent) and others also contributed to last year's gains.
But the rapidly changing policy landscape has become a key driver for how the scrap industry, including the iron and steel scrap sector, will evolve going forward, impacting the industry's on-going restructuring, trade flows, and investment in technology.
On the trade policy front, the U.S. administration's 232 steel investigation in particular has been garnering a great deal of attention. According to a recent U.S. Commerce Department press release, the Secretary's list of potential trade remedies submitted to the President include the following:
1. A global tariff of at least 24 percent on all steel imports from all countries into the United States, or
2. A tariff of at least 53 percent on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100 percent of their 2017 exports to the United States, or
3. A quota on all steel products from all countries equal to 63 percent of each country's 2017 exports to the United States.
Although U.S. steel industry representatives have almost unanimously cheered the Trump administration's approach to trade, taxes, regulations, and manufacturing, protectionist measures also pose significant downside risks, not least of which is the potential for retaliatory trade measures. Reuters recently reported that "China will cut export taxes on some steel products and... ditch those for sales abroad of steel wire, rod and bars from January 1." The threats posed by China's incentivized steel exports and growing reservoir of ferrous scrap should not be overlooked.
In addition, the renegotiation of the North American Free Trade Agreement could have significant consequences for the flow of steel and steel-containing products across our borders. In 2017, U.S. ferrous scrap trading with Canada and Mexico was valued at more than $1.6 billion according to Census Bureau trade data. Any policy changes that would restrict the free and fair trade of ferrous scrap within the NAFTA region or around the world could significantly offset the healthy tailwinds the ferrous scrap industry is currency experiencing.
Joe Pickard is the chief economist and director of commodities at the Institute of Scrap Recycling Industries (ISRI) located in Washington, D.C. ISRI's 2018 Annual Convention is set for April 14 - 19, in Las Vegas.