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Commentary: Policy decisions continue to reshape ferrous commodity markets

Steel and ferrous scrap market participants in North America enjoyed a much healthier 2018 amid higher prices and sales volumes. Nucor Corp. reported their average sales price for steel sheet increased from $689 per net ton in 2017 to $828 per net ton in 2018. At the same time, steel production in the United States expanded 6.2 percent to 86.7 million tons in 2018, according to figures from the World Steel Association. As steel production increased and pricing improved, scrap demand rose and profit margins were bolstered. U.S. Steel Corp. reports their adjusted net earnings rose to $957 million in 2018, up from $341 million in 2017. 

But not all segments of the ferrous supply chain are benefitting equally from today's market conditions, which in turn are being shaped by trade and other policy changes.

Ferrous scrap processors saw the average price of No. 1 heavy melt increase 18 percent year-on-year in 2018 to $333.50 per gross ton, but steel prices posted even larger gains. Scrap recyclers have also been dealing with rising competition from imported ferrous scrap along with numerous rail, truck and other transportation bottlenecks. U.S. imports of carbon steel scrap from Canada, for example, increased nearly 17 percent year-on-year during January to November 2018 to 2.75 million metric tons, as Canadian steel output cooled and a stronger dollar made imports more attractive.

On the other hand, restricted steel import competition stemming from Section 232 tariffs has been widely cited as a source of support for U.S. steelmakers. According to Commerce Department data and American Iron and Steel Institute estimates, U.S. finished and total steel imports during January to November 2018 declined 10.8 percent and 13.2 percent respectively, as compared to the corresponding period in 2017. 

As U.S. demand for steel increased and imports declined, domestic steel capacity utilization rates rose above 80 percent, as steelmakers began to restart idled capacity and invest in expanded production. Nucor alone announced 2019 capital expenditure plans in excess of $850 million in order to commission new capacity and update existing facilities.

Positive demand, trade barriers
In early 2019, the pace of U.S. steel production has continued to ramp up as steelmakers recently announced new price hikes. So far this year (through February 23rd), AISI reports U.S. steel mills produced 14.64 million net tons of crude steel, an eight percent increase from the corresponding period in 2018. 

Political support for infrastructure investment and domestic steel production has contributed to a positive outlook for U.S. ferrous scrap demand in 2019. Improved overseas demand for ferrous scrap has also played a role. During the January to November 2018 period (according to the most recent data available), U.S. ferrous scrap exports, excluding stainless and alloy steel scrap, rose 15 percent to nearly 14.5 million metric tons thanks in part to improved demand from emerging markets including Vietnam, Indonesia, India, Egypt and Bangladesh. 

More troubling in the U.S. has been the slowdown in trade with more traditional markets such as Turkey, Canada and China. While the ratification of the USMCA would remove some market uncertainty regarding North American trade flows, tariff and other trade barriers on steel may put scrap exporters at a disadvantage if their largest overseas buyers (e.g. Turkey) can no longer market their steel competitively in the United States.

The China effect
Last but not least, policy changes in China continue to have disproportionately large impacts on global commodity markets. Even as Chinese steel production has continued to rise (+6.6 percent to 928 million metric tons in 2018, according to worldsteel), China's strict restrictions on scrap imports and emphasis on improving environmental conditions are translating into greater dependence on scrap generation within China. 

According to the latest Bureau of International Recycling estimates of world steel recycling, Chinese steel scrap consumption during the first nine months of 2018 increased 38.9 percent to more than 140 million metric tons, even as Chinese ferrous scrap imports from the U.S. decreased 37 percent. According to the BIR, the rise in Chinese ferrous scrap consumption has been driven by a growing need to meet tighter emissions standards, which is also incentivizing the construction of new EAF mills. 

For the remainder of 2019 and the foreseeable future, China's environmental and recycling policies, the evolution of trade policy among the world's major economies, along with investment decisions in the U.S., will continue to reshape global steel and ferrous scrap markets. 

- Joe Pickard is the chief economist and director of commodities at the Institute of Scrap Recycling Industries (ISRI). 

This article was originally published in the March 2019 edition of Recycling Product News, Volume 27, Number 2.

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