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ANALYSIS-Scarcity to boost scrap metal prices in 2010

December 3, 2009 | Leave a Comment

Scrap metals prices are braced for further gains in 2010, as a shortage bites, caused by the recession that held consumers back from ditching the old household goods and cars that account for 80 percent of supply.

The knock-on price effect will be felt in the reviving steel industry, just as its mills demand more feedstock to match the early signs of economic recovery.

Supply tightness has pushed scrap prices higher even when the demand was low because of production cutbacks. Prices in the Black Sea region, centred on major importer Turkey, are around $300 a tonne, having fallen as low as $130 late last year.

“Due to increasing steel output we will see more scrap demand coming in,” analyst Michael Shillaker at said.

“Supply side will improve as well, but it will be several million tonnes of more scrap coming in versus tens of millions of demand (due to production start ups). So will there be a shortage enough to drive the prices higher? Yes.”

The UK arm of Sims, the world’s biggest metals recycler, estimates a fall of 79 million tonnes in scrap consumption this year, from last year’s 475 million tonnes.

It does not see a significant bounce next year.

That 79 million tonnes dip came when steel production is down around 13.5 percent in January to October this year.

A harsh spell in the northern hemisphere winter, which would restrict the transport, and hence supply, of scrap, would add a further bullish factor.

“I think scrap will remain tight for the first quarter in 2010, simply because of weather,” Mitchell Padnos, executive vice president of marketing with Louis Padnos Iron & Metal Co in the United States.

“If business continues to slowly improve, then it will remain tight. Here in the Midwest, we have no snow on the ground yet, but when it does hit here, it will hit hard and that will slow down the raw material coming into the scrap yards, and that will keep supplies tight,” he said.

 

CHINA WILD CARD

Scrap is maybe the only material in the $500 billion steel industry where China is not a driver, as the world’s biggest consumer of the metal heavily relies on iron ore, with more than 90 percent of its mills operate through blast furnaces.

But this could change next year.

Supply and consumption of scrap, which is used in electric arc furnaces, has traditionally been driven by Western economies.

“Scrap corrolates closely with economic activity, so if there is a better economy, there should be more scrap supply,” said analyst Charles Bradford of Affiliated Research Group in New York.

“In general, the world economy is going to be better next year than this year, but not very much stronger and China is not a big scrap user.”

However, China is the wild card of the market.

Graham Davy, chief executive of the UK arm of Sims Metal Management said scrap purchases from China had risen about five fold to around 7.6 million tonnes in the first half of this year, compared with the same period last year.

The scale of any price rise will be hard to gauge but traders can bank on volatility continuing.

“It was a dismal first week in the scrap market in November, but by the second week, the whole thing turned around,” Padnos said. “The rumor has it that pricing is up anywhere from $40 to $80 over the lows of last month,” he said.

Obsolete scrap was about $230 a tonne in November, compared with a low of $100 a tonne last November. Shreded scrap, which is around $258 a tonne was at a high of $594 a tonne in July 2008, when steel market was booming.

 this week have raised upgraded the U.S. steel sector this week to “attractive” from “neutral,” saying higher raw material costs should continue to drive steel prices.

“This upturn is likely to be driven more by rising scrap, iron ore and coking coal cost increases, fuelled by China’s demand for these inputs, than by strong domestic demand for steel,” the analysts wrote in a note to clients.


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