Mike Marley is market intelligence correspondent for MetalPrices.com. He is the editor of the newsletter Marley’s Heavy Melt, in which he reports on metals prices, focusing in particular on steel scrap. Marley has more than 35 years’ experience in the metals industry and has been reporting ferrous and non-ferrous scrap prices since 1977 – first for Iron Age magazine, followed by the American Metal Market, and most recently World Steel Dynamics.
He sat down with JLN’s Sarah Rudolph to discuss the challenges of determining steel and scrap prices, the lack of hedging in the steel industry, Nasdaq’s push into the metals space and the outlook for supply and demand.
Q: You’ve been doing your newsletter, Marley’s Heavy Melt, for how long?
A: About two years. I started it when I working with Peter Marcus at World Steel Dynamics. And then Mark asked me to join him [at Metalprices] in February of this year. Metalprices is very interesting in terms of scrap prices but also all metal prices. They don’t just provide a price and reports, they have an interactive website that allows people to do all sorts of calculations and manage their businesses better. We provide the prices from the LME, CME, and the Shanghai Futures Exchange, in addition to our own ferrous and non-ferrous scrap prices. The programming and computer expertise that we have provides more than just a publication that is available on a computer. It’s designed with the computer in mind, so people can use our databases to discover the price for terbium or gallium or other metals.
Q: Why is it difficult to find steel prices?
A: It’s a very complex market. People sometimes look at it as just scrap, but it’s not that simple. There are two streams of scrap: industrial scrap, which is generated by companies manufacturing products (fenders, sheet steel, or machining bars) and which comes back into the market right away, and then there is obsolete scrap, which can include old appliances, old cars and buildings that are being torn down.
And there are diverse uses for those materials. If you’re making rebar, for example, it’s going to be buried in concrete for hundreds of years, so it doesn’t need to bend. You can use the old obsolete scrap material that isn’t as clean and proper. But when you make steel for cars you need to have certain properties such as formability, so you must use certain types of scrap and the proper amount. If the product is too thin and cracked, it will break the machinery.
People buy and sell scrap as dealers, and steel companies buy and sell it but have certain limitations on using scrap. For instance, if they are located in the Midwest but have scrap companies down in the Carolinas because it is too costly to transport – it costs about $50 a ton! And scrap is not that expensive for a metal. Copper is more expensive per pound but it’s easier to transport long distances.
Also there are different ways scrap is bought and sold. Some steel companies have individual buyback contracts where they take back steel from some of their big users and give them a discount, or buy it back directly. One critical problem for steel companies is “known chemistry”. They want to know what the residual elements are in the scrap, because when making steel, if you have too much copper it is too hard – you don’t want more than 1.2% copper, or it makes the steel too difficult to work with. And there are other residual elements besides iron, because scrap comes from such a diverse range of places – computers, copper wires, cars. You must keep the residual elements to a minimum when you’re making steel.
Q: What are some of the difficulties in hedging steel?
A: First of all there seems to be a comfort zone among some people in the industry that hedging and futures trading is violating. They’ve been buying and selling scrap this way for a hundred years and then suddenly you come in with a whole new regimen, and they don’t want to do it your way. There is a whole learning process these guys will have to go through to understand hedging. Some traders understand hedging very well, because they came up on the non ferrous or the stainless side of the business. But many others in the industry don’t quite trust that hedging is going to work. They are accustomed to setting their own prices and now someone from outside wants to set the price.
There’s also an aspect of, “Let’s see you do it first.” There was just as much opposition to futures trading in copper at first as there is with steel now. Copper companies would issue their own price releases sometimes two or three times a day. They said, “We set the prices, not the exchanges.” But I think people will realize that in the steel business you have to know what your inputs are – what it’s going to cost to build a project. You have to be able to go back to Exxon or whatever power company is your supplier, and they will want to know how you are controlling costs. If you have a mechanism for controlling costs and managing risk, it’s going to work. I don’t think every ton of scrap should necessarily be hedged, but I think it’s a great tool for people who need to be able to monitor prices.
When you tear down a big plant, you generate a lot of scrap in that process. You can’t tear it down overnight – you would flood the market with all that scrap and drive the price down, and you wouldn’t get enough workers to do it all. You may be moving thirty thousand tons of scrap into the market a month at a time. How can you predict that? How can you bid on the contract to demolish that plant [if you don’t have a good pricing mechanism]? With the non-ferrous metals it’s easy to say what the price will be eighteen months out, but you don’t really have that with scrap or steel, and that’s where it’s needed.
I think hedging is something that is going to come, but not necessarily from within the industry. That was my suggestion to Peter Marcus when he was here because he is about to launch a futures trading platform for steel and ferrous scrap. He’s working with Nasdaq. They have a target date of October. What they’re talking about isn’t a ferrous scrap contract and a hot-rolled band contract in competition with the CRU. They initially were talking about a busheling contract, which is what CME offers. I told them I thought it would be much more successful if they launch a shredded contract. Shredded is a much bigger commodity in terms of the ferrous scrap market. It’s four times larger than busheling. And it’s traded more widely throughout the steel industry. Busheling is generally used by only the flat-rolled electric arc furnace steel mills, the mills that make sheet steel. That’s a very limited market. If you’re making rebar or similar products, you don’t want bushelings. It’s too rich for your stock. You buy shredded.
The ability to to do that will come from outside the industry, There are people outside the industry who are coming up with more possible ways to do indexing. We thought this would happen because a lot of folks at the scrap companies are very comfortable with indexing prices and futures trading on copper and aluminum on the non-ferrous side of the business. You talk to them and they get it. But you go to the ferrous guys and they don’t grasp it at all. They come from two different worlds even though they’re in the same business.
Q: When you say you think the pressure will come from outside the industry, you mean from whom?
A: From people who are steel users and scrap generators. There’s a lot of discussion about how all the utility industry’s coal-fired power plants are going to have to be replaced because of the carbon [emissions]. So a lot of those old plants will be dismantled in the not-too-distant future. Those are huge facilities and you don’t tear them down in a day or two. The industry is very sensitive to cost and will want to know what you’re going to generate out of that. If you’re the guy bidding on the contract you have to know what you are going to be able to say to them. I see the scrap generators saying, “This is what we want. This is how you need to do this.”
Q: What is going on in the steel market at the moment?
A: I don’t want to say it’s bleak but it’s been down. Ferrous prices have dropped this past month, anywhere from $10 to $20. Industrial scrap prices dropped $10 and heavy metal scrap prices dropped $10. This is an anomalous inversion of what we saw last year when prices for shredded became more valuable than prices for busheling, which is odd because bushelings are much better products. They give a better recovery rate when you put them in the furnace.
Now we’ve got things back in the right range and huge premiums are being paid to bushelings. Prices have weakened this month. One of the things I saw this month in the market was a lot of scrap dealers sold virtually all the scrap they had.
That seems to be saying they don’t have much confidence in the market because they don’t want to be holding any of this scrap in a falling market. It’s kind of odd, because the steel business is doing pretty well at this point. Automotive demand has been very good. We’re seeing the lead times getting shorter on steel and iron. That may be because there’s more steel coming into the market, either from the mills or from imports, or else the financing of steel is weakening. That means the steel guys are not buying as much scrap as they had been. Another possibility is that a number of steel mills have had outages recently.
The whole ferrous market all revolves around the bargaining during the first week of what they call the buy week. Everybody haggles over a deal and then they buy all the tons that they’ll need for the month. They make what they call their melt for the month. Then the whole process starts all over again the next month.
The idea is you want to make sure you have the supply of scrap that you need for the month. Price is important but a critical issue for a steel mill is supply. You always hear buyers talk about how, “I can always pay more for scrap, but if I ever run out, they’ll fire me,” because if you run out of scrap, what are you going to make? You can’t make steel and you’ve got guys standing around the mill saying, “What am I going to do today?”
Q: What is the scrap supply situation at the moment?
A: It’s abundant, particularly shredded. The thing that seems in tight supply is a grade called heavy melt which used to be the bellwether. It’s a miscellaneous grade that can be any sort of steel that’s reached a quarter inch thick and has to be cut by two-foot by five-foot.
Shredded is a valued product. It’s a manufactured product. They bring a whole piece of a car or pipe and feed it to a machine and create a unique product usable in all the steel mills. In the past it was only used by the electric furnace mills, but now the integrated mills use it as well because they like the density.
Q: What about what’s going on in the construction industry and how that is affecting steel? Do you see people talking about a possible rebound in the construction industry?
A: That would be great. That would help the steel business a great deal because that’s been the one segment of the steel market that has been pretty weak, the rebar business, the structural business.
Q: What about China? They are a big producer and consumer of steel, I believe.
A: Yes, most of their steel is used to produce their own products. They do export some. China still has a big construction and manufacturing business and that’s where a lot of the steel has been going. They’re starting to export some steel. They haven’t really been as much of a factor in the export market because they’re an emerging economy and they’re growing.
Q: Do they import steel?
A: They don’t import steel. What they import is iron. Much of it comes from the two big sources, Australia, where much of the mines are, and Brazil. In China they make iron and then they put it back into the basic oxygen furnace and make steel products such as flat-rolled. It was probably better for them to go in that direction than to go the scrap direction because there are limits on how much scrap is built.
China is now talking about being self-sufficient in scrap. They import some scrap from the U.S., but not much. The biggest overseas market for US scrap recently has been Turkey. They buy mostly from east of the Gulf Coast. The west coast stuff goes to China and also to Taiwan, which has a lot of electric arc furnaces and uses a lot of scrap. It doesn’t have its own resources much like Korea doesn’t have its own iron ore. They have to buy it overseas as well. Taiwan has been probably more active in terms of buying from the US than China.
Japan is now self-sufficient in scrap. Their economy is becoming a fully-developed economy like the US and Europe. Now, in addition to generating enough steel for their businesses and their country, they’re also generating enough scrap from old cars, old appliances, and other things. They sell their scrap overseas to Korea and China.
Q: Why is Turkey a big consumer of steel right now?
A: They produce a lot of steel products for export throughout the Far East, particularly for construction. Rebar is a big part of their business. They have been a big producer of steel but their mills are electric arc furnace mills, and in many mills they don’t have as much scrap. They’re an emerging economy so they don’t have the huge consumer demand that we have. A car there has a lifespan of 30 years or more. They don’t generate anywhere near as much scrap as we do, so they have to import it. They import around 15-20 million tons of scrap a year – the U.S. supplies about a third of that.
Q: What has been the effect of the general economic uncertainty and downturns in the steel and scrap business?
A: The steel business has been running on a pretty even keel. The operating rates have been up in the upper 70 percent range, which is healthy, although they’d love to see it at 90 percent. But that would be kind of crazy because of the way the consumption of scrap has changed. The good old days when the steel business was integrated, that meant the steel mill owned the iron ore mines, the coal mines, everything but the air and electric mill, pretty much. That’s not the case anymore. The industry is not as integrated as it was.
It drives everybody in the scrap business crazy because if you’re a scrap company that owns a shredder, you have to show profit from that shredder and you’re competing against the captive operation that can afford to pay top dollar. It cuts your margins to the bone. Say shredded is selling for $350. A fair price to find the beat stock junk cars at these days is about $250 a ton. That gives you $100 straight but out of that $100 you only recover about 70 percent of ferrous from the car because when you shred a car, you don’t just get ferrous metals. You get glass, you get plastics, you get fabrics from cushions and seats. You lose money on that when you buy a car because you paid $250 a ton for that car and you’re only going to get 75 percent of it. That increases the cost of the ferrous cycle.
And then you have the operating costs around the shredder, and delivery costs to ship your scrap to a steel mill. Whereas when it’s captive it just gets delivered into the melt shop next door or just down the road. It’s created havoc in the scrap business for the guys who have to compete against these captive shredders. It’s like playing poker and when you bid $10 the guy on the other side of the table bids up and keeps raising you another $10, and you say, “How long can I keep doing this?” That’s what the game is like these days.
That’s just the nature of the business. It’s changing, becoming very, very competitive. It is an interesting business.