US ferrous scrap market players take a gamble on April's prices

Every other April, ferrous scrap dealers descend upon Las Vegas for the annual Institute of Scrap Recycling Industries (ISRI) convention, held there every two years.

With the event held at Mandalay Bay Resort and Casino this year, there were numerous nearby opportunities for convention-goers to gamble. Roulette wheels, blackjack tables and sports books where the NCAA Basketball and Master’s Golf Tournament broadcasts were being shown, were all within earshot of the convention hall.

Before even touching down at McCarran International Airport, five miles south of the glittering Vegas strip, many scrap dealers had already placed their first bets.

Those scrap dealers were betting on the market, which lately would be the equivalent of betting on the forsaken Cleveland Browns in American football or the woeful Aston Villa team in European football — which is to say, your chances are not very good.

However, the US scrap buy week, typically the first week of each month, was shaping up differently for April. The US scrap supply chain had been recently beaten down from consistently low prices, to the point where the volume flow had become a trickle.

And suddenly, mills had healthy April scrap wish lists, bolstered by higher finished steel prices in the wake of import-limiting unfair trade cases and improving order books.

The convention was scheduled to begin April 2. Not the best timing for ferrous scrap buyers or sellers who traditionally transact all their monthly scrap sales during a frantic few-day period within the first week of the month (a unique quirk of the industry and perhaps worthy of a blog post for another day).

With the possibility looming of having to transact scrap deals in their hotel rooms in Las Vegas, missing out on presentations and meetings, working on Eastern Standard Time while in Pacific Standard Time, combating the three-hour time difference and everything else that comes with an extended stay in Las Vegas, the prospect of finalizing sales the week before the convention was enticing.

Mill scrap buyers may have sensed as much. During the week of March 28, several days before most would depart for Las Vegas, buyers were making inquiries about early deals.

Some floated offers with prices attached — up around $30/lt from March levels. Some sought April scrap commitments on a pricing-to-be-determined (TBD) basis, a very common occurrence in the market (and perhaps worthy of yet another blog post for another day).

Dealers wanted larger increases, $40, $50, maybe $60 more than March. Dealers did not want to begin shipping scrap on a pricing TBD basis, losing most of their leverage against scrap-starved mills.

So many dealers made a slight gamble. They left the $30/lt on the table, made no TBD commitments, turned their cell phones off and left the office on Friday, April 1.

Some dealers stayed home, others went ahead to the ISRI convention. By Tuesday afternoon of the convention-week-turned-buy-week, the market was up $50/lt almost uniformly throughout the US.

The waiting game had paid off and dealers had their long sought-after price bump.

Of course, this is 2016, and all good news is met with a certain skepticism. Dealers were asking, “What is the catch? When will the other shoe drop?  Was up-$50 too much?” as any significant market rally brings with it the concern of an immediate correction.

And there were the usual concerns about the sustainability of the strong scrap price increases as well: Can the recent success of US finished steel price increases be sustained? Will China’s steelmaking overcapacity crush hopes for US mill pricing once again? Are recently surging US scrap export volumes and prices sustainable?

However, the up-$50/lt scrap price boost is not causing material to flood the market immediately. Scrap flows have the ability to be shut off like a faucet but rarely, if ever, do they turn on like a faucet.

The strong US dollar, the bane of US scrap dealers for the better part of 2015 and 2016, has softened. The weakening dollar has allowed exports to recover and has helped mute steel imports.

Chinese billet prices have gone up and availability has gone down, leaving a void for international steel mills who will seek to fill their input needs with scrap.

Prime scrap grades are tight in the US and steel mills are issuing more and more price increases.

Now might not be the time for scrap dealers to double-down on black, but it also does not look like the time to run from the table.