EARLY 2017 SCRAP MARKET OUTLOOK
Predicting what will happen with scrap prices and demand volumes in 2017 depends critically on several variables that as of the end of Q1 have yet to become clear. Perhaps the largest question mark currently affecting the domestic scrap market is predicting how successful the new administration will be in pursuing protectionist trade policies. On April 18th, the president signed the ‘Buy American, Hire American’ executive order which specifically addressed the American steel industry. On its face, such an order would increase demand for domestic scrap, increase activity at scrap facilities and mills, and subsequently increase demand for scrap shipping. However, many industry pundits have already expressed doubt about whether the act could be enforceable and how quickly the administration could reverse loopholes that have plagued such edicts in the past—‘buy American’ has been a part of federal steel policy since the 30’s. Furthermore, the steel-specific import loopholes targeted by the order have generally come from within the steel industry itself—cheaper foreign inputs trump domestic inputs. Either way, it is unlikely that the order will drastically affect scrap in 2017 in any real terms aside from affecting peoples’ expectations. The administration’s broader trade goals will likely have a larger impact on the domestic scrap market. The U.S. is the largest importer of steel products worldwide (including rolled, flat, and billeted), but relies on international trade partners for a significant portion of its scrap inputs. The balance of increased scrap prices if trade restrictions are imposed would likely offset increased domestic activity from the same policies—but the net balance is difficult to determine.
While the global demand and supply of scrap and steel products does not directly affect scrap-by-rail in the U.S., the price fluctuations experienced as a result of international circumstances has a tremendous influence on domestic demand. The influence of China’s economic policy has the largest single impact on overall supply and price. China’s economy and the related construction boom has been slowing, and by 2020 China is aiming to cut its steel production by 20%. The U.S., however, only receives 2% of its raw steel imports from China. Another significant factor affecting global supply is the record cutting-up of large container ships. In 2016, 186 vessels were scrapped and 56 have already been scrapped in 2017. With dead weight of around 200,000 tons, one container ship produces about as much scrap steel as 6500-7000 rail cars. Ocean freight shipping is down and shippers have overbuilt in the previous 5 years. The resulting oversupply of shipping capacity will take some time to equilibrate. Shipping demand is expected to stay relatively flat, and the pace of ship retirement in 2017 depends on the price of scrap—the price per long ton of ship scrap has been steadily declining since 2014. AlphLiner (a marine shipping analysis publication) and The Economist have different perspectives on how much excess capacity will be headed to the scrap yard in 2017. AlphaLiner predicts another record year, while The Economist says it looks like most owners will wait to see how shipping demand and scrap prices play out before making any decisions.
In 2016 and Q1 of 2017 scrap prices have seen significant swings. Scrap prices have rebounded in Q1 and domestic steel producers like ArcellorMital, US Steel, and Nucor have been reopening and expanding production. Most industry insiders attribute this to hold-over effects from the tumultuous market in 2016. With prices fluctuating many mills delayed or slowed scrap purchases, which ran down domestic stocks. The resurgence in prices in Q1 was largely due to mills replenishing their stocks in hopes of more favorable conditions on 2017. This buying boom drove prices of scrap up 20% from Q4 of 2016 but is already tapering as positive outlooks are confronting a still slow market. Overall, demand for steel is expected to increase 5-6% in 2017. Much of this expected growth is due to a strong market for rolled and tubular steel products.
The principle issue with predicting what will happen with scrap in 2017 is that many of the variables affecting the market are nested which leaves open a lot of uncertainty and potential for volatility. For example, recycled container ships have the potential to drastically increase the global supply of scrap, but the decisions facing ship owners also depends critically on this price. Currently, it is such factors on the supply side of the equation that have the potential to determine the vitality of the scrap market in 2017. Global demand is expected to be slightly better than 2016, but with a glut of excess rail cars and container ships waiting for the right conditions to go to the scrap yard it is unlikely that prices will be able to rise too much. Q2 of 2017 is shaping up to be more of the same wait-and-see market that plagued 2016. If you have scrap, it’s looking best to either sell it now while prices are temporarily elevated or prepare to wait it out and see what the rest of 2017 brings.