Davis Index: Market Intelligence for the Global Metals and Recycled Materials Markets

The US domestic steel market is bringing additional capacity online in the next six to 24 months at about 7.5mn nt (6.8mn mt) in hot rolled and over 2.5mn nt in slab and plate. An augmentation of over 10mn nt in flats capacity is estimated to add about 7mn nt in demand for prime scrap and scrap alternatives.


The expanded capacity is a two-prong issue for mini-mills according to Phil Gibbs, equity research analyst at KeyBanc Capital Markets with a focus on the steel sector. On the one hand, the additional capacity will place downward pressure on finished steel pricing, which is at historical highs in March 2021 but also adds a procurement challenge. 


Prime scrap

Domestically, Gibbs indicated, mills consume about 20mn mt of low residual metallics with approximately 40pc or 8mn mt imported. Mills import around 10pc or 2mn mt of prime scrap annually. 


Unlike additional bar mill capacity, which faces no shortage of obsolete scrap, sheet mill chemical compositions require higher quality raw materials. At a minimum, with no incremental HBI and pig iron sources domestically, mini mils will further disaggregate from local sources and actively increase imports of prime scrap and metallics.


Prime scrap has a limited output source domestically and as the EU increases its environmental shifts and electric arc furnace (EAF) installations, prime scrap exports will become limited in the near term. Generally, an EAF mix consists of 60pc prime scrap grades, 20pc pig iron, and 20pc obsolete grades in the composition, demand for prime grades will increase prices according to Gibbs. 


The overall expectation is that prime scrap, which has traditionally traded at an average price of $400/gt delivered to mill, will remain at an average price of $540/gt delivered in 2021 and despite post-covid supply chain balances, it will stay elevated at around $475/gt in 2022. 


Increased demand in overall scrap volumes is also expected to keep average prices for shredded scrap elevated at $423/gt delivered in 2021 with a slight downward adjustment to $395/gt in 2022, close to the previous average for the better prime grade. 


Consumers & higher prices

Giving insights on some EU mills’ statements that consumers may have to absorb an additional 60pc in finished steel costs on improved, low carbon technologies, Gibbs stated, “Steel consumers do not want to pay more and therefore industrial companies are not trying to increase costs.” He noted that some of those statements are also posturing for government incentives and support for import barriers. 


Gibbs added that over time supply and demand, along with innovation, play a role in managing prices. Thus, the baseline prices of metallics will likely decrease as iron ore prices trend down from the present high and technologies like hydrogen come online. and gain efficiencies. Iron ore prices at about $170/mt now are expected to be half of that amount in the next two years. 


Imports are also important in managing the competitive balance. China is actively expanding iron ore sources in Africa and Australia. With 85pc of steel produced via blast furnace, they will play an important role in influencing market dynamics. 


For now, China’s domestic activity has supported higher global prices. The country has vast steelmaking capacity, and its state-influenced entities are investing in many Asian countries with domestic consumption and export potential.  China has limited exports recently with high domestic development but could return to exports and disrupt global pricing. 


Section 232

It can be argued that the Section 232 tariffs may have assisted the US domestic steel industry in gaining strength, but they are also showing signs of injuring consumers, Gibbs noted. US mills saw the order books climb in September 2020 and into Q4 2020, but capacities have only recently risen. The delay in production capacity has affected customers now facing historically high finished steel prices and at times no volume access. Gibbs said, “The steel supply side in the US and globally overreacted in 2020, by acting too bearish in response to what ended up being a milder demand-side contraction.”


Higher domestic finished steel products will ultimately make steel consumers non-competitive. The scenario could drive some steel-consuming companies out of business and others to seek alternative supply models that include the import of product segments that are not subject to tariffs. Either of those scenarios results in some permanent demand loss for US domestic mills at elevated prices. 


Gibbs stated, “The US has a robust antidumping and countervailing mechanism and can extensively track imports to address unfair trading practices without Section 232.” 


With various organizations such as the Coalition of American Metal Manufacturers and Users complaining about steel shortages and soaring finished steel prices that are affecting the viability of members, Section 232 may come under review soon.

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