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Steelmakers seek clean bill
February 03, 2013
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NEW YORK: About 60 million tonnes of ferrous scrap, a key raw material for steel making, are used by the US steelmakers while over 20 million tonnes are exported every year, according to data from the Bureau of International Recycling. 

The US steel scrap recycling market is very fragmented and as most firms operating the sector are privately-owned there is no obligation upon them to release these kind of information.

Scrap in the US is often priced using trade publications assessments such as the AMM index.

The steel scrap market is the least transparent among the steel raw materials in the United States, and steps to improve the situation need to be taken, a Severstal North America executive said in an interview this week.

Severstal North America, a subsidiary of Severstal one of Russia’s largest steel producers, has two steel mills in the United States. 

“How the scrap market evolves, how the price is set, is something that we still find relatively unexplainable to a large extent,” Severstal North America chief procurement and strategy officer, Saikat Dey, said.   

“In most other commodities you know what has been produced, what has been consumed and stocked, you have good idea of the demand supply gaps. It feels like scrap is more driven by rumors and conjecture.”

Availability of data on scrap demand, supply generation and inventory levels would help steelmakers to be a more reliable business partner for recyclers too, Dey said.

But the methodology behind these indices is not satisfactory as the process of getting to a price, based on a survey rather than on actual receipts, is rather opaque, according to the Severstal executive.

The lack of supply and demand information is also making it difficult to estimate the effects of natural disasters on scrap prices, according to the steelmaker. 

“You pretty much know what the impact of Australian floods is going to be on the iron ore and coal markets, but we are struggling to figure out how the barge shut down in the Mississippi is going to affect scrap,” Dey said.

Low water levels in the Mississippi river due by a drought in the United States, caused barge traffic delays in the last few weeks and a section of the river had to temporarily close this week after two tanker barges struck a railroad bridge.

Severstal, a firm controlled by billionaire Alexei Mordashov, has decided to change its scrap buying strategy in the US this year after reckoning the way it bought scrap last year resulted in a margin erosion.

“On a weighted average basis, we may have paid more than someone who bought the same volume every month, because we bought more when the market was up and less when the market was down,” Dey said.  “Going forward we want to buy consistently, similar amounts every month.”

The company also thinks that increased investment from steelmakers in direct reduced iron (DRI) capacity in the US, boosted by the low shale gas prices, will depress prices of some scrap grades.

DRI can replace raw materials such as pig iron or premium scrap grades such as bushels and bundles, which unlike shredded scrap are generally not exported outside the US  Steelmaker Nucor is developing a $750 million plant in Louisiana expected to produce two and a half million tonnes of DRI.

“Suddenly you have two and  a half million tonnes of net mass balance of product available. Other people are also building DR plants, which is great as this will impact the demand and the supply for scrap,” Dey said.

“Prices of bushes and bundles could fall as a consequence. And if that is the case we could stand to benefit, not having put significant capital investment in DR.”

Severstal is in the meantime looking actively at scrap derivatives but it is waiting for the market to evolve before actively participating.  Availability of data on scrap demand, supply generation and inventory levels would help steelmakers to be a more reliable business partner for recyclers too, Dey said.

But the methodology behind these indices is not satisfactory as the process of getting to a price, based on a survey rather than on actual receipts, is rather opaque, according to the Severstal executive.

The lack of supply and demand information is also making it difficult to estimate the effects of natural disasters on scrap prices, according to the steelmaker. 

CME Group Inc launched its US scrap futures contract last year and the contract has gained a good amount of interest in the US steel industry, brokers said.

Reuters

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