Viewpoint: Low volumes force US recycling closures

OREANDA-NEWS. December 23, 2015. US post-consumer ferrous scrap collections are down by an estimated 20-40pc year-to-date as falling demand from mills hit scrap prices and hurt margins.

Sustained high levels of steel imports from countries now fighting antidumping and countervailing charges and low oil prices caused capacity curtailments and shutdowns at US steel mills, which in turn drove scrap prices lower.

For the week ended 12 December, US steel capacity utilization dropped to 71.4pc year to date from 77.5pc, according to the American Iron and Steel Institute. Production dropped by 9pc to 83.8mn net tons, from 92.1mn nt.

In recent weeks, capacity utilization rates have ranged between 60-65pc, after starting the year at 77pc.

Some steel producers have suffered more than others. Market estimates place capacity utilization at producers geared to serve the oil and gas sector at 30-35pc, long product makers at 50-55pc and auto steel producers at around 70pc.

Weaker steel production amid a strong flow of high quality industrial scrap added more pressure to scrap prices as high volumes of scrap generated from industries like the auto sector adequately covered the lower volumes of post-consumer, or obsolete, scrap processed at yards and shredders.

Industrial grade scrap prices have dropped by more than 50pc from the start of this year to levels of around \\$170 per gross ton in December, from a January start of \\$365-370/gt.

Shredded scrap prices traded at a national average of \\$174/gt in December, down 49pc from a January 2015 average of \\$342/gt.

Obsolete and shredder feed scrap supply remains a concern and has caused some shredder operators to raise scale prices over the past two weeks. But healthy flows from manufacturing plants could help mills with low demand substitute more of their shredded scrap needs with prime scrap and alleviate the pressures of obsolete supply.

Dealers and shredder operators said these mixed signals are alarming since supply fundamentals and depleting bottom lines should ideally deliver either a flat pricing market, if not higher prices.

Prevailing costs and sales prices for shredded scrap processing reveal that operators secured a nationwide average margin range of \\$14-28/gt this month on shredded scrap delivered to a mill on sales prices of \\$160-175/gt delivered mill. Though the number looks appealing on a percentage basis, operators said that an erosion in volume has sent many to the brink. This is evidenced in the large number of companies that have announced lay-offs, facility closures and sell-offs over the year.

About 70-100 US facilities owned by medium to large sized recyclers have closed since the start of the year. In addition, a few hundred small scale operators are estimated to have shuttered in the past few months.

Shredder operators and dealers of obsolete scrap have been especially hard hit by lower prices.

Scrap companies built to feed steel mills with industrial scrap that they collect from manufacturing plants appear to be faring significantly better since collection and processing prices are calculated almost entirely off sales prices with a fixed margin tucked in.

For shredder operators and yards that collect obsolete scrap to prepare cut grades like heavy melt a falling price environment has challenged cash positions since fixed costs only rise on a per ton basis when volumes drop.

Only meaningful cutbacks in Chinese steel production or equally a recovery in oil prices can turn the tide for US steel production and its need for scrap.