Uncertainty continues in metal pricing

April 5, 2014

Editor’s Note: This information is provided by the staff at MetalPrices.com.

The steel and ferrous scrap markets are headed into uncertain times in the second quarter, while nonferrous markets are feeling the effects of the harsh winter and worldwide geo-political events.

Steel

Much of the uncertainty in the steel market stems from weaker flat-rolled steel prices and a slower pace of auto sales in the first quarter. Spot market prices for hot-rolled steel coils slipped to $630 to $640 per net ton at the end of February. The hot-rolled coil futures prices on the Chicago Mercantile Exchange have sunk as well, which could affect steel prices in the industry’s longer-term contracts with its largest users.

Several factors are driving prices down:

  • Mill order books are weaker, and some steelmakers are offering discounts in an effort to fill their production schedules.
  • Steel service centers are operating with lower-than-normal inventories, possibly waiting for the mills to cut their base prices to match lower scrap prices.
  • Cheaper imported steel is putting pressure on domestic mills.
  • Production outages that reduced steel supply in the second half of last year are not likely to be repeated this year.

Auto industry demand has been the main driver for the domestic steel market for the past year. However, sales were weaker in January and February, and the industry’s unsold vehicle inventory is at its highest level in almost a decade. Continued lagging sales could force automakers to cut production, affecting domestic steelmakers, particularly the flat-rolled mills.

Ferrous Scrap

Prices for ferrous scrap sank in January and February despite the numerous snowstorms and cold temperatures. Harsh winters normally slow the intake and processing of obsolete scrap like heavy melt and shredded, as well as the deliveries to the mills. This year, however, the absence of much offshore scrap demand has forced exporters along the U.S. East and Gulf Coasts to sell more of their scrap to the domestic steel mills, undercutting prices in the domestic market.

Weak offshore scrap demand is likely to continue in the near term. In addition, U.S. mills have been receiving an abundant supply of industrial steel scrap from both U.S. and Canadian manufacturers, pushing domestic scrap prices down further. Cutbacks in industrial scrap flow usually lag the steel industry’s reductions in scrap demand, creating short-term surpluses of that grade of scrap. Industrial scrap, unlike obsolete grades, is not price-sensitive.

Demand for this so-called prompt steel scrap has been rising steadily in the past few years because of the growth of the electric arc furnace segment of the steel industry. That has ended, and now some scrap traders believe industrial scrap demand may remain weak. Some EAF mills are installing their own ironmaking facilities, which could reduce their scrap consumption.

Aluminum

Aluminum premiums increased globally since the end of 2013. New rules for LME-registered warehouses in Europe and North America, which went into effect April 1, may encourage off-exchange warehousing.

In the Midwest, the North American aluminum premium increased on average 40 percent since the beginning of the year. Recently the premium has fallen from the high, but it is not expected to continue to slide to previous levels. Demand is still strong for material domestically, and recent smelter shutdowns have added pressure to the already high premium. The current premium represents about 20 percent of the cost to acquire the physical material. The recent downturn in the premium may continue with scrap availability increasing, but the premium will likely remain high during the second quarter.

Since the new year, secondary ingot prices have risen about 5 percent because of the tightening of obsolete scrap caused by the harsh winter. Scrap prices have increased from 5 to 7 percent for the secondary market. Secondary prices are expected to decrease as obsolete scrap begins to flow in warmer weather.

Forecasts indicate LME aluminum prices also may rise, as an increase in costs for raw materials has been curtailed by capacity cuts. European works are fully booked, and there seems to be enough secondary ingot and primary material available for the automotive consumers.

In China primary aluminum has been overproduced, and consumers are using prime to supplement scrap. Sources have told MetalPrices.com that the largest Chinese secondary aluminum smelter will be buying only 10 percent of the scrap raw materials it purchased last year.

Copper

When the Chinese government cut credit because of a hot housing sector and overcapacity in the manufacturing sector, traders increased copper imports, using the asset as a substitute to traditional financing. But Chinese refineries are operating at low capacity, and their demand for scrap copper has dropped off, so copper imports are expected to decline next quarter.

From September to March, copper inventories increased to about 300,000 MT. With the Chilean strike over and shipment delays a short-term problem, cathodes are expected to become more readily available, possibly causing premiums to drop. Bloomberg reports Jiangxi Copper expects refined copper demand and consumption to expand.

European copper consumers currently are operating at higher capacity rates as both refineries and brass mills find it easier to buy raw material than in 2013. In North America copper cathode premiums have held steady since the third quarter of 2013. Prices for scrap metal continue to tighten on obsolete grades; most obsolete material is generated through construction and demolition, which has been slow because of the harsh winter. Spreads for scrap could widen as warmer weather creates additional supply.

Lead

Prices for lead should remain stable as the automotive business and battery business continue to remain strong. Winter weather causes an increase in demand for lead for replacement batteries.

Nickel

MetalPrices.com premiums for melting-grade nickel have increased because of weather and limited supply, which many believe is short-termed. Major U.S. stainless mills raised surcharges for March shipments because of higher material costs for nickel and chrome; both 304 and 316 stainless increased 2 percent from February.

Spot prices for high-carbon ferrochrome, the base material for stainless steel production, have increased because of tight supply and weather. Ferrovanadium prices have risen recently and likely will remain strong. Demand for vanadium is determined by the steel industry, and upward movement is expected into the second quarter.

Zinc

LME premiums currently sit at $155 to $165/MT in Rotterdam and $150 to $160/MT in Shanghai. Demand is decent as automotive production continues to stay strong. Supply also is ample, and merchants are expected to sell large lots at discounts to the LME premium.

Prices in this report should not be construed as a solicitation nor as offering advice for the purposes of the purchase or sale of any metal, investment, or derivative. Prices, information, and opinions contained in this report were considered by MetalPrices.com to reflect market conditions on the date when they were compiled. Although MetalPrices.com has reasonably been prudent to ensure this information is correct, it does not offer any warranty as to the accuracy or completeness of such information. Any person or company placing reliance on the information published by MetalPrices.com does so entirely at their own risk, and MetalPrices.com does not accept any liability as a result.



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