Nerds of Steel

It used to be the case that minimills (scrap buyers) and integrated mills (iron ore buyers) had very different cost structures. Integrated steel producers’ costs were relatively fixed because iron ore and coking coal were sold on an annual contract basis and did not change much year to year. Scrap prices on the other hand, moved up and down with steel demand end helped minimills maintain their margins across the cycle. That was then and this is now.

The raw materials used to make steel are in short supply globally, causing much greater volatility in all raw material prices and different purchasing behavior by steel producers. From the few time series which are available to compare the two, scrap and pig iron prices track each other. See the chart below.

So it’s not really fair to fault EAF producers for reacting to iron ore price hikes or integrated producers for reacting to scrap price shifts. Iron is iron and, if priced efficiently, the two commodities will price an iron unit about the same. If you don’t believe iron is iron, check out the recent announcement that Nucor, the largest minimill in the country, plans to build a blast furnace to make the stuff.

And it’s the surcharge, another undoubted frustration for steel buyers (and producers), that has driven steel prices most. There are a number of different flavors of surcharge depending on the product you’re buying and who you’re buying from. But in all cases the surcharge mechanism is relatively transparent, at least enough to show how the supply/demand tensions of the raw material compare with the supply/demand tensions of the finished product.

To make that comparison, just take the calculated surcharge of hot roll sheet or plate from any of the US producers and subtract it from the Purchasing Magazine monthly spot price for those same commodities. You will see that after an initial run up in the base price (i.e. the price excluding the surcharge) in 2003/4, most of the price changes since then have come from the surcharge mechanism alone. It’s only in recent months that the supply/demand dynamics of the finished steel product markets have also started to put upward pressure on prices.

There has been a recent flurry of steel producer acquisitions of scrap processors (SDI-Omnisource,  Nucor- DJ Joseph, DJ Joseph-MRS, Galamba) and persistent rumors that others are circling targets. By my calculations steel producers now control about 40% of the US ferrous scrap industry. They controlled less than half that only a few years ago. If the experience of US integrated producers and the iron ore industry at the turn of the last century is anything to go by, there’s more to come.

This paper describes the process of vertical integration into iron ore production pursued by steel producers in the 1890’s. In 1896 65% of the total iron ore consumed in the US came from mines located in the Lake Superior region. There were more than 100 companies located in the region and they produced about 10MT tons of ore between them. But only one company, the Oliver Mining Company, was owned by a steel producer (Carnegie Steel).

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This is a very interesting presentation from Russian mining & metallurgical company Metalloinvest from September 2007. It provides some good data on Russian steel output through 2015 along with changing raw material use and sources as the Russian economy and particularly the steelmaking portion expand. This is especially important as the withdrawal of Russian scrap supply from the international market is one of the factors driving scrap price increases in North America, rebar prices in Turkey, non-residential construction costs everywhere etc. etc.

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DJ Joseph puts together a handy summary every month of various data related to ferrous scrap and steel. You can find it on the company’s website under the menu “Industry” and option Scrap Recap. They have monthly data going back to 1997.

This file - Scrap use Calculations - is a little old, but it’s from the Steel Recycling Institute and offers one way of calculating both scrap use and recycled content in steelmaking by both EAF and BOF routes. There are good explanations of scrap terms particularly home, prompt etc.