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Taking stock of the ‘tail that wags the dog’


The North American ferrous scrap market is set for a strong 2017 thanks to solid demand at home as well as abroad, American Iron & Metal Co. Inc.’s (AIM’s) top executive said.

Global scrap prices might, in fact, be undervalued by as much as $80 per tonne given current market conditions, Herbert Black, president and chief executive officer of the Montreal-based scrap recycler, suggested during a keynote presentation at the S&P Global Platts 13th annual Steel Markets North America Conference held mid-March in Chicago.

“The metal markets are very firm. ... Mr. Trump, in my humble opinion, inherited a good economy.... It wouldn’t have mattered who was there. The numbers would have been great,” Black said, pointing to recent strong U.S. economic and jobs data.

At the same time, metals demand is stable or growing in China and India while scrap consumption in Mexico is rebounding and Canadian scrap consumption remains firm, Black pointed out. As a result and barring a political calamity, the United States will remain on the right track, he predicted.

Black calculates that compared with the price of iron ore and coking coal, scrap hovering at current levels of about $300 per ton, might be underpriced. He pointed out that in August 2014, for example, iron ore prices were at $89 per tonne, coking coal at $110 per tonne and ferrous scrap prices to Turkey at about $385 per ton.

Raw material prices are roughly on the same level or higher, Black noted in mid-March. Iron ore is at $88 per tonne and coking coal at $158 per tonne—yet the price of scrap to Turkey is between $295 and $305 per ton, he noted.

“Scrap, one could say, is $80 (per tonne) under the true, fair value of the market,” Black reasoned. “Why was it worth so much in the past?”

The problem is market volatility and the root of that volatility rests in large part with market dynamics in Turkey, he said. “It’s the tail that wags the dog.”

The result is “a lot of nervous consumers’” he said. “The minute they have offers of three to five cargos, it’s a bear market. The minute those cargos get sold ... scrap turns around and moves up,” Black observed.

Over the past 12 months, Turkey has been even more volatile than usual, Black noted, attributing the increased volatility to bitter cold weather which forced it to divert natural gas to residential consumers from the industrial sector earlier this year. As a result, some mills had to cut output by up to 50 percent which, in turn, hurt scrap demand, he said.

At the same time, Turkey was suffering from deep political uncertainty following a 2016 coup attempt, and sentiment only worsened in the wake of a string of terrorist attacks, Black said.

Since then, temperatures in Turkey have returned to normal and mill output and construction are returning to where they should be.

While Black sees U.S. scrap prices travelling on an upward trajectory in 2017, he says there will be short-term volatility because even under normal conditions, the manner by which Turkish mills procure scrap contributes to volatility.

Turkish mills tend to enter or exit the North American market at the same time, creating short-term panics or price spikes, he summarized.

As a result, the price of ferrous scrap could jump to $400 per ton in any given month if Turkey reenters the market in a big way or fall should Turkish buyers retreat, Black concluded.


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