The long awaited news that we have all been yearning for… “Scrap prices are up”… but is it “built to last” or will it just drift away as fast as it flew in?
In our opinion, this recent price hike could likely be driven by rapid inventory replacement that has run dangerously low and not true market driven demand. While steel mills and scrap processors are “upbeat” about increasing prices, they are also skeptical about the sustainability of these prices over the long haul. No doubt, commodities have improved over the past quarter, but not to these recently observed pricing levels as published in various trade papers.
Historically, there has been an impending correction of steel and scrap prices in the “dog days” of summer. This correction could be fueled by sustained challenging market conditions, a downturn in oil and gas, and unfairly traded imports. We have watched this cycle run its course many times over the past years. The markets seem to follow this path once or twice a year. Here is the “readers digest version” for your reading pleasure:
- Mills increase prices on steel products and orders increase rapidly as steel buyers look to secure orders before more price increases. Orders are larger than usual and service centers build inventories.
- Scrap inventories at the mills are too low to sustain these new orders so the mills hastily raise scrap prices to secure tonnages – temporary raising scrap prices.
- After 60-90 days, mill orders begin to slow down so mills begin the process to lower scrap supplies by lowering prices – sometimes just as hastily as they were raised – and begin melting into their scrap inventory.
- Mills cut new steel prices to incentive new orders and further cut scrap prices. This hurts everyone downstream due to higher priced inventories at service centers and scrap processors.
- Cycle restarts over again….what an inefficient market…
Hopefully, if a correction looms on the horizon, it will be a gentle adjustment instead of a sharp slide we have all experienced the past year. In the meantime… enjoy it while it lasts!
Early optimism gives way to market realism. This has been the sentiment the past 30 days. March was generally good for commodity prices as you can see below with all the green (positive) numbers under the heading “30 day Change.” Unfortunately, all of these gains in base metals have begun to retreat to lower levels and have headed back into negative territory during April. It will be interesting to see if base metals can manage another positive rally during the second half of April or if the negative sentiment will prevail.
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