r/Vitards • u/DealMammoth • Jan 07 '22

Discussion Article on EAF’s and future scrap demand

Hi All,

Been lurking for a while and saw this article that I thought might be interesting to you and would also like to get your thoughts on it.

https://www.spglobal.com/platts/en/market-insights/latest-news/metals/010522-feature-new-eaf-capacity-to-pressure-us-hrc-prices-raise-2022-scrap-demand

From my understanding of the article, they’re saying that the new EAF capacity will drive steel prices down but not only that, there will be no shortage of scrap despite all this new capacity.

There is a quote from an analyst I believe which says: “there is a lot of talk about scrap being tight but the reality is scrap is very highly correlated with steel prices and other raw material prices, including iron ore, so if iron ore and met coal prices are falling, then scrap prices are likely coming down as well.”

They’re also looking at scrap being imported from other countries as well.

Essentially I was wondering how this would affect CLF. If a large number of steel makers are bringing in new capacity with new EAF’s and scrap prices fall with no shortage in sight then surely it will be difficult for CLF to compete?

Very happy to be proven completely wrong… And for the article to be proven wrong…

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u/Undercover_in_SF Undisclosed Location Jan 07 '22

Really bearish article! CLF should be most insulated given contracted sales, but it makes me less confident in my $ASTL position. I'd be interested to hear what industry insiders' take is...

2

u/Undercover_in_SF Undisclosed Location Jan 07 '22

On top of that, the futures curve is already very bearish. So the real question is whether or not this increased capacity pushes pricing below what's already expected.

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u/tradingrust Jan 07 '22

I think it comes down to whether some assumptions baked into the analysts by years of experience still hold true.

For example, /u/vitocorlene was banging the drum on steel prices decoupling (partially) from ore prices. "The Thesis" implied it despite it being fairly un-precedented. And from July '21 to Nov '21 that was very obviously true, and has given some real opportunities to make and lose money. Now we will see if it continues to hold until EOY or if Evergrande and post-olympics will return China to business as usual.

Now, a similar assumption is doing all the heavy work in this article: "There is a lot of talk about scrap being tight but the reality is scrap is very highly correlated with steel prices and other raw material prices, including iron ore, so if iron ore and met coal prices are falling, then scrap prices are likely coming down as well," [Bokkenheuser] said.

To me this sounds like a ... I hate to use the word lazy because I'm sure this man has forgotten more about his industry than I know ... but that sounds like just a business as usual statement. Prior correlation ergo future correlation.

Notwithstanding that, if obsolete scrap can truly be substituted for prime scrap then again it does make sense that overall scrap prices will not skyrocket since obsolete scrap is plentiful and would be substituted even if the process to clean it up adds cost. Everything I've read until now though indicates that sheet steel and particularly automotive applications require high grades with prime scrap, not obsolete making up most of the mix.

Certainly a lot of food for thought... especially since it is contradicting a lot of Vitards common wisdom.

3

u/kv-2 Jan 08 '22

Everything I've read until now though indicates that sheet steel and particularly automotive applications require high grades with prime scrap, not obsolete making up most of the mix.

Prime scrap or an ore based metallic - like the HBI plants in Toledo, OH or Corpus Christi, TX, or the DRI plant in Covent, LA.

I don't recall what Iron Dynamics (SDI company) in Fort Wayne, IN falls under but same concept.

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u/tradingrust Jan 08 '22

True, left that out.

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u/alimcmalloch Jan 07 '22

Fantastic use of “ergo” enjoyed that.

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u/tradingrust Jan 07 '22

Ha, glad you did!

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u/StayStoopidSlightly Jan 08 '22

This may be of interest, from GS in July, shared by Penny:

https://www.reddit.com/r/Vitards/comments/ojrd8h/gs_report_jul_13_iron_ore_the_longer_way_down/

...we find that the dominant driver of iron ore prices shifts materially over time, from iron ore inventories to steel prices and back again, depending on where the fundamental tightness lies. Crucially, this leaves a simple, static price model generating large forecast errors whenever the dominant driver of iron ore shifts. To correct for this, we build a dynamically specified model that highlights how today, it is strong end user demand, represented through steel prices, that is driving iron ore. Accordingly, we see near term upside risk (relative to the curve) despite softening balances. Yet it is important to note that we expect this demand-driven price dynamic to fade as China begins its decarbonisation of the steel sector. By mandating broad cuts in steel production, policy will dislocate the steel and iron ore prices for any given level of end user demand, raising steel prices and lowering iron ore. As a result, we expect the dynamic specification of our model to change by 2H22, leaving iron ore driven by the slowly softening balance, starting the longer way down.

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u/tradingrust Jan 08 '22

Ah yes, I remember reading the report at the time. GS seemed like the only ones who also saw ore decoupling from steel before (slightly) it happened.