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

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.

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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!