1 Mar

What the Trend in Scrap Prices Indicates for Nucor

WRITTEN BY Mohit Oberoi, CFA

Scrap prices

Steelmaking is raw material intensive in nature, and raw material pricing tends to impact steel prices. In this article, we’ll discuss how steel scrap prices are playing out in the United States.

To begin, we should note that integrated miners such as U.S. Steel Corporation (X) and ArcelorMittal (MT) use primarily iron ore, whereas minimills such as Nucor (NUE) and Steel Dynamics (STLD) rely more on steel scrap (DBC).

What the Trend in Scrap Prices Indicates for Nucor

Notably, higher scrap prices have mixed impacts on Nucor and Steel Dynamics. While these companies’ scrap processing operations stand to gain from higher scrap prices, higher scrap prices also raise unit production costs for their steel mill operations.

The above graph shows the movement in spot HRC (hot rolled coil) prices plotted against benchmark-shredded scrap, according to data compiled by Metal Bulletin. As we can see, spot HRC prices have been moving in tandem with scrap prices. Generally, a rise in scrap prices is followed by a rise in steel prices.

Producers’ views

During its 4Q16 earnings call, Steel Dynamics pointed to some weakness in the scrap market. Russel B. Rinn, STLD’s executive vice president, pointed out, “[The] December and January markets got a little hotter than they probably should have.”

Rinn also said, “I am anticipating we will see a mild correction in February and maybe a little bit in March, but I think beyond that I think we’re seeing a pretty robust market.”

We did see some weakness in the scrap market in February 2017. However, thanks to improved steel demand, scrap prices could again start looking up. Furthermore, rising iron ore prices could impact the US scrap market. We’ll discuss this further in the next article.

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