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Why Scrap Prices Could Haunt Nucor

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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 and look at the factors that could drive pricing in the near term.

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Steel companies’ opinion

Nucor’s (NUE) management sounded somewhat wary about the outlook for scrap prices. John Ferriola, Nucor’s CEO, noted that he sees some downward pressure on scrap prices. He pointed to falling iron ore prices (CLF) as a bearish driver for scrap prices.

Seaborne iron ore prices are now in the $60 range, losing significantly from their 2017 highs. However, domestic scrap prices have mostly held their ground despite the rout in seaborne iron ore prices. We should remember that US scrap prices don’t follow seaborne iron ore prices in the short term. However, over the medium term to long term, changes in alternate raw material costs tend to impact the overall dynamics.

Price arbitrage

Some of the Turkish steel mills, which are the largest buyers of US steel scrap, could shift to alternate raw materials like billets and slabs to take advantage of the price arbitrage. If we see weakening scrap demand from Turkey, it could impact market dynamics in the US as well.

Any decline in scrap prices could impact US steel prices as well, as US steel prices and scrap tend to move in tandem with each other.

Meanwhile, despite the recent weakness in steel stocks (X) (AKS) (MT), there are some bullish drivers as well. We’ll discuss these in the next part of this series.

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