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Steel Scrap Weakens: Will Finished Steel Prices Follow?

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Jul. 17 2019, Updated 8:12 a.m. ET

Steel scrap prices

On August 31, Platts reported, “Steel mills throughout the US issued cancellation notices this week for undelivered August scrap, effective at the close of business Friday, as they prepared to buy lower next week following the US Labor Day holiday.” The report also adds, “The cancellation notices came as no surprise to scrap suppliers who have been bracing for a September scrap fall.”

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Raw material

Steel scrap is the key raw material for mini-mills like Nucor (NUE) and Steel Dynamics (STLD). Companies like U.S. Steel (X) and AK Steel (AKS) use steel scrap along with iron ore (CLF) in their blast furnaces.

Generally, US steel scrap and finished steel prices tend to move in tandem. However, the recent downwards correction in steel scrap prices has also been influenced by the turmoil in Turkey, which happens to be the largest overseas buyer of US scrap. Also, scrap prices rose this year, which tilted the arbitrage in favor of using alternatives like billets.

Will falling steel scrap prices put pressure on US finished steel prices? US steel prices might continue to soften further regardless of the trend in steel scrap prices. Lower scrap prices could also lead to buyer resistance to higher steel prices. However, given the section 232 tariffs, US steel buyers’ options are constrained in bargaining hard with US steel mills.

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