While the ballroom at the Planet Hollywood Resort and Casino in Las Vegas was filled with long product market players during SteelOrbis' 3rd Annual Rebar & Wire Rod Conference on January 23, 2012, they were all eager to hear what a relative "outsider" had to say--David Hodory, Vice President of Marketing and Communications for David J. Joseph Company (DJJ). As a subsidiary of Nucor, DJJ's scrap operations have tremendous influence in the US longs market, but Hodory expanded his presentation's reach to the worldwide scrap market, which is becoming an ever-more influential factor in US scrap pricing.
The "ascendency of China" is not news to anyone--the nation only accounted for 7 percent of the world's steel production in the 1980s, compared to 45 percent today--but an interesting point was that although predictions peg China's production to increase by 57 percent by 2020, the share of electric arc furnaces in that estimate will not increase significantly. The US, on the other hand, will see a rise in EAF steelmaking, along with India and Turkey, while Brazil will follow China's trend and continue to rely primarily on traditional blast furnaces. How this will affect the US scrap export market is a major concern for US scrap producers; currently, the US exports one in four tons of scrap produced, and that figure is expected to increase with the growing trend of containerization. Despite the relative lack of growth in Chinese EAF mills, Hodory insisted that China will not become a net exporter of scrap anytime soon, remaining a top consumer of US scrap along with other Asian countries such as South Korea and Taiwan.
David Cheek, President and CEO of Keystone Consolidated Industries, followed Hodory with a domestic mill perspective on the current wire rod market. A major concern plaguing wire rod mills, said Cheek, was the "decoupling" of ferrous scrap pricing and mill demand in the US. According to Cheek, the EAF industry in the US is competing for scrap and other raw materials with developing economies, which are expected to drive global steel demand for much of the near future. Additionally, Cheek noted that while US scrap exports exceeded 20 million tons in 2010 for the third consecutive year and were on pace to set a new annual record in 2011, the US wire rod industry continued to operate at about 25 percent below capacity. Regardless of whether mill demand for scrap is high or low, exports seem to have more of an influence on domestic scrap pricing. In order to dampen the effect of global steel demand on US domestic scrap prices, Cheek suggested that the US ensure trade laws are enforced, secure the free flow of basic raw materials, and boost the construction and manufacturing sectors to avoid further decline. Additionally, during the Q&A portion of the presentation, Cheek also suggested adding export tariffs to scrap, to possibly "recouple" prices back to domestic demand.
Lastly, Frank Bergren, Vice President of Metal Partners Rebar, offered a blunt assessment of the independent rebar distributor sector. The threat of imports, in particular, is vastly overrated according to Bergren. In 2006, for example, imports composed 24 percent of the US rebar market, while they only made up 10 percent of the market in 2011. Additionally, consumption of rebar recovered at the same rate as imports in 2011, and even though 2012 has started off remarkably strong for rebar imports, the currency exchange outlook for this year suggests that import prices will become less attractive to US buyers, while US mills will see more opportunities for exports. Although overall imports will not be much of a concern to the US rebar market, Bergren insisted that the oligopolistic market dominated by the top three US rebar mills (Nucor, Gerdau NA and CMC) will continue to damage the independent distributor market by importing rebar strategically through their distribution channels. The general trend of vertical integration with US mills is a major concern to independents, as mill-owned downstream operations consume more than 50 percent of all domestic rebar production, which results in an aggressive price structure that drives down profit margins and drives out independent distributors. However, new micro mills coming into the market can potentially threaten the existing oligarchy, although it would take time for them to make a significant impact.