Strong as Steel

Apr 23, 2020, 17:06 PM
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March/April 2020

By Megan Quinn

Despite a sometimes-shaky political relationship between Turkey and the United States, the two countries are bound together in the global market for ferrous scrap and finished steel.

Strong as SteelGreg Dixon makes a point of gathering regular reports, research, and trade data about Turkey’s ferrous scrap trade with the United States. “We don’t do business there,” says Dixon, CEO of Smart Recycling Management (Nicholasville, Ky.), “but I still make sure I know what’s going on there.” Other ferrous scrap recyclers and traders say the same thing. “Turkey is the epicenter of the ferrous scrap trade, and it affects everyone in the ferrous space, even if you are not a seller to Turkey,” says Nathan Fruchter, principal of Idoru Recycling Corp. (New York), a ferrous scrap trading agency and consulting company that does business in Turkey.

Turkey is the world’s largest importer of ferrous scrap, and it also has been the primary destination for U.S. ferrous scrap exports. In the past 10 years, Turkey has consistently purchased between 24% and 30% of all exported U.S. ferrous scrap, according to U.S. Census Bureau and International Trade Commission data. The main grades the United States sells to Turkey include heavy melt, a blend of No. 1 and No. 2 shredded scrap, and cut, plate, and structural scrap. Turkey relies so heavily on importing ferrous scrap because it makes steel using scrap-intensive electric-arc furnaces. “They don’t have enough domestic [scrap] supply to fuel that,” says Joe Pickard, ISRI’s chief economist. 

At the same time, Turkey relies on the United States to buy back some of the products it makes from that scrap in the form of finished steel. The United States is the fourth-largest importer of steel from Turkey, according to trade data, typically purchasing long products such as rebar. This rebar, which enters the United States from ports in Houston, New York, and other Gulf Coast and East Coast locations, is typically more affordable than domestic rebar and gets sold not far from these ports, which also cuts down on logistics and freight costs, says Sean Davidson, owner of the Davis Index (Singapore), a price publication for scrap recycling markets.

The tight trade relationship between Turkey and the United States has turned rocky in the past few years as the Trump administration has made tariffs its primary tool for achieving a variety of goals, from supporting domestic industries to putting pressure on foreign governments.

Tariff troubles

In March 2018, citing national security and the need to protect U.S. manufacturers, the Trump administration announced a 25% tariff on steel imports and 10% tariff on aluminum imports from most countries. It was a move President Trump said would protect the American steel industry—which supplies material for “critical infrastructure and national defense”—from being displaced by “rising levels of imports of foreign steel,” according to the Commerce Department.

In August 2018, the Trump administration announced it was doubling steel tariffs on Turkey, raising them to 50%, in response to news that the country had detained an American pastor on espionage charges. “Our relations with Turkey are not good at this time,” Trump tweeted. Tensions between the countries stayed high throughout the rest of 2018 over issues such as Turkey’s decision to purchase a Russian missile system and the two countries’ differing interests in how to handle the war in Syria. The Trump administration had hoped the doubled tariffs would put pressure on Turkey to end its offensive in Syria against the Syrian Democratic Forces, which are led by Kurdish militias allied with the United States.

Turkish steel exports to the United States fell 38% in 2018 because of tariffs, the Financial Times reported. The United States bought about 1.1 million mt of iron and steel from Turkey, worth about $559 million, in 2018 compared with the 1.7 million mt the United States bought in 2017, according to the Office of the U.S. Trade Representative. That same year, the United States sold Turkey 3.4 million mt of ferrous scrap, down from the 3.63 million mt it exported to Turkey in 2017.

In May 2019, the United States announced it would bring the tariffs on Turkey back down to 25%, in line with the steel tariffs it imposed on other countries. Yet a few months later, in October 2019, Trump reacted to news of Turkey’s military actions in northern Syria by announcing the United States would again double the steel tariffs on Turkey. Just a week later, the White House reversed that decision after it announced it had brokered a cease-fire deal between Turkey and the SDF. Yet Trump said he could still change his mind. “Should Turkey fail to honor its obligations, including the protection of religious and ethnic minorities … we reserve the right to re-impose crippling sanctions, including substantially increased tariffs on steel and all other products coming out of Turkey,” Trump said in a statement in October 2019.

The tariffs had an impact on ferrous prices and scrap availability in late 2018 and throughout 2019, Pickard says. Turkey’s currency, the lira, dropped sharply after the tariffs went into effect, and Turkey’s demand for U.S. ferrous scrap evaporated. The lack of export buyers helped drive down ferrous prices throughout the year. Though Turkey has remained “the foremost steel scrap importer” in the world, the tariffs are partly responsible for Turkey’s decision to purchase about 16% less imported ferrous scrap between January and June 2019, said Rolf Willeke, statistics adviser of the Bureau of International Recycling, during BIR’s October 2019 conference in Budapest, Hungary. Turkey still imported more than 9 million mt of ferrous scrap during that time. Demand from Turkey bounced back later in 2019, after the United States eased steel tariffs back to 25%, the level imposed on other countries, Pickard says. At the end of 2019, Turkey showed the largest net volume gain in imports of any country, increasing by more than 524,000 mt, he says.

The United States exported 3.91 million mt of ferrous scrap to Turkey in 2019, almost 25% of its total ferrous scrap exports, according to U.S. Census and ITC data. That’s an improvement over 2018, when U.S. ferrous scrap exports to Turkey dipped to 3.4 million mt, just 22% of the total exported from the United States. Turkish steel production fell that year, which contributed to the drop in demand for U.S. ferrous scrap, Pickard says. Despite the dip, Turkey kept its place as the largest export destination for U.S. ferrous scrap. Meanwhile, the United States purchased 339,925 mt of steel from Turkey in 2019, almost 70% less than in 2018, according to trade data.

Turkish demand for scrap continued to recover into the early part of 2020, Pickard says. “Shipments to Turkey have been going up in recent months,” he says. “Turkey did get some relief from the reduction of tariffs.… At the same time, pricing for ferrous [was] falling for 2019, so that makes ferrous scrap more attractive.” 

Many American and Turkish companies have maintained their long-term steel and ferrous trade relationships throughout the tariff changes because they understand the tariffs are political, not personal, Davidson says. “In the last few months, Turkey has shipped steel to the U.S. and they are shipping with a margin,” he points out. “It’s not because things changed in terms of policies—the tariffs are still there—but because market factors allowed it to happen. U.S. companies are not distrustful of Turkish steel. They like having it, and it makes sense logistically and economically to continue to do business with them.”

Though the market seems to be stabilizing somewhat, the United States and Turkey’s rocky political history has “made it much more difficult to read the ferrous scrap market and make reasonably safe price development predictions,” Fruchter says. “This is uncharted territory. We have never seen this type of political drama before.”

Tom Knippel, vice president of commercial industrial sales at SA Recycling (Orange, Calif.), agrees the tariffs have complicated the scrap market, throwing businesses that rely on ferrous scrap sales into flux. “It becomes difficult to plan ahead, and that affects pricing even more,” he says. However, the tariffs have helped U.S. steel mills, which now have access to more domestic scrap and less competition in the market for finished products, he points out. “We used to be
the No. 1 home for Turkish rebar sales, so the tariffs really helped U.S. steel mills benefit,” he says. However, when Turkey finds itself with direct competition for rebar production, it buys less scrap from the United States to feed its electric-arc furnaces. “That kills the scrap dealers,” he says.

Turkey’s market impact

Turkish buyers have somewhat predictable buying habits, where “every month they buy X numbers of EU cargoes, Y numbers of U.S. cargoes, and Z numbers of Black Sea and Baltic Sea port cargoes,” with a few short sea cargoes they buy on a regular basis from places such as Libya, Lebanon, and Israel, Fruchter says. Their buying schedule differs from U.S. buyers, who schedule their purchases at the beginning of each month, Dixon says. “Turkey doesn’t buy on a 30-day cycle like [the mills in] the United States. When they do buy, it’s advantageous for them to buy when they can get it cheaper, or they wait until they absolutely have to have it. Turkey might come in tomorrow and buy seven vessels’ worth, but they may not ship it for another 30 or 45 days. Then they might not buy any for another month. … They are opportunistic buyers, versus U.S. domestic buyers, who are cycle buyers,” he explains. 

When Turkey comes in and out of the market, it directly affects U.S. scrap prices, Pickard says. “If export yards are selling a lot into Turkey, there’s less availability to domestic mills,” which pushes prices up. “When less is being sold to Turkey, the influx goes to the domestic market,” which can drive prices down, he says. When Turkey has less demand for scrap and its mills ease off on spending, ferrous prices can drop between $20 and $50 per metric ton depending on how long the Turkish buyers are out of the market, Fruchter estimates. “Then one morning we wake up and the Turks are back in the market with a vengeance, fighting to buy at the lower numbers before prices move up again,” he says. “Financially stronger sellers hold back a few more days, hoping to get a few dollars more per ton. The financially weaker ones sell as fast as they can in order to replenish their bank accounts because they are sitting on large stocks and low cash flow. That’s when the market tends to move up,” he says. 

The push and pull of prices creates future price expectations, which is why ferrous scrap sellers keep such a close eye on Turkey, even if these sellers sell only domestically, Knippel explains. “We watch Turkey because it takes such a large part of the surplus scrap market,” he says.

Turkey’s location at the intersection of the European and Asian continents allows Turkish mills to buy ferrous scrap from a wide range of countries that might have advantageous pricing, Pickard adds. For example, China had excess steel production in 2018, prompting Turkey to import Chinese billet to make rebar because prices were “sufficiently low,” he says. That also drove down ferrous scrap prices in the United States and elsewhere, he says. 

Turkey has transparent price-setting practices and maintains a generally good reputation as a fair player in the steel market, and that helps the country find other markets in which to sell its steel when U.S. steel demand is low, Davidson says. In in 2019, China consumed more of its domestic rebar than in years prior, “allowing Turkey to sell steel into Southeast Asia, a market they otherwise would [not] have competed in,” he says. “Turkey is very agile, but it takes time, maybe two to three months, to set up a new supply chain. That’s quick for steel sales, but it affects the volumes Turkey can ship because they are busy finding new homes for the steel.”

Turkey’s economic health

Tariffs are not the only economic factors that influence the global market. Turkey’s sluggish domestic economy and the value of the lira have also created some volatility in global ferrous scrap demand and pricing, says Adina Renee Adler, ISRI’s acting vice president for advocacy. Despite the United States easing its steel tariffs back to 25%, “the lira is still facing significant depreciation, and that impacts Turkish buyers’ ability to buy,” she says. “That has an impact on where Turkey will buy scrap from—they are [the United States’] biggest ferrous export market, but they are also the Europeans’ biggest export market. When the lira is stronger against the euro than the dollar, they can buy more tons there for the same amount as they would spend [for fewer tons] in the United States.” 

Turkey’s weak economy, especially after the lira crashed in 2018, has affected not only its steel output, but its domestic businesses that buy its steel, too, Pickard says. Turkey’s construction industry is taking longer than other segments of its economy to recover, meaning there’s less domestic demand for rebar and other building materials made from Turkish steel. In September 2019, Istanbul-based steelmaker Koc Metalurji announced it would halt production at its plant in Iskenderun until January 2020 because of weak domestic demand and the weak national economy. Yet the plant began producing again in December—a month early—in part because domestic steel consumption rose in the later part of the year, S&P Global Platts reported. Turkey’s domestic steel consumption rose 34% year over year in October 2019, which “has raised recovery expectations for the coming months as well as for 2020,” the Turkish Steel Producers Association said in a statement. Turkey is building several major infrastructure projects that could fuel domestic steel demand, including several high-speed rail lines and an expansion of the Istanbul metro system, Pickard adds.

Continued economic recovery will help fuel positive market sentiments—and fuel stronger Turkish demand for U.S. ferrous scrap, Fruchter says. In the long term, he predicts that Turkey could reduce its appetite for U.S. scrap as it begins relying more on its domestic scrap collection, but that shift is years away. “Import demand for steel scrap can only fall with more domestic collection, which is not possible at the moment due to the low growth rate” in Turkey, he says.

U.S. exporters will need to make long-term plans to diversify their customer base if Turkey can significantly develop its domestic ferrous scrap supply, he says. For now, the United States and Turkey’s ferrous scrap trade relationship is cemented in the market, despite the uncertainty of its foreign policy relationship, Pickard says. “We used to talk a lot about how what happens in China affects American recyclers. But what happens in Turkey has huge implications for what happens to ferrous scrap in the United States,” he says.

Megan Quinn is senior reporter/writer for Scrap.

Despite political tensions, Turkey and the United States share an important ferrous scrap and finished steel trade relationship.   

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