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A Conundrum for the Steel Industry: Rising Scrap Steel Prices

Steel Companies Are Caught in the Middle

The construction industry and the automobile-making industry have been shaken due to coronavirus. This has caused ripple effects in the steel industry, which supplies them with materials. While these downturns are unfortunate for steel producers, they are fairly easy to explain. However, steel companies are facing another challenge that is more puzzling: rising scrap steel prices.

Upon first glance, this uptick in scrap steel prices seems to defy the laws of supply and demand. Fewer people are buying scrap steel, yet prices of the raw material have risen 13% year-to-date and have spiked 40% since March. In contrast, as demand for oil has fallen worldwide due to coronavirus-related shutdowns, year over year oil prices have plummeted 60%.

Steel companies are now dealing with both decreased demand for their products and increased costs due to the spike in scrap steel prices—a conundrum that industry leaders and economists did not foresee.

Despite Spring Thaws, Scrap Steel Prices Soar

The recent leap in scrap steel prices is all the more puzzling given the current time of year, when prices are usually at their lowest. Scrap yards are often iced-over in the winter, but spring thaws make it easier to dig out materials, making prices go down. Additionally, construction tends to pick up in the spring, which generates more scrap steel available in yards. Analysts have noted that the US economy, in some ways, is behaving as if it is still winter, as construction remains sluggish due to coronavirus.

Of all the materials on earth, steel is the most recycled. Companies like Nucor (NUE ) and United States Steel(X ) gather scrap steel from yards and put it back into furnaces in order to manufacture new goods. Because scrap steel is so important to the steel industry, changes in its supply and price creates unexpected shockwaves which then impact automakers, construction companies, and other businesses that need steel.

Wall Street’s Response

Nucor stock has fallen 30% year to date. Fellow US steel producers have also seen stocks sink between 30% and 50% over the past year. These drops are worse than the overall downturns for the S&P 500 and Dow Jones.

If scrap steel prices stay high and demand for steel products stays low, companies will continue dealing with lower profit margins. However, some sectors of the economy, including factories that buy steel are gradually reopening, which could help demand for steel rise. Like so many sectors of the economy right now, steel producers face many unanswered questions.

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