Covid-19 has hit many industries in obvious and some not so obvious ways. The steel sector, for one, is reeling from falling demand. Falling demand because cars aren’t being produced and construction projects are halted is an obvious impact from the pandemic. But there is also another problem for steel producers no one saw coming: rising raw material prices.
Commodities aren’t supposed to rise when demand is falling. Oil prices, for instance, are down about 60% year to date. Scrap steel prices, on the other hand, are up about 13% year to date and up almost 40% from March lows. That’s a problem for steel producers because scrap is a key raw material.
Steel is the most recycled material on earth. It is put back into steel making furnaces and turned into brand new products. Scrap is the main raw material for companies such as Nucor (ticker: NUE) who’s business model was originally built on scrap steel. But traditional steelmakers such as United States Steel (X) also will buy scrap steel as part of an overall raw material sourcing strategy.
Scrap steel’s recent rise is doubly-weird because scrap steel is usually weakest in the middle of the year. That’s because scrap come from scrapyards and in the winter scrapyards can literally get iced in. It’s harder to dig out from under, say, a Chicago snowfall. What’s more, construction slows down in the winter, generating less scrap metal for yards to process.
