Listen up you little Schnitz as I steelsplain to you why SCHN is going to crush it short term, mid-term, and long term. Ask yourself: Are you in solidarity with SCHN as a scrap ally, or are 👏 you 👏 a 👏 fascist 👏 pig?
## tldr, ape style
Old steel from car and machine has name “scrap” and use in make new steel cheaply and earth friend. Scrap very valuable when steel price go up.
China produce, consume, and export most world steel by big number. But China want less pollution and emission! Steel make many pollution and emission! To fix, China make less steel, export less steel, and use more scrap. **Now many less steel in world.**
World got sick and no make steel long time but now world feel better and need steel to build many thing like inferstucture and car and machine. But China not sending too many steel! **Steel price go up up up and away!** Scrap price go up too!!
But why matter SCHN??? USA long time make steel, many of that steel old now. So USA have big number high quality scrap. SCHN make money by collect and buy scrap all over USA then do export it all across whole wide world. **SCHN making moneys!!**
In future suit people tell steelmaker to use scrap for good earth weathers. Also China use new machines that use scrap to make steel. Demand for scrap go up! Not infinity scrap exist! **SCHN go up!** 🚀 🌚 🌝 🌚 🌝 🚀
China maybe very soon say “we no more export steel” and that make steel price go up more! Maybe even somebody buy SCHN because steel companies are come together now and they know control scrap be important for future!
Many thing to make SCHN go into sky and space! 🚀 🚀
[Schnitzer is sex positive, and about to restock green dildos](https://preview.redd.it/svg0od1bk1a71.jpg?width=932&format=pjpg&auto=webp&s=9dc235ff9eae1f9bbcb17518bdcd3777eae8f3a1)
# I. Short Term: An Update
This is a brief follow-up to my previous post: [$SCHN: The Scrap Attack. (Part I: Balls of Steel)](https://www.reddit.com/r/wallstreetbets/comments/of2qwj/schn_the_scrap_attack_part_i_balls_of_steel/). You developmentally disadvantaged people of mental disability basically ignored it, but that’s ok. I’m assuming you just went to go read a book and educate yourselves.
Anyway, the set-up is the same:
* SCHN dips post earnings due to discrapmination, and the SCHN/HRC spread widens.
* Steel stocks rise up into earnings since they’re printing like crazy.
* HRC ramps up mid-month as usual
* SCHN takes the above as consent to express itself via candlestick boners
* Finally: cute little post-earnings-low-IV SCHN jumps up to 52w highs in a month or two
Here’s what happened yesterday, Jun 7:
[As of close Jun 7. Party’s just getting started.](https://preview.redd.it/ryzbn23dk1a71.png?width=886&format=png&auto=webp&s=2a6754652617bb06a94073f956a20e8a5d4f2208)
Here’s today (Jun 8) @ 2pm:
[As of Jun 8 @ 2:00 pm](https://preview.redd.it/27rv3txdk1a71.png?width=889&format=png&auto=webp&s=c85368ee2baa4981d737a831572dce16024a6379)
The IV remains low, with no bump up from [Tuesday’s post](https://www.reddit.com/r/wallstreetbets/comments/of2qwj/schn_the_scrap_attack_part_i_balls_of_steel/), because, congratulations, you guys didn’t YOLO. Yes, IV is so low that a +2.59% day moves Aug 20 options up 30% and non-weekly FDs up 40% and 84%.
**Below is the updated chart:**
[Still plenty more to climb.](https://preview.redd.it/gps46kpek1a71.png?width=1697&format=png&auto=webp&s=69fa286b2c994ce5620c45d4f38e9e51f2c53eaa)
Still looks good to me. I still thinking we hit $55 by July and $60 by August, which would be multi-baggers.
Lastly, steelmakers earnings are coming up. If you’re a believer in STEELGBTQ (steel goes big this quarter), then now’s not a bad time to load up. Steelmakers will for sure absolutely demolish earnings this quarter, but it’s debatable how the market will react. My take is they cannot ignore the amounts of cash coming in, and a flight to value has to start some time.
# IIa. Bananas
Imagine it’s 1990. Nirvana is rocking the charts, and you grow and sell bananas. Business is good and you’re able to sustainably expand your business slowly and surely. You pay your workers well and you’re not too mean to the environment.
However, a new banana grower hits the scene across the world. They grow bananas with less regard for the environment and their workers. This makes their bananas cheaper to make. They ship the bananas all across the world for cheap, and rake in money. In the span of 30 years, they go from growing less bananas than you to growing almost 15x the bananas as you, and more than half of the whole world.
As the price of bananas plummet, banana growers across the world suffer. They can’t afford to expand, and they don’t. They barely scrape a living by and the only thing that keeps them alive is their country slapping taxes on bananas imported from the evil banana empire across the world.
The amount of bananas the world wants has grown, but the the only people who have increased their banana farms is the evil empire. For better or worse, the world has practically grown to rely on those cheap bananas coming in.
This continues for years. Until, rather quickly, those cheap bananas stop flooding in. Yet, the appetite for bananas remains the same. What happens now? **The price of bananas shoots up!**
**In fact, it’s even more extreme than this: not only has the supply of bananas vanished, and demand stayed the same — no, the demand for bananas has skyrocketed!**
You see, just a year ago, everybody got sick and nobody was making bananas for awhile. Sure, less bananas were being eaten, but stockpiles of bananas still fell. Then the world got better, and people’s appetites for bananas exploded. All that time with no bananas… now they want to feast on bananas! They’ve even decided to build bridges, buildings, cars, and appliances out of bananas!
Whoa, so it’s pretty awesome to make and sell bananas right now. Maybe it’s time to expand your banana farms? Well, you see, that takes a lot of time, and a lot of money. It can’t happen overnight. Furthermore, the last time you did this you got fucked by the evil banana empire.. so maybe this time you’ll be more careful.
That’s where we are at right now. Huge demand for steel that will last for a long time, and supply that’s not coming back for a long time.
# IIb. Steel: China, and the rest of the world.
This is the wrinkle version of the above section. Skip if you want.
Basically the dynamics of global steel are changing, and changing rapidly. On top of that, we are seeing immense economic growth. On top of that, we are coming out of COVID (which saw lower levels of production, and caused demand to pent up). **There is a lot of intersectionality going on, but it’s the perfect storm for steel.**
## Before: China sets the price of steel.
China enjoys steel privileges, and they oppress the rest of the world’s steelmakers. Look at just how much steel they manufacture:
[China produces a lot of steel. A lot.](https://preview.redd.it/0y4yzy2hk1a71.jpg?width=1200&format=pjpg&auto=webp&s=16511dae352ce8c711f7373cc9d6ec9c159d46c7)
Yeah, it’s that crazy. China produces more than 9x the amount of steel of the #2 steel producer (India), and 6x all of Europe combined.
They also consume a fuck ton of steel. But, in the end, they’re left with plenty of steel to export, which they’ve happily been doing. So much so, that for years they’ve driven the price of steel to the ground and nearly bankrupt the entire industry here in the US. **They export about 15-20% of all the steel in the world that is exported.**
[China exports a lot of cheap, dirty steel.](https://preview.redd.it/xy1cdyxhk1a71.png?width=745&format=png&auto=webp&s=829226b71f6879cbea70d3feb5168014076c0603)
While they may not export much directly to the US, the effect is that the world is flooded with cheap Chinese steel, and prices all over the world drop as a result.
## Now: China doesn’t want to make so much steel.
Part of the reason Chinese steel was so cheap to make was that by the rest of the world’s standards, they cut corners. The manner in which they produce steel produces a fuck ton of CO2 emissions as well as PM2.5, and I haven’t looked into it but I’m sure there are better jobs to have than working in a Chinese steel mill.
If you don’t know what PM2.5 is, it’s particulate matter (dust, grains, etc) of size 2.5 microns or less. For reference, your hair is about 50-70 microns thick. **PM2.5s are habitual microaggressors and systemically oppress your lungs.**
Given the amount of steel China produces, the pollution is astronomical. Akin to 40 packs a day in some regions:
[PM2.5: Microaggressors everywhere](https://preview.redd.it/nn0zb0sik1a71.jpg?width=580&format=pjpg&auto=webp&s=e8a87f329c2a4aee1cb92e0b7ec8e42fb1c59c75)
If you want to blame it on non-steel, then don’t. You are part of the problem, not the solution. It is steel that is to blame. Read [this article](https://www.reuters.com/article/us-china-tangshan-steel/china-environment-minister-urges-crackdown-on-steel-mills-illegal-production-idUSKBN2B407Q)) and listen to their supreme-minister-of-whatever:
>China has pledged to cut its crude steel output in 2021 from a record 1.06 billion tonnes it churned out last year to reduce carbon emissions. The steel sector accounts for 15% of China’s total emissions, topping all other manufacturing categories.
>“Steel companies are the main body responsible for air pollution…(they) should not just focus on performance and leave pollution to local people,” said Huang (Minister of Ecology and Environment)
Yeah, steel causes **15% of China’s emissions** and probably a *much* higher percent of their poor air quality. This is because not only do they produce a fuck ton of steel, but also their efficiency at producing it sucks:
[China produces 2.5x the amount of CO2 per ton of steel.](https://preview.redd.it/og3g8drjk1a71.png?width=850&format=png&auto=webp&s=5a5d896524327eb40b0fba3877cd3599fdd15e17)
It’s to the point where it’s costing China human resources and money from people dying sooner and having health problems at a macro scale. It’s also causing them geopolitical headache, as all eyes are on them to literally clean up their act.
**Thus, China is working to make their environment a safe space:**
1. Use the steel for yourself (you need it all for that 6% growth)
2. Stop exporting, so you can cut down production
3. Switch to cleaner ways of making steel
## China’s walking the walk
It’s not just talk, China is actually doing this.
* First, a decree of production cutbacks. Violators are probably sent to reeducation camps or some shit.
* Next, removing export rebate in May (#StopAsianRebate). This makes it less profitable to export.
* Next, fucking with domestic commodities prices, so that steel could remain cheap just for a little bit longer. In May, they increased margin requirements for commodities traders, causing them liquidate their positions and tanking steel prices…. temporarily.
* Meanwhile, they’re building out EAFs.
**They want to make less steel, they want to keep it for themselves, they want it cleaner.**
# III. EAFs and Scrapfirmative Action
By now you see why steel is expensive, and that there’s a lot of incentive for China to produce it sustainably. So let’s explore how that is done. Hint: scrap metal.
## How steel is made
Steel has two primary pathways to its production:
[BOFs on the left, EAFs on the right](https://preview.redd.it/jt0bvemlk1a71.jpg?width=593&format=pjpg&auto=webp&s=6efb8ce2b59e770084fae3f865a27302661beda3)
Notice that both BOFs (basic oxygen furnaces) and EAFs (electrical arc furnaces) can take scrap as input. However, BOFs produce a lot more CO2.
[EAFs – the wave of the future.](https://preview.redd.it/83tqwvbmk1a71.png?width=999&format=png&auto=webp&s=f644892f2875ba0cdf2436cebd4d78fbefc67db1)
**EAFs are the future of steelmaking.** And EAFs love scrap.
## Cultural Appropriation
It’s not just conjecture that China is moving towards EAFs, [it’s a fact](https://www.spglobal.com/platts/en/market-insights/latest-news/coal/032521-chinas-eaf-capacity-growth-to-slow-down-after-reaching-196-mil-mtyear-in-2021):
>China’s electric arc furnace, or EAF, steelmaking capacity will increase by 14.3 million mt/year in 2021 to about 196 million mt/year, accounting for 15% of China’s total crude steel capacity, according to S&P Global Platts Analytics. The net increase of China’s EAF steelmaking capacity will be just 6.1 million mt/year in total over 2022-2023, according to Platts.
That’s another 14.3 million mt of added EAF capacity this year, and another 6.1 million mt in 2022. **For reference, 20.4 million mt is about 30% of the US’s** ***entire*** **steelmaking capacity — this is what China is adding in a span** ***of just two years*****.**
**Curious why they aren’t building more, even though they could? It’s because they know scrap will become far more expensive in the near future.**
>However, the growth of EAF capacity will slow down in 2022-2023, as **tight scrap supply** and expensive electricity will continue to undermine EAF steel’s profitability.
In other words, the amount of scrap available is the bottleneck. Thankfully, here in the US we have a shit ton of scrap, and SCHN knows how to get it and how to sell it.
# IV. Scrapping over Scrap
[Me, during the Floyd protests.](https://preview.redd.it/woh14ccnk1a71.jpg?width=3000&format=pjpg&auto=webp&s=98b1e184c4d07462eb45f6055f8989b2ca318bd8)
1. China is cutting back on exporting. 15-20% of the world’s exported steel is diminishing.
2. Global steel demand is surging back with a vengeance.
3. China (and the world) are moving towards EAFs
4. EAFs + Scrap are the best way to make steel.
## The future fight for scrap
This whole thing about scrap is not some secret that I’ve discovered. It’s been echoed by CEOs in the steel biz for some time now.
Lourenco Goncalves, AKA “steelmaker of the year 2021”, the guy who told GS interns to kill themselves and loves it when shorts suffer, the guy who basically laid out the entire banana story I said earlier [*in fucking 2016*](https://www.youtube.com/watch?v=FeZIohZB4u4), the guy that knows *everything* about steel — well he said this just a week ago:
>**Prime scrap is the new precious metal.**
[Full video is here.](https://www.youtube.com/watch?v=uY9uC79gUug) Very good watch, but trigger warning: it will cause you to get a boner with or without your consent.
Basically, the world of steelmaking is going to continue to shift towards EAFs, and government policies will shift towards cleaner steel. It doesn’t get any cleaner than scrap, so everybody is going to fight over it, particularly China and the US (which has strict emission regulations).
## SCHN’s take
Meanwhile, SCHN just reported earnings last week. [The babe in charge, Tamara Lundgren](https://www.google.com/search?q=Tamara+Lundgren+bikini&tbm=isch) said this in the [earnings conference call](https://www.schnitzersteel.com/documents/2021-q3-earnings-conf-call-transcript.pdf):
>Strong global demand for recycled ferrous continues to be driven by both cyclical and structural factors, including continuing economic recovery, benefits of government stimulus, tight supply, growth in EAF and the increased use of scrap in steelmaking.
>The expected decrease in Chinese steel exports following the removal of their steel export rebate tax paired with higher Chinese steel demand is expected to increase overall ferrous scrap demand in Asia.
There are a wealth of other quotes in there. [Slides can be found here.](https://www.schnitzersteel.com/documents/2021-q3-earnings-conf-call-presentation.pdf)
Of note, the bump up in scrap demand from Asia is obvious:
[SCHN export destinations. Notice the Asia wedge getting bigger?](https://preview.redd.it/zahlm9mok1a71.png?width=461&format=png&auto=webp&s=9d9d7f6c25bd158c6c9318278241ba3fdabbabd9)
**So there you have it. Scrap is the future. It’s time to become a proponent of scrapstainability, scrapversity, and scrapclusion.**
# V. Catalysts
## Short Term
* As described in [my previous Schnitzer DD](https://www.reddit.com/r/wallstreetbets/comments/of2qwj/schn_the_scrap_attack_part_i_balls_of_steel/), SCHN has shown itself to rise up after earnings, aided by steelmakers getting bid up into earnings and steel futures doing their mid-month rally.
* SCHN also seems to be leading the steel pack lately. Since earnings, it goes up more than the rest, it goes down less than the rest. The only exception is STLD, which got a boost from announcing $1b in buybacks. Yeah, steel is rolling in cash right now.
* A flight to value could happen at any time, but who the fuck knows anymore.
* Steel earnings coming up. 🌈 STEELGBTQ 🌈 (steel goes big this quarter).
## Long Term
Despite only making up 27.7% of steel production, Electric Arc Furnaces (EAFs) are going to be responsible for a huge surge in demand for scrap over the long run. The US, formerly the steel center of the world, has 100 years worth of high quality scrap laying around, and China doesn’t. You wouldn’t happen to know of any publicly traded US company with a vast network of scrap collection, technology to sort and process that scrap, and strategic export hubs to export that scrap, would you?
SCHN also makes for a very juicy acquisition target, which would make sense given the recent narrative of steel consolidating in the US.
# VI. That’s all.
I was not intending to go so hard on this DD but what can I say? I love you guys. Now, please, make me fucking rich.
Recommended positions: The same as mine, obviously.
Take care, and see you all in Part III, where I get more in depth about SCHN.