The Shipping Dilemma

Features - Supplement

The renaissance in the scrap metal market is being supported by domestic and offshore orders. There are risks and rewards to each.

February 10, 2011
Dan Sandoval

As manufacturing outside North America, most notably China, continues to grow, scrap metal recyclers are playing a pivotal role in supplying the steel industry with raw material.

Currently, obtaining sufficient supply to meet the needs of domestic and offshore buyers is a concern for scrap processors. The situation could intensify going forward as there are indications that offshore buyers of many metals will increase their buying.

China’s demand for recyclables is expected to continue to grow. A representative from Nanjing Iron & Steel, a Chinese steel company, recently announced that steel mills in China will be looking to sharply increase their intake of ferrous scrap while reducing their use of iron ore. This will put even greater pressure on U.S. scrap metal recyclers and domestic steel producers in search of scrap metal.

During The World Scrap Congress in China in November 2010, Pan Lu Ying of the raw materials department for Nanjing Iron & Steel said ferrous scrap could theoretically account for 20 percent of the raw material used in steel production in that country, rather than its current 9 percent. Pan said that China’s 12th Five-Year Plan calls for steelmakers to increase their use of ferrous scrap by 2015 in order to decrease reliance on iron ore.

While steelmakers in the United States urge recyclers to focus on supplying domestic mills, scrap metal exports have continued to grow. Some recyclers endorse this sentiment and offer reasons for keeping ferrous scrap at home.

Traditionally, companies near ports have used this proximity to their advantage to ship material offshore. A weaker U.S. dollar has recently made it more lucrative to ship material offshore. Also, freight rates are competitive currently and container availability is not an issue.


One of the often-mentioned advantages of shipping scrap offshore is prompt payment. Chris Grier, general manager of Don’s Car Crushing, a South Carolina scrap metal recycler, says that despite being near a large consuming mill, his company opts to ship much of its ferrous scrap offshore. The reason is simple: “We are paid up front for the shipment, compared to waiting 45 days or more to get paid for domestic shipments,” Grier says.

And, even if an overseas consumer isn’t paying cash up front for shipments of scrap metal, a significant down payment or a letter of credit (LC) through a bank typically can expedite payment to the seller. (One important aspect to using an LC is to be aware of the process of dealing with an international bank.)

Frank Goulding with Newell Recycling, a Georgia-based metals recycling firm, also says his company ships material to both domestic and offshore consumers, and payments are typically much quicker when moving material offshore. Some buyers pay cash up front, while other companies may provide a significant deposit, he says.

Several other recyclers also note that this payment philosophy currently applies to many offshore shipments. However, this was not the case prior to the collapse in the market in late 2008. Many scrap metal exporters were stuck with losses of millions of dollars, though their shipments were en route to consumers.


One opportunity that is offered to exporters but is infrequently used is an Interest Charge – Domestic International Sales Corp. (IC-DISC). This program, little known by many exporters, was first introduced nearly 30 years ago. It allows U.S. companies a significant tax savings when shipping offshore, says Jim Young, director of export incentives with the Alliant Group (, a tax consulting firm based in Houston. The goal of the program is to help improve the U.S. trade imbalance.

Initially, IC-DISC was a tax deferral program. However, starting in 2003, under a revamped IC-DISC program, U.S. exporters could establish domestic entities that act as a commission agent for a company’s export sales. Once the IC-DISC is set up, a firm can pay commissions to the IC-DISC that can be as high as 50 percent of the net income or 4 percent of the gross export receipts, whichever is greater.

According to the Alliant Group website, “Under an IC-DISC strategy, the exporter pays commissions to the IC-DISC. The commissions are deductible to the exporter, and the deemed or actual dividend payment of the commission income in the IC-DISC is taxed to the exporter's shareholders or partners at a favorable 15 percent rate. Thus, on one hand, the exporter receives a deduction of 35 percent on the commission payments made to the IC-DISC, and, on the other hand, only pays a 15 percent tax rate on the income repatriated from the IC-DISC. This results in a permanent tax saving for U.S. exporters and their shareholders of 10 percent or higher of net export income.”

According to the Alliant Group, the advantages of an IC-DISC include the fully deductable commission; the IC-DISC pays no federal income tax; and, at heart, the IC-DISC is a Subchapter C corporation, meaning it distributes its income to its owners as a qualified dividend.

Young says the program, which was scheduled to end on Dec. 31, 2010, has been extended an additional two years.

Despite the potential for significant savings, Young says only a handful of companies that qualify for the incentive take advantage of the program to offset taxes. He adds that while his firm sees most of its IC-DISC business coming from California, Oklahoma has the next greatest number of established IC-DISCs, though the state is not considered a hotbed of export activity.

While the IC-DISC can be beneficial for exporters, it can be complicated. Young says one company using the program was realizing a savings of slightly more than $100,000 per year. However, that company had not realized the full potential of the program, and, with some adjustments, realized that it could have saved more than $1 million per year.

Newell’s Goulding notes his company has benefited from the IC-DISC program. In fact, Goulding adds that during the dark days of 2009, when domestic steel mills saw operating rates drop below 50 percent of capacity, the export market was the saving grace. “We went almost nine months without shipping any material domestically,” Goulding says.

While the incentive program is valuable, Young cautions that the benefits are only available for transactions occurring after the IC-DISC is set up. “Manufacturers must be proactive in all areas of their businesses. U.S. manufacturers must educate themselves on the tax incentives available to them. For exporters, the IC-DISC is the only viable option left, but it is a tremendously powerful one,” he says.

While Newell has been able to take advantage of export opportunities, the company keeps close track of the domestic market as well, Goulding says. He stresses that the company’s first priority is to “take care” of domestic mills. “We take care of our domestic industry first. We always aim to supply them first.”

While offshore shippers may have the upper hand in many instances, a number of domestic scrap processors have eschewed the offshore market, rather than taking the domestic route to grow their businesses.


A number of scrap metal recyclers say the offshore market, especially China and India, best serves as a good, strong destination for lower grades of scrap. However, many are quick to say that doesn’t mean shipping waste overseas. Rather, in light of the significant labor cost differential between North America and developing countries, overseas buyers can purchase lower grades of material such as insulated wire and process them there. Goulding says many of the prime grades such as busheling stay on shore.

Pacific Steel & Recycling, a scrap metal company with 38 locations throughout Washington, Idaho, Utah, Nevada, Wyoming, South Dakota and Montana, has not had as great an opportunity to capitalize on offshore opportunities because of its distance from export ports. However, the company is in the process of acquiring a scrap transloading facility near the Port of Tacoma in Washington, which should give it better access to offshore markets.

Ken Halco, vice president of Pacific Steel, says that while the company wants to support domestic consumers, there are a number of instances when it is beneficial to have an overseas outlet for some materials. For example, he says that materials such as counterweights are difficult to market domestically but are a sought-after commodity on the offshore market. Additionally, Halco says a number of more specialized materials, such as those containing manganese, are more likely to find an offshore buyer rather than a domestic one. “All of our oddball commodities, such as those containing manganese and other specialized items, are shipped offshore. Some domestic foundries will buy specialized items, but not too much,” Halco says.

Goulding agrees that there are some grades of scrap that are more sought-after by offshore sources. These mills may prefer scrap with certain types of residuals to make their finished products.

Halco says despite the company’s move to grow its export business, he agrees that it is important to supply U.S. consumers. “Everyone wants to support domestic businesses.”

The author is senior and Internet editor of Recycling Today and can be contacted at