2008 Scrap Metals Supplement - At Any Price

Scrap dealers continue to offer high scale prices, but attracting more material is proving daunting.

Considered as a reflection of supply and demand, scrap pricing has been screaming at a fairly substantial volume that demand is exceeding supply.

Global demand factors are reflected in the increased melting capacity that has been installed in China and other parts of the world where economies are growing at a rapid clip.

But for more metal to be produced, more feedstock—whether ore or scrap—has to be sourced. For North American scrap dealers, the need to keep furnaces fed not only in their home markets but also half-way around the world is causing them to search for scrap wherever it can be found.

REGIONAL FACTORS

Scrap processors seeking additional material face different sets of challenges depending on the market cycle.

Historically, down cycles have usually meant a drop in scrap generated at manufacturing plants. This same part of the cycle may also include lower overall commodity prices, bringing with it lower scale prices, potentially harming the flow of obsolete scrap.

While that prospect is unpleasant, a high-priced market can also bring its challenges. During the past two years, those quandaries have included a) increased competition in the form of start-up businesses; b) better-funded competition in the form of publicly traded or venture-fund-backed competitors; c) increased scrutiny and regulations pertaining to stolen material entering the scrap stream; and d) a tightness in supply brought about by prices that have been high for so long that inventories of old scrap have largely been rounded up.

Ideally, overheated commodity prices work in combination with an overheated manufacturing sector, but the widening of the global economy may have thrown some variables into that scenario.

In some cases, the changes are regional, like the migration of a percentage of the automotive industry from the Great Lakes region to the Southeast and Mexico. (See "Due South," in the March 2006 edition of Recycling Today.)

Veteran recyclers in the Great Lakes have been through automotive up and down cycles, without question, but in the past two decades what has changed is the nature of capacity that is idled temporarily versus capacity that is permanently lost.

The market share gains by overseas automakers and then their decisions to locate most of their United States assembly plants in the Southeast have been central to that phenomenon.

The results have been declines in automotive assembly activity (and presumably supplier activity) in states such as Michigan, Indiana and Illinois and the emergence of states such as Alabama, Kentucky and Tennessee as automotive hubs.

There has not yet been a funeral for any of the Big Three, and plenty of metal continues to be produced, stamped and recycled for automotive sector purposes in the Great Lakes region.

But holding onto remaining capacity seems to be the best that scrap recyclers can count on in terms of automotive and industrial scrap generation in that region. "We’re not losing accounts to competitors," remarks Rob Bakotich, vice president of sales and marketing at Ferrous Processing & Trading, Detroit. "But major plants are closing down and not re-opening; instead they are going down South or to Mexico," he notes.

At Cohen Brothers Inc., based in Middletown, Ohio, Executive Vice President Don Zulanch says the company’s geographic expansion efforts have largely been directed toward the south and west, into Kentucky and Tennessee. "The [industrial] flow is getting tighter all the time in the Northern regions," says Zulanch.

While the automotive industry migration has caused woes in the North, the Sun Belt region is by no means immune from the retail and manufacturing sectors’ eternal quest to find the lowest cost operating environment.

A scrap buyer who procures scrap in northern Georgia, northern Alabama, Tennessee and the western Carolinas notes that scrap generating customers in industries ranging from air conditioners, folding chairs and textiles have closed plants in his region within the past three years, relocating them in Mexico or Asia.

Northerners tend to be less optimistic about the likelihood that their shuttered facilities will be re-opening with new tenants. "In Detroit, it’s a pretty gloomy prospect," says Bakotich. "If you want to buy a building in Detroit, there are a heck of a lot of them to pick."

Adds Zulanch, "When the big companies leave a plant, it’s very difficult to replace them. Some of the big 1 million-square-foot plants get sub-leased into smaller lots, but those small tenants don’t produce a lot of scrap."

However, scrap buyers are unanimous in saying that they would rather see such buildings come back to life with potential generators rather than yield a potential one-time payday as demolition scrap.

CHANGING SHAPE

Whether the result of a shrinking manufacturing sector or economic revitalization, demolition scrap can be a valuable source of supply.

In some markets, these seemingly at-odds conditions have existed at the same time, allowing the construction and demolition sectors to grow in importance as a scrap supply source.

Art Arnstein of United Milwaukee Scrap in that Wisconsin city calls it "the condominium effect," where urban loft and condominium projects have resulted in teardowns or strip-outs that have provided good sources of scrap.

Arnstein also notes that while the ailing automotive industry is a source of concern, industrial customers who serve economic segments such as the mining and energy sectors have stayed very busy in 2007.

For scrap recyclers in markets such as these, the way the business is managed may need to be examined carefully, including where buyers focus their efforts, how equipment investments are made and whether different consuming destinations might be better fits for the newly sourced scrap.

Recyclers who operate in the Northern Big Three automotive regions again serve as examples of this. "If you’re obtaining less industrial [busheling] to bale, you may in turn seek out more demolition scrap that needs to be sheared," says Zulanch.

Cohen Brothers has been gravitating toward "bigger shears or bigger shredders that can shred not only cars, but also other grades," he comments. "We look for new equipment all the time to adapt to our scrap flows."

Although FPT is based in the heart of Big Three automotive country, "We’ve always been a pretty strong shredding company," says Bakotich.

Recyclers with capital to invest have been clear in their willingness to invest in new or upgraded shredding capacity. (See "Spending Power" in the October 2007 issue of Recycling Today.)

The number of investments has been difficult to track, with either recyclers or their equipment suppliers making a steady stream of installation announcements throughout the past three years.

Investments in shredding have been made not only by the deep-pocketed giants, such as Sims Group and Alter Trading, but also by smaller companies operating in medium-sized markets.

As one example, Andersen’s Sales and Salvage of Greeley, Colo., is replacing its top-feed 60-inch shredder with an 88/112 model from Riverside Engineering, San Antonio, Texas.

Dean Andersen, owner of the 48-year-old family auto salvage and scrap business, says "our little mill can’t keep up with the local scrap flow."

The Colorado Front Range area that Andersen’s company serves has attracted new residents throughout the decade, resulting in not only more auto bodies but also more construction and demolition scrap.

The Andersen’s Sales and Salvage scrap yard is adjacent to its U-Pull-It auto salvage location, from which the company draws part of its shredder feedstock.

Beyond that, the company sees its new heavier-duty shredder as a way to attract scrap streams that it formerly had to watch go to other processors. "We can buy auto logs and other baled material now, allowing us to work with some new customers," says Andersen.

He says the heavy hammers and considerable inertia of the Riverside shredder will also "allow us to shred a wider variety of material in addition to baled cars and logs, such as farm equipment and some plate and structural grades."

Andersen estimates that from 50 percent to 80 percent of the No. 1 and No. 2 heavy melting steel material the company takes in can now be directed toward the heavier-duty shredder, where it can be upgraded to fetch better per-ton pricing.

Regarding his company’s auto shredder investment, he says, "It’s not just about more tons per hour, but adding to our mix of what can be upgraded via shredding."

SEEKING RETURNS

Ultimately, a healthy percentage of scrap processors are demonstrating enough bullishness about the market to re-invest in equipment.

Even those with concerns about the state of certain manufacturing sectors in their operating regions are still confident that metals recycling remains a viable sector in which to invest.

Bakotich notes that it can be disconcerting when a major scrap generator or a nearby melt shop closes its doors. Receiving scrap from a one-time demolition project is bittersweet when the facility in question used to be a vital part of the local scrap community.

But even in the heart of Big Three country, which has at times taken its lumps from the Southern upstarts, Bakotich remains optimistic about the scrap industry’s long-term prospects in the region.

"We believe that over the course of 10 years, we’ll help the industrial base rebuild in this region," he states.

The author is editor in chief of Recycling Today and can be contacted at btaylor@gie.net.

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February 2008
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