Commodity Focus- Hide and Seek

An old adage in the scrap industry holds that "scrap is bought, not sold." In the second half of 2002, ferrous scrap dealers are proclaiming that message loud and clear, as lackluster scrap generation is making for a competitive climate in many regions of the country.

Number one heavy melt scrap has stayed above $100 per ton since May of 2002, based in part on heavier demand from domestic mills given renewed confidence from the Section 201 measures taken by the Bush administration.

The boosted melting rates created by 201 are likely to slow down with the onset of the holiday season lull, but the accompanying slowdown in scrap generation may be keeping scrap in short enough supply to sustain pricing at its current levels.

It is unclear whether an economic recovery will take hold in 2003, with some economists worried that consumers are too tapped out to pay for many new automobiles and homes next year. Likewise, statistics indicate that business owners are reining in capital spending plans for 2003.

Restrained spending forecasts are a primary reason why the stamping plants, fabrication shops and service centers that generate industrial scrap are producing only modest amounts of clips, turnings and busheling-grade scrap.

Scrap recyclers in many regions have been reporting a downturn in industrial scrap for several months, and in some regions for more than a year. "I see about one-third of what I saw before, even from earlier this year," says one ferrous scrap recycler in the Great Lakes region. "I guess the economy and production are just not going that well. There’s just not a lot of scrap to be had out there."

In Columbus, Neb., Sam Jacobs of Columbus Iron & Metal says business among his industrial generating customers has picked back up somewhat since it "came to a screeching halt in the fourth quarter of 2001." But it has not rebounded to full strength. "During that quarter, their production fell off by probably by 30 percent to 35 percent. I would say only 10 percent to 12 percent came back this year."

Jacobs has noticed a curious divergence among the automotive stamping customers in his region. "Those stamping for foreign cars are busy; those stamping for domestic automakers are slow."

Further west in Artesia, N.M., much of the industrial scrap obtained by James Bly at J&M Enterprises comes from the western oil fields. "I have plenty of scrap cut-offs from the oil fields, things like ends of pipes and old obsolete pipe," says Bly.

Earlier this year, in regions where industrial scrap is scarcer, a resurgence in obsolete scrap helped fill the void for many dealers. "We were busy all summer long with our door trade, which was busier than last year, obviously," says Jacobs, noting that scale prices were able to stay at a more attractive level this summer compared to last.

Jacobs says the ferrous price rise of this spring and summer lured a lot of pent up scrap auto bodies and appliances out of hiding. "There is a threshold that a lot of dismantlers see at a certain per body price for autos. When that market came back up, they started to let go of bodies."

There are signs, though, that much of that pent-up inventory has been worked through, and that other sources of obsolete scrap may be drying up.

Concerning the demolition market, the Great Lakes region scrap recycler says, "Things like I-beams, h-beams, material that comes from demolition and building construction has slowed down a little bit. The non-government building market is slowing down."

In Nebraska, Jacobs faces a consideration that does not affect scrap recyclers in most metropolitan areas. "Our flow was good up until October, and it could have slowed in part because it’s harvest time, and farmers are doing their harvesting and not as much clean-up work."

Bly faces less of a scrap shortage in part because of how his company sources material. "The bulk of what I do is [obsolete] appliances stemming from municipal contracts," says Bly, adding that his company also recycles damaged and replaced guardrails collected by the state highway department.

Provided ferrous dealers can put together a shipment, most are currently reporting strong markets on the buy side.

Macro-economic factors ultimately affect the demand for steel (and thus scrap), and forecasters are far from unanimous in their predictions for 2003. However, the narrower steel industry picture looks brighter now than it did 12 months ago, at least for North American steelmakers.

Several steel producers are reporting profitable quarters for the first time (in some cases) this decade.

As noted in the October Recycling Today Ferrous department, ("Steel Rising," pg. 10.), mini-mill executives who spoke at the Institute of Scrap Recycling Industries Inc. (ISRI) Commodity Roundtables this fall were relieved that they have finally been able to charge higher prices for their steel this year.

Keith Busse, CEO of Steel Dynamics Inc. (SDI), Fort Wayne, Ind., noted that for 2003, "a lot of [SDI] customers are requesting yearly pricing at today’s levels. The market for some time has been undersupplied," said Busse regarding U.S. manufacturers who use steel. Busse said he does not see cold-rolled steel rising to $400 per ton next year, nor does he see it falling to $250 per ton.

Despite some optimism, Busse is not certain 2003 will see better economic times. "The economy is in malaise," he remarked. "It may well be a triple-dip recession," said Busse. He noted that auto dealers are unwilling to continue offering vehicles at 0 percent financing. "If vehicle production goes down from 16.5 million units to 15 million, that will hurt the manufacturing sector. We’re being buoyed by the auto industry."

Integrated steelmakers are still facing stiff overseas competition, but investors such as those who have re-started the former LTV mill in Cleveland as International Steel Group (ISG) still believe the facilities can be viable.

The largest integrated steelmaker, U.S. Steel, Pittsburgh, has reported two straight profitable quarters, breaking a string of red ink long blamed on an inability to compete against low-cost imports.

"Our solid third quarter financial results were due largely to higher realized prices for both our domestic and U. S. Steel Kosice (Czech Republic) operations, continued strong shipments and operating efficiencies," says U. S. Steel chairman, CEO and president Thomas J. Usher.

"For the second consecutive quarter, our steel production facilities operated at high levels with domestic operations at 93.7 percent of capability. Aggressive actions to reduce our costs are paying off, and we’re ahead of our $10-per-ton cost savings goal for the year," Usher says conerning the company’s operations.

In its earnings news release, U.S. Steel notes that fourth quarter shipments are expected to "decline moderately," and more costs could be incurred from blast furnace repairs and higher scrap metal and natural gas costs.

Even iron and steel foundry operators, who have faced tough going the last several years, believe the worst may be behind them.

Speaking at the ISRI Commodity Roundtable event, Norman Bliss, a vice president with the American Foundry Society (AFS), Des Plaines, Ill., revealed an industry forecast that saw production of most foundry materials increasing between 2003 and 2005 after hitting historic lows in 2002.

Ductile iron, which is due to surpass gray iron as the largest foundry-made material by the end of this decade, is predicted to have a 2.3 percent growth trend throughout the decade. The amount of U.S.-made ductile iron is predicted to grow from 2 million tons in 2001 to nearly 5 million tons by 2010.

Shipments of gray iron have been in a downward trend since the early 1980s, as automakers increasingly have substituted ductile iron and cast aluminum for cast iron parts.

The U.S. production of gray iron peaked at 15 million tons in 1965, declining to 5.1 million tons in 2001. The AFS-commissioned forecast sees annual production of gray iron staying in the 5 million tons range each year in the coming decade.

Bliss noted that ductile iron makers generally require higher-grade, cleaner shipments of scrap, a trend also noted by the EAF steelmaking executives in their industry.

It’s hardly smooth sailing for the steel, iron and scrap metal industries, as the clock is ticking on Section 201 protection measures, and several exemptions have been granted to overseas steel producers to weaken the protections.

Even with clouds hanging over the steel industry, scrap recyclers in some regions are far more concerned about supply than demand right now. "It’s just not out there," the Great Lakes region recycler says of ferrous scrap.

"I don’t think it’s a price issue," he continues, "the scrap just doesn’t seem to be there right now. The demand from the mills is steady. None of them are overstocked with material. It just seems to be that scrap is not there to ship. I haven’t run my shear all month. All I have on the ground lately is only a week’s worth of material."