Settling In

The per-ton difference steel mills pay for shredded scrap compared with heavy melt changes but lately has found common range

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October 21, 2011

Scrap recyclers choose to purchase shredding plants for numerous reasons, including gaining access to forms of obsolete scrap that may otherwise go to competitors.

Installing a shredder brings with it a considerable upfront investment followed by a parade of ongoing operating costs (such as power, maintenance and wear parts).

A potential selling point is the per-ton price that can be fetched for shredded ferrous scrap versus the grades produced by shears and balers.

The number of variables that can differ from plant to plant and from one regional market to another make it difficult to conclude whether the spread between shredded grades and cut grades helps make a shredder installation worthwhile.

So comparing monthly national averages paid by domestic steel mills for No. 2 shredded scrap and No. 1 heavy melting steel only provides a blurry snapshot, not a crystal clear photo.

But data from the previous several years at least point to some trends or clues as to when and how the spread between these two grades moves.


A National Yardstick

Data collected by Management Science Associates Inc. (MSA), Pittsburgh, for its Raw Material Data Aggregation Service (RMDAS, http://rmdas.msa.com) has provided a monthly national average for domestic steel mill scrap buying since 2006.

RMDAS collects mill scrap purchase transactions and averages them over 30 days by geographic region and by grade. Among the most common ferrous scrap grades purchased and tracked are:

  • Prompt industrial grades (No. 1 bun- dles, No. 1 busheling and No. 1 fac- tory bundles);
  • No. 1 heavy melting steel (HMS);
  • and No. 2 shredded scrap, defined as con- taining 0.17 percent or greater cop- per content.

Looking at the RMDAS data for prices paid for No. 1 HMS and No. 2 shredded scrap from January 2008 to May of 2011 shows that the value of the two grades demonstrates some consistencies (No. 2 shredded always fetches more per ton on average) but a number of variables over time as well.



Digging into the Data
Perhaps the first collection of numbers to examine consists of the averages during the course of this three-and-a-half-year span.

As recyclers know, the market for ferrous scrap has zoomed from bull to bear and back to bull from January 2008 to May 2011.

The 41-month-span provides ample opportunities to observe the market from peak demand periods on the one side (the first seven months of 2008, for instance) to some months where U.S. steel mills were operating below 40 percent of capacity (such as January 2009).

The average price paid by mills for No. 2 shredded scrap during this 41-month roller coast ride has been $352 per ton, while the average per-ton price for No. 1 HMS has been $315. This yields an average monthly spread of $37 per ton between the two grades.

While $37 is the average spread, the market has been volatile to an extent that this average was created despite several "outlier" months where the spread was either far wider or in a situation where it was somewhat narrower.

At the height of the bull market for ferrous scrap in July of 2008, the steel mills in the United States reporting to MSA paid $80-per-ton more for No. 2 shredded compared with No. 1 HMS—the widest spread recorded during the 41-month span. (The only other two months when the spread exceeded $70 per ton were August and September of that same year.)

The narrowest spread occurred not during the ferrous scrap market's absolute lowest month in the past four years (which, according to RMDAS data, would have been in April 2009), though it was in a month when the market took a dramatic step backwards.

In November 2009, the value of No. 2 shredded scrap fell by nearly $30 compared with the month before, and domestic mills paid on average just $19-per-ton more for No. 2 shredded compared with No. 1 HMS.

That month marked the narrowest spread in the most recent 41-month span, though it is joined among the narrowest spreads by a $20 spread in October 2009 and two months in 2010 when the spread was $21. A


Narrower View
A second way to calculate an average spread over time is to determine what percentage the monthly spread represents of the per-ton price of No. 2 shredded scrap.

For example, while the $19 monthly spread in November 2009 represented the lowest spread by dollar amount, that figure represented 8.05 percent of the $160 per ton domestic mills paid for shredded scrap that month.

By percentage, recyclers were rewarded the least for shredded scrap in May of 2010, when the $21 spread between the two grades represented just 5.90 percent of the $365 per ton paid by domestic mills for shredded scrap.

The $80 spread in July of 2008 represented 13.42 percent of the $596 per ton paid by domestic mills for the No. 2 shredded grade that month. That percentage is well above those in the low months mentioned in the previous paragraph, but is not among the five highest "reward" months for ferrous shred.

Using this measure, shredder operators received their healthiest premium when the ferrous scrap market was struggling in November of 2008. That month, domestic mills paid just $160 per ton for ferrous shred—but that was at a $41 spread over No. 1 HMS, representing 25.63 percent of the total price of No. 2 shredded scrap.

As the market bounced back a bit the following month, shredder operators were rewarded with a $47-per-ton spread over No. 1 HMS, 19.75 percent of the total price of No. 2 shredded scrap.

The trend as the market has slowly returned from its trough in late 2008, however, has been for this monthly percentage figure (the spread divided by the per-ton price for No. 2 shred) to narrow.

Throughout the 41 months examined, the spread between No. 1 HMS and No. 2 shredded scrap has averaged 10.86 percent of the $352 per ton paid for No. 2 shred.

The majority of months when this figure was more than 10 percent, however, occurred between January 2008 and June 2009.

In the most recent 23 months, only one time has that monthly spread represented more than 10 percent of the per-ton cost of No. 2 shredded scrap—and that was just barely, in December 2009 at 10.20 percent.

During the market's recent relatively stable stretch from January 2010 to May 2011, the spread's percentage of the per-ton price for No. 2 shredded scrap has averaged 7.83 percent. In the first five months of 2011, this figure stayed in a relatively narrow band of from 7.52 percent to 8.22 percent.

Shredder operators and other recyclers have learned to never count on conditions staying the same for long, so to try to identify something as a trend is a dubious exercise.

However, since July of 2009, the difference that domestic mills will pay for shredded scrap compared with No. 1 HMS seems to have settled in at below 10 percent of the total value of No. 2 shredded scrap—no matter how much the per-ton price moves up or down every 30 days.

This is in stark contrast to the period from January 2008 to June 2009, when in each of those 18 months the spread mills paid was always more than 10 percent of the per-ton cost of No. 2 shredded scrap and averaged 14.49 percent—almost double the percentage paid during the first five months of 2011.

If the volume of shred is now matching demand to the point where the premium has narrowed, it will test shredder owners to keep their operating costs low and to wring the highest quality and largest volume of ferrous and nonferrous scrap from their plants.

The author is editorial director of Recycling Today and can be contacted at btaylor@gie.net.