Supplement -- Can’t We All Just Get Along?

In any industry segment stress is natural within the customer-vendor relationship, and the ferrous scrap industry is certainly no exception. In the span of less than three decades, a host of fast-growing steel companies have emerged to become primary consumers of North American ferrous scrap.

Steel mini-mills have provided the spark for a great deal of change within the scrap industry, most observers and analysts agree. Direct requirements of the steel makers (driven, they point out, by their own customers) have caused scrap processors to sort, monitor and analyze scrap much more carefully than they did a generation ago.

The melt-specific needs of the mini-mills can produce contrasting reactions from scrap processors. Resentment and frustration can certainly result when loads are rejected. On the other hand, the need to know exactly what their customers require has caused many processors to form very close relationships with particular mini-mills.

LONG-TERM CONTRACTS MORE COMMON

A long-term contract between a high-production mill and an established processor has obvious advantages for both parties. In an era when manufacturers are looking to limit their suppliers to a handful of carefully chosen companies, long-term arrangements (contracts with five or ten-year lengths) have become more common.

Putting in place a long-term contract is one of several ways steel companies have of exercising a stronger control over scrap. Controlling scrap has taken many forms for steel makers, including: acquiring or starting their own scrap yards, building their own scrap substitute fabrication facilities, and strengthening long-term relationships with favored scrap suppliers. For a scrap processor who wishes to remain both independent and prosperous, the option of entering a long-term agreement can be the most attractive.

A complex but noteworthy example can be seen in the relationship between Steel Dynamics Inc. (SDI), Butler, Ind., and OmniSource Corp., Fort Wayne, Ind. SDI started operations in early 1996 at its 1.4 million tons-per-year mini-mill. OmniSource, one of the largest ferrous processors in the Great Lakes region, is in place not only as a critical ferrous scrap supplier, but also as a shareholder. OmniSource is a significant investor in a holding company that owns more than 10 percent of SDI.

The arrangement links OmniSource to SDI not by the threat of the stick, but by the lure of the carrot. It is in OmniSource’s best interest to provide SDI with timely, high-quality scrap shipments in order to maximize its return on the considerable share of Steel Dynamics stock it holds.

More common are standard supplier-customer contracts of fixed duration, or arrangements where an established processor agrees to operate a facility on land adjacent to a major mill. These arrangements provide some control to the steel companies without adding new operating costs or investment capital costs.

While contracts to guarantee a quantity of scrap over a fixed period of time are becoming more common, any clauses locking in prices seem to be far less common. Some industry analysts and participants believe that even the future of the 30-day price contract may be in jeopardy, eventually to be replaced by daily pricing.

THOSE WITHOUT QUALITY CERTIFICATION NEED NOT APPLY

Almost universal to any long-term contract is the presence of defined quality certification requirements. ISO-9000, its successors, and its automobile-related cousins have become a standard part of doing business for scrap processors in the 1990s.

“We’re pursuing ISO-9000. I don’t know if it opens doors, but certainly it keeps them from closing,” says Marty Wilhelm, president of Youngstown Iron And Metal Inc., Youngstown, Ohio.

One set of doors of particular interest to processors like Wilhelm are those belonging to steel mini-mills. The Steel Manufacturers Association (SMA), Washington, estimates that the steel industry consumed more than 57 million tons of ferrous scrap in 1996—much of it in the electric arc furnaces of mini-mills.

Hosting seminars on how to begin and follow through on the quality registration process became a lucrative business in both scrap processing and steel making circles.

The Crawfordsville, Ind. mini-mill of Nucor Corp., Charlotte, N.C., recently went through its ISO-9000 audit and has asked scrap suppliers about their quality certification status. “We’ve sent them audits inquiring about their quality certifications, but we have not made a decision how to use the results,” says Crawfordsville mill controller Jim Frias.

Frias notes that a positive track record is still regarded as the most important thing a scrap supplier can have in its favor. The information as far as quality certification status may come into play soon, however, since quality control personnel at Nucor Corp. will soon be examining the inbound scrap procedures. “That’s going to be their next project—the testing and screening of inbound scrap,” says Frias.

North Star Recycling, a subsidiary of mini-mill operator North Star Steel, Minneapolis, has not sought the quality certification many smaller processors feel compelled to obtain. “We have not attempted to achieve the ISO certification,” says North Star vice president-general manager Jim Jonasen. He does add, though, that it is likely “it will become more important in the future.” 

Certification or registration with quality programs is seen by many processors as a way of demonstrating a commitment to the types of standards equated with large, multi-national companies—the types increasingly present both as consumers and competitors.

Are all the quality standards strangling processors with rules and paperwork? “I think the quality requirements have been progressive,” says Wilhelm. “Progressively, they’ve tightened up.”

He adds that going along with such programs, when required, is the safest and sometimes wisest way to proceed. “I think mills are paying a lot for scrap now, and they expect a better product. We better provide it,” Wilhelm comments. “Let’s demand from ourselves what the customer demands.”

THE THREAT OF IN-HOUSE OPERATIONS

A scrap processor creating a list of things to worry about would, at some point, probably list the fear of losing a mini-mill customer who has decided to bring scrap operations in-house. Vertical integration is the business school euphemism for when a company moves into a related industry—often one in which established customer-supplier relationships previously existed.

Several of the nation’s leading electric arc furnace mini-mill operators have taken steps to be in firmer control of their own scrap (or scrap substitute) supply lines. Birmingham Steel, Georgetown Steel and North Star Steel and are among the many steel companies who have purchased or started operations directly related to providing feedstock for their furnaces.

Not all industry analysts and participants believe vertical integration is necessarily a trend. But the 1990s witnessed several of the largest EAF operators make moves to take more active control of scrap and/or scrap substitute supply lines.

•Nucor Corp., Charlotte, N.C., has expended considerable resources to build a somewhat experimental iron carbide facility in the Caribbean nation of Trinidad & Tobago. The facility is producing iron carbide scrap substitute for some of its eight U.S. mini-mills, though company officials have admitted that they are still fine-tuning the manufacturing process to increase both the volume and the melt quality of the iron carbide being produced.

•Chaparral Steel Co., Midlothian, Texas, announced the location of its new mini-mill as the new site of Virginia’s “largest steel recycling facility.” The company will be constructing a structural steel making plant on a 600-acre site near Petersburg, Virginia. The site will almost certainly also house scrap processing operations to provide much of the necessary feedstock for the plant’s electric arc furnaces. Chaparral has long operated a shredder and other scrap processing equipment at its Midlothian mill.

•Birmingham Steel and Georgetown Steel (GS Industries), have nearly completed construction of a direct-reduced iron (DRI) plant that will produce more than one million tons of DRI annually. Birmingham Steel also operates or jointly operates several scrap processing facilities.

•Co-Steel Inc., Toronto, has long operated Co-Steel Recycling as one of its divisions, and Commercial Metals Co., Dallas, has put together an operating division consisting of more than 30 scrap processing locations.

•The North Star Steel division of Cargill Inc., Minneapolis, operates North Star Recycling, a subsidiary that acts as a scrap supplier.

Jim Jonasen, vice-president and general manager of North Star Recycling, says his division processes about 25 percent of the scrap used by North Star Steel and brokers the remainder. “Everything that goes into the melts comes through North Star Recycling,” he remarks.

In the world of management philosophy, justification can be found for both deciding to vertically integrate, or to leave the scrap processing function to other companies. Some students of the total quality school might favor bringing the scrap processing operations in-house as a means of ensuring maximum product quality from the earliest possible stages. For publicly-traded companies, the mandate to grow earnings can make vertical integration attractive—provided the scrap operations prove profitable.

Conversely, the school of thought that urges companies to stick to their “core competencies” would seem to weigh in against vertical integration. A steel making company should make steel, they might contend, not iron ore pellets or ferrous scrap bundles. Leave that task, this argument might go, to a company that specializes in it. For publicly-traded companies, there is a danger that entering a new segment can put shareholder funds at risk if the venture proves to be an unwise one in a segment management thought it new a good deal about, but was proven wrong.

WILL CONSOLIDATION CHANGE NEGOTIATING STANCES?

For decades, scrap processors operated as smaller companies negotiating with large steel producers.

To some extent, however, steel mini-mills are being operated by newer start-up companies that can hardly be considered monoliths. At the same time, the ferrous scrap processing business is consolidating rapidly, creating entities with double-digit market shares and a weighty presence in regional markets.

The decision by many steel companies to engage in the production of scrap substitutes is a reaction to scrap prices these companies considered too high. The consolidation of the market, combined with what some forecasters see as an eventual shortage of high-quality  scrap, may cause steel companies to continue to seek control of their feedstock.

What the steel companies may fear is that, through consolidation, the handful of large processors could have a future  advantage dealing with a steel mini-mill industry that is still in the process of developing its start-up companies into global competitors.                        

The author is managing editor of Recycling Today.