Supplement -- U.S. Ferrous Scrap Flow Undergoes Changes

With the New Year underway and a new century just around the corner, this is a good time to do some advance scouting for ferrous recyclers by looking ahead at what the industry will face in the next several years.

Mini-mills are working full-steam up and down the Mississippi Valley and are popping up in places like Arizona. While the industry has swallowed the adjustments required to supply scrap to these newcomers, there certainly will be some hiccups down the road.

“It is obvious by what has taken place in the past two years and what is scheduled in the next two to four years that we will have more need for scrap,” states Bill Heenan, president of the Steel Recycling Institute, Pittsburgh, Pa. “Buy steel scrap futures.”

The result of the mini-mill build-out has been strong upward price pressure on No.1 and No. 2 scrap. “The price is going up. Whether it is 1999 or 2002, it’s just a matter of time,” Heenan says. “I look at the Golden Gate Bridge  as steel scrap in inventory,” he says. While admitting that it will be a long time before the 90,000 tons are recovered from the landmark bridge, his point is that much of the existing infrastructure in this country is being revitalized and all of those projects generate scrap.

FORMER EXPORTS STAYING HOME

Scrap movement has changed quite a bit, even in the past 12 to 24 months. “The East Coast is much less an exporter of steel scrap than it has been in the past,” says Alter Goldstein, trading manager for Glencore, Ltd., Stamford, Conn. He says the East Coast export market may have dropped 40 percent in 1997 in favor of shipments to New Orleans. He had 10 cargoes move to New Orleans from Europe and the United Kingdom. Large cargoes from New York and Philadelphia also are moving south. He has seen two shipments per month moving from the East Coast to New Orleans.

Stephen W. Wulff, vice president of planning for the ferrous division of the David J. Joseph Co., Cincinnati, says the three biggest changes he sees are the re-orientation to domestic markets of scrap that had historically been exported; the almost complete disappearance of exports from the Great Lakes and Northeast; and the meaningful rise in the amount of scrap, pig iron and DRI brought into the United States.

In 1986 1.5 million tons of scrap were exported through the Port of New Orleans. Since 1994 that average has dropped to fewer than 100,000 tons per year. In 1986, the Great Lakes ports shipped 1.3 million tons of ferrous scrap overseas. Since 1994, that average has fallen to under 50,000 tons (excluding exports to Canada, which have remained fairly constant). In addition, Wulff notes, the net exports of metallics from the United States have dropped to the vicinity of three million tons. While the country is exporting ten million tons, we are importing close to seven million tons of iron units, including scrap, pig iron and DRI. Look back a decade—total imports totaled barely one million tons.

This change is having an especially significant effect on the East Coast market, Goldstein agrees.

With improved steel-making technology, it is possible that the United States could return to the glory days when it consumed all of its own scrap and exported finished product overseas.

Dr. Richard Burlingame, a Cleveland-based steel consultant, notes two trends which could vault the United States into a leadership position again. The first is the ability of scrap processors to do a more effective job of chemical quality control at the scrap preparation stage. “Analytical labs will no longer be a rarity,” he says. “They will be commonplace for dealing with tramp elements.” Particularly when handling the No. 2 grades, scrap processors will be able to do a more effective job of sorting and analyzing materials, he says.

The second is the likely successful deployment of two or three designs of mini-smelters. “There are eight to 10 mini-smelter designs under development by companies who are recognized for their expertise,” Burlingame says. One, at Steel Dynamics, will use a rotary hearth direct reduction process followed by a special EAF (electric arc furnace) to provide the last stage of reduction and melting. Another, North Star-Beaumont, will use the patented Technored process. “If these prove practical, it will be an enormous breakthrough in steel making for everyone,” he adds.

Such mills could use domestic iron ore concentrate and domestic coal. Since they heat the material only once, there is a big economic advantage in production compared to conventional DRI, which undergoes two heatings in the course of steel production.

The good news, Burlingame adds, is that such systems can be added incrementally, not only to existing mini-mills, but also to integrated mills.

Goldstein is not quite as bullish about the USA again becoming the world’s primary supplier of steel, but he does see good markets for scrap.

POTENTIAL SCRAP SHORTAGE NO HINDRANCE TO STEEL INDUSTRY

Any time demand for a product begins pushing prices upward, people look for alternatives or replacements. Long-teerm, there may be some move to other metals, but most industry observers agree that there will be no real challenge to steel in the next five years.

In some cases, the steel industry is moving in on other products’ turf. For example, there has been a marked growth in the amount of steel used in building construction at the expense of wood 2x4’s.

“Substitutes may come on line, but they will not make a dent in the market in the next two to five years,” Heenan says. “I’m a firm believer that there is enough scrap. On a macro basis, I do not see a shortage. The infrastructure is out there. We will find the scrap,” he says.

There are about 12,000 auto dismantlers and 250 shredders in the United States. Processors are everywhere. Today virtually every automobile and three of four appliances are recycled.

Roughly 60 percent of all cans are recycled, as well. Still, there is room to generate more scrap, especially if the number of appliances being recycled inches closer to 90 percent and there is improvement in the recycling of cans.

C&D waste has the potential to become another large producer of steel scrap. Once the industry figures out how to recycle scrap concrete, the recovery of rebar should skyrocket at a profit both to the concrete and to the iron segments of the business.

“We believe that, overall, there will be plenty of scrap available,” says Dave Wood of Midrex Direct Reduction Corp., Charlotte, N.C. They are involved in the engineering and construction of 65% of the DRI plants in this country. Remarking upon the impossibility of making a high-grade flat-roll with No. 2 scrap, he asks, “The question is, are the right types of scrap available in the right places?”

ONE IF BY LAND, TWO IF BY SEA

Scrap flow—both offshore and domestic—is likely to change as the American heartland continues to increase its demand for steel scrap.

On the international scene, several trends are converging. The first is an increased incentive to ship steel scrap within the United States. At the same time, many nations which were third-world economies in the 1950s and 1960s have modernized their economies. Nations like Japan, which used to import millions of tons of steel scrap annually now take only a few hundred thousand tons each year. Other countries also are building up their infrastructures and likewise will not be major demand factors down the road.

A short-term dearth of railroad gondola cars is one factor that has bolstered the economics of shipping scrap offshore. The railroads are aware that the shortage is costing them business and the shortage should end. When it does, it is likely a shipper in Los Angeles will find it more attractive to load scrap on a train for Arizona than to put it in a container ship for India.

Wulff says that the single mill in Kingman, Ariz. will not have the effect that the numerous million-ton per year mills in the Southeast and Mississippi Valley will have. “We first saw the changes five years ago with the Nucor mill in Arkansas and the quick cessation of exports from New Orleans,” he says. Soon shipment of both Louisiana scrap and all scrap from New Orleans was redirected Northward from offshore customers to those mills up the Mississippi.

“If the domestic industry wants the scrap, it will not go overseas,” Burlingame says. “Wouldn’t it be a glorious thing if we ended up once again as the best steel producer in the world?”

Today, it does not make sense for a West Coast shipper to load a container for movement elsewhere in the United States. The Jones Law, requiring an American flag vessel be used to transport material between two U.S. ports, makes it expensive to ship from Los Angeles to New Orleans or Philadelphia to New Orleans. While there are no more than 10 bulk cargo vessels available for moving scrap between U.S. ports, there are perhaps 3,000 appropriately large international vessels that can handle the shipments.

However, Goldstein notes that East Coast shipments are thriving despite the Jones Law. He saw two cargoes move from the St. Lawrence River to New Orleans. Since Canada is a foreign port, the Jones Law did not come into play. Still, he maintains East Coasters will ship by sea because there is a lack of rail cars—and what rail cars are available will stay in the Northeast quadrant.

The situation is different on the West Coast. While some California scrap may move to Arizona, Goldstein figures that final figures will show there actually was a slight increase in scrap exports from the West Coast this year. “Population is shifting West, so more scrap is being generated in the West,” he points out. The demand and cost of transportation have not yet caught up with the Western scrap supply.

As competition in the shipping industry heats up, the direction of scrap flow from the West Coast may well change. “I would keep an eye on freight rates,” Heenan says.

Even more significant, Wulff says, is the “meaningful change” in the volume of imports of metallic scrap. “The U.S. always has been the largest exporter of scrap, but now we are importing product as well,” he notes.

OPTIMISM REIGNS IN FERROUS FORECASTS

“I see only good things for ferrous prices,” Heenan says. “Looking out over the next five years, I see only flat to upward pressure on prices. I don’t see anything that would drive prices down.”

“I see a likely further decline in the total volume of U.S. exports,” Wulff says. “I see a more dramatic increase in imports. In the next two to three years, it is likely we will be a net importer of metallics.”

He expects the most dramatic growth will be in the imports of DRI and some pig iron, to happen late in 1999 or in the year 2000.

Midrex’s Wood says he expects to see shortages of the premium grades of scrap, thus the build-up of DRI facilities. Things will be tightest for the premium grades, as opposed to the No. 1 heavy.

All of this should be bullish for domestic ferrous scrap handlers, as local firms will be able to undercut the trans-oceanic shipping costs in bringing scrap to market. Eventually, overseas users will begin to ratchet the price for scrap upwards, and that trend should be reason to celebrate as the ferrous scrap industry heralds in the 21st century.

The author is an environmental writer based in Strongsville, Ohio.