Establishing average pricing for recent scrap metal transactions is an often thankless task that has traditionally been tackled by trade publications such as American Metal Market, New York, and other publications covering the metals industry.
The averages and price lists presented by these publications have been widely used for decades (and, in fact, two such price averages are presented in chart format in this publication), but that does not mean that relationships between those in the steel and recycling industries and these publications are always harmonious.
Traders, ferrous scrap generators and steel mill buyers are at times suspicious as to the accuracy of the prices, either fearing that the publications are not collecting enough information or, even more worrisome, are being misled by providers of information with a stake in the market.
The unhappiness with price surveys and retroactive published “price corrections”, and the notion that there must be more cost-effective, accurate ways to gather information and make analyses available to the industry has become an opportunity that Management Science Associates, Inc. (MSA), Pittsburgh, has pursued with vigor.
PROOF OF PURCHASE. MSA, incorporated in 1963, one of the world’s largest data analysis and information science companies, has for many years collected, interpreted and provided information to several business sectors in the United States, including to the tobacco industry, magazines, cable television networks and segments of the candy industry.
For a company to establish its presence and credibility in such markets, an important requirement has always been to have access to sales information.
MSA’s establishment of the Raw Material Data Aggregation Service (RMDAS) is its attempt to meet that requirement. MSA is working with a growing number of steel producers, including both electric furnace and integrated steelmakers, and is obtaining transaction-specific information on their ferrous scrap purchases.
Management Science Associates Inc. (MSA), Pittsburgh, has provided services to metals and metals-related industries for many years, but expanded its presence in the sector by acquiring, in 2001 and 2002, the assets of MetalSite and Global Steel Exchange (GSX).
Those firms, owned by a dozen steel companies, had hoped that MSA would restart or develop services they had wanted to satisfy their perceived domestic and global needs.
While RMDAS gained attention on the ferrous scrap and steelmaking side of the industry, ScrapSite was focusing on hosting nonferrous scrap online auctions. MSA has operated and hosted auctions since 2002 on www.ScrapSite.net, developed to replace a service that closed in 2001.
"We have a business with many regular users who sell specific types of nonferrous metals and other products on our site," remarks Ralph J. Pinkert, MSA Director of Business Development.
A list of auctions underway on one day in February included sellers offering shipments of the Zorba post-shredded nonferrous grade, heavy media material (Zebra), electric motors, aluminum wheels and mixed copper bales, among other offerings.
Several large scrap companies, including OmniSource Corp., Fort Wayne, Ind.; Galamba Metals Group, Kansas City, Mo.; and Tennessee Valley Recycling, Decatur, Ala., were among those offering products through the auction format.
Participation in the auctions, at the option of the sellers, can be open to anyone who visits the site or restricted to a group of buyers designated by the seller.
Says Pinkert, "Activity on the site grew quietly and steadily as a loyal community of sellers and buyeres was cultivated. The site proved to be an efficient, effective personnel time-saving tool for firms to sell and buy scrap, consistent with my experience in working in the scrap steel business for 30 years. As a result, ScrapSite has had an upward trend in sales since MSA launched the service. A critical mass of sellers and buyers appears to have accumulated by the fall of 2005, however, since each month since then has been hitting new highs," he comments.
Patrick J. Gallagher, V.P. of the MSA Metals and Advanced Manufacturing Division, estimates that 75 percent of the ScrapSite buyers are based overseas or represent an overseas consuming destination. "We have Chinese-speaking employees within our firm who work on the site and can help bidders," he notes, pointing out that MSA maintains a Shanghai office and is translating the content pages of its ScrapSite Web site into Chinese.
According to Patrick J. Gallagher, vice president of the Metals and Advanced Manufacturing Division of MSA, participants certify that their information is complete, accurate and verifiable. MSA engages in statistical verification procedures to assure accuracy and to help RMDAS participants that may at times have difficulty with their internal systems.
Furthermore, public companies would risk running afoul of Sarbanes-Oxley requirements if they were to file false information, he points out. Complaints have been filed against firms in other industries who have been charged with providing false data in an attempt to manipulate indices and stock prices. “Data are transmitted electronically to MSA and are tied to the clients’ purchasing and accounting systems,” notes Gallagher. “If the data comes from their accounting systems, the penalties of playing games with the information could be great because of Sarbanes-Oxley.”
Such auditable reporting requirements help establish the accuracy of the information. Additionally, a growing percentage of total ferrous scrap purchased tonnage represented by steel mills that are participating in RMDAS helps ensure that the averages that are developed have the volume behind them to be legitimate.
The RMDAS effort started by MSA in 2003 had the participation of several mills that, combined, accounted for about one-third of the ferrous scrap purchases for steel making. That has grown, according to Dr. Alfred A. Kuehn, founder and CEO of MSA, so that at the beginning of this year the combined ferrous scrap purchases for mills participating in RMDAS accounted for more than 75 percent of the scrap consumed by steel mills in the United States (17 firms provide scrap purchase data for 65 mills, according to MSA). In the near future, five additional mills may be added as MSA is helping three steel firms prepare their data from those mills for inclusion in RMDAS and its price indices.
To a statistician such as Dr. Kuehn, there are significant differences between the MSA methodology and telephone surveys that, he says “...are far from transparent and comprehensive, and may not ask about actual scrap prices. Use of census techniques provides verifiable data that are more informative than responses obtained by a magazine asking, ‘How do you feel?’ about the direction of prices in the market.”
Virtually all other industry services that MSA has developed achieved participation representing 90 to 99.7 percent coverage of those industries in a five-year period, says Dr. Kuehn. “It is reasonable for that to also occur with Steel RMDAS and Paper RMDAS, the latter being a new similar service under development for paper recycling,” he remarks. “The timeliness, accuracy, detail, and comprehensive data that RMDAS provides for decision-making, coupled with MSA security, anti-trust compliance and reduced communications and computer costs, provide assurance that all firms will want to have the benefits of such a system. All non-participants will be at a disadvantage relative to their competitors.”
MUTUAL INTEREST? The RMDAS product, as it has been developed and marketed to date, was created to serve the steel industry as well as to provide a representative and accurate ferrous scrap price index. So should scrap processors be suspicious of there being a pro-scrap buyer bias in the numbers?
The MSA leadership team says that scrap companies that have looked at the RMDAS methodology have a difficult time finding fault with it. MSA has, and continues to learn, from scrap dealers and some of them see how a transparent market can benefit them, says MSA. Several scrap dealers are exploring how to become RMDAS participants, which would provide not only increased “coverage” of the market but another opportunity for MSA to verify the accuracy of some of the data provided to it by participating steel firms.
“People want more reliable and accurate information, because it makes markets more efficient,” says Ralph L. Pinkert, MSA Business Development Director. “Price transparency brings more stability and rationality to the market, yet reflects genuine volatility caused by supply and demand changes. Reporting based on aggregated volume and price data will provide both scrap buyers and sellers a reasonable barometer of what has occurred.”
Adds Pinkert, “Historically, scrap companies have been able to make money off obsolete scrap by adjusting scale prices and turning the spigot on and off. But it is in serving industrial accounts, which continuously generates new production scrap that is usually bought on a pricing formula basis pegged off of an index, where an inaccurate 30-day price can be costly. If that price is not representative of the true market price that month, scrap companies can lose money.”
Dr. Kuehn, a veteran of establishing networks of sales information systems involving participation by competitors and adversaries, is optimistic that distrust in the market can be overcome by use of its system. “In all past industry services developed by MSA, some companies say, ‘We’ll be honest, but we have doubts about our competitors,’” he notes.
Having doubters in the market is not a new challenge for MSA, says Dr. Kuehn. “In the tobacco industry, a holdout company was convinced its own information was the best, but at the end of 1974 the Federal Trade Commission provided aggregate data that proved MSA was right on target,” he recalls. All of those firms have continued to participate for the past 35 years, and the majority of cable TV networks (now 71) have participated for 19 years, he notes.
A good test for the RMDAS ferrous scrap pricing number occurred in the first half of 2005, according to Dr. Kuehn. “RMDAS showed the market going down while published prices in magazines were going up. We were put into a defensive position and asked to justify our technology,” he comments.
But according to Dr. Kuehn, in mid-July, one of those publishers said the prices it had reported should be adjusted downward retroactively by $60 to $80 per ton. Such corrections have also been made in the past. Dr. Kuehn says, “Confidence in MSA’s systems and its methodology was vindicated. Economists can seldom identify turning points as quickly as RMDAS had done, so RMDAS gained great credibility last summer.”
DATA MINING. MSA did not establish RMDAS simply to prove it can produce and provide timely, accurate databases and the price indices that have supplemented its web-site reports since November, the company’s leaders are quick to point out.
Several new ways were identified by users of the system to have this information help steelmakers judge purchasing performance, control costs, mine the data for other helpful information, and develop sound ongoing relationships with their suppliers and customers.
A number of ways in which careful looks at transactions, or a series of transactions, can reveal valuable insights affecting scrap-purchasing decisions have been proven to be of such value that MSA has pre-programmed them so they are easily available for use by subscribers. Another benefit of RMDAS market data is it reduces the cost of preparation for audits and Sarbanes-Oxley compliance with “Alerts” and “Management Discussion and Analysis” requirements in quarterly and annual financial reports.
Gallagher notes the accuracy and detailed information maintained by RMDAS led to separating shredded scrap into two categories, based on whether the shredded scrap has 0.17 or less percent copper, defined as low residual copper “#1 Shredded,” typically priced at a premium, or “# 2 Shredded,” which contains a higher level of copper. “Those more detailed performance levels for customers on the buy side are equally valuable for scrap sellers,” remarks Gallagher.
The above capability may also prove valuable for paper recyclers, according to the company. MSA representatives who attended the European Paper Recycling Conference talked to attendees there, who last October saw that RMDAS detailed transaction data could incorporate estimated values for ash and moisture.
Ash and moisture measurements can help establish the premium value of high quality recycled paper and the price differential that entails, according to MSA. There is high interest in MSA extending Steel and Paper RMDAS to Europe as well as to Asia.
For Dr. Kuehn, pursuit of such detail and accurate knowledge is a passion. He says, “We are working toward using real-time census data rather than a convenience survey.”
The author is the editor of Recycling Today and can be contacted at email@example.com.