Tough Sledding Ahead

While things may be a bit tighter than they were a few years ago, there is no room in the ferrous scrap markets for Chicken Little. Most analysts agree that the sky is not falling . . . at least not in the domestic market, and at least not yet.

Although the market is highly unlikely to reach for the stars in the coming months, there is sufficient support and demand from the expansion of steel mills in the United States that, while prices may drift lower, things should not completely fall apart. Some say that if Japan manages to get its show together (and that is a big IF), things could improve as early as the first quarter of 1999.

"Scrap has been a very good business in North America for 100 years. It will continue to be a good business for the next 100 years," says Firoze Katrak, vice president of Charles River Associates, Boston. "Occasionally we see scrap prices spike upward. And occasionally we see them dipping down."

While there is no question that the second half of 1998 is one of those dips, Katrak says it should not be a disaster for any scrap dealer who is in the market for the long haul. "It is not true that business is lousy," he maintains.

One reason that material continues to move is the expansion of the mini-mill industry all over the continent (see Recycling Today, October 1998, p. 34). The traditional steel markets are also continuing to suck up scrap iron. With both long and flat products demanding material to feed furnaces, the market continues to move forward.

While agreeing that the mini-mills have kept prices afloat, Richard Lerner, manager of Cycle Systems’ Lynchburg, Va. facility, says he thinks the market is going to have to see some further downward movement. "We haven’t seen a tremendous softening. Mills still are busy and they are buying their melts.

"But," he continues, "I’ve thrown my crystal ball away. There are so many things that affect the market in this global economy." One of those things is the availability of scrap that generally would be sent to the export markets. It certainly is weighing on the domestic scrap market, and pushing prices lower."

"I’ll be down, on the dealer side, by $50 a ton from January to October," says Stu Simms, chief operating officer of Parkwood Iron & Metal, Cleveland. He says scrap is not moving and his ability to ship material has been diminished. "There’s nothing wrong with this market that a $20 upward swing in prices wouldn’t help," he says.

Indeed, many scrap dealers seem to be treating the current slump as more than a temporary dip in prices. As the fourth quarter rolled on, the news seemed to become more pessimistic. Prices on a lot of the grades began to drop down and continued to inch lower. Even auto bundles are down and the price on those bundles is not strong.

Matthew Ferer, president of Aaron Ferer & Sons, Omaha, Neb., is another of those who has seen the decline in prices first-hand. "There is no question that prices are down due to the backlog because no exports are going out," he says. On top of that, a flood of imported pig iron has come up the Mississippi River to the mini-mills, depressing the market for domestic scrap. However, this might be a short-term dislocation in the market.

"Pig iron is cheap enough to compete," agrees Robert Draper, senior vice president/ferrous scrap, with Commercial Metals Co., Dallas. "At the prices it is today, you might be better off buying pig iron."

That may not remain a constant. "Although imported pig iron has provided a major source of low-residual charge material for North American mini-mills, there is a good chance imports will decrease in the future," John Kopfle of Midrex Direct Reduction Corp., Charlotte, N.C. told the Institute of Scrap Recycling Industry’s (ISRI’s) Ferrous Roundtable in Chicago.

Among the reasons he cited are environmental pressures on Brazil’s charcoal pig iron producers, rationalization of the Russian and Ukrainian steel industries and closure of their blast furnaces. In addition, he noted that recovery of the demand for steel in Asia will absorb a lot of excess blast furnace hot metal production and reduce the need to produce merchant pig iron.

Katrak says that it is not surprising that the export markets have dried up. However, availability of export markets really does not have much effect on his long-term outlook for steel scrap. While admitting that dealers in areas that are heavily or solely reliant on exports are getting hurt, he says that the export market will become progressively less important over the next five to ten years no matter what happens to the overseas supply-demand picture.

The driving force in North America will be domestic demand. He sees that as being substantial enough to provide a safety net under any overseas losses. Simms is quite chagrined at the amount of foreign steel coming into the United States at reduced prices. "It is almost dumping," he says, referring to the selling of material into another market at a price below the cost of production. On top of that, there is a great deal of foreign scrap being offered to the United States because it cannot find a market in its home mills. At the same time, exports of domestic scrap material are down.

A look at the U.S. market statistics would indicate a strong demand for scrap in a normal market. Interest rates are low, unemployment remains low, and consumer goods are selling in the United States. However, the decreased demand at the mill for scrap and the increased supply in scrap available offshore has caused a topsy-turvy situation.

Some observers still are holding out hope that there will be a bit of relief when the winter weather comes. Traditionally, winter means stronger prices in the ferrous market. Faced with today’s depressed market, most scrap dealers would welcome a really severe winter if it would boost prices.

"It is a bad sign for any market when people are relying on Acts of God to put a floor under prices," observes Bob Garino, director of commodities for the Institute of Scrap Recycling Industries Inc. (ISRI), Washington, D.C.

Acts of Man have not been too helpful for the ferrous market, either. The General Motors strike this past summer was no great help to a scrap market that really needed good news at home in the face of bad news from abroad. Just when the market most needed its traditional customers to remain on a steady keel, one of the industry’s biggest customers was on the sidelines.

"GM was not buying so the mills cut output, so we were not selling," says Ferer. Added to that was the prospect of low-price, low-quality feedstock piling up in some yards. While he does not see consumption getting much stronger soon, and resulting low prices, he is more bullish about the longer term.

"I am an optimist," he says. He expects the current market slump to be a short-term thing. "While I think it would be too optimistic to say there will be an upturn at the start of the year, I think things may get better after the first quarter of 1999," Ferer says.

However, many dealers are selling on the slightest up-tick in the market. They are holding nothing back, in any of the grades. This is a fairly sure sign that they do not expect any long-term improvement in prices. A number of the larger consolidators are not in a business position to hold on to scrap. Where some hoarding might help stabilize the market or even drive it up a tad in the short term, they need cash flow just like any other business.

Some purchasers of scrap iron actually have reason to see the current downturn as a market opportunity. "As with any product, lower prices stimulate more demand and prices eventually recover," Midrex’s Kopfle says. "A short-term price drop is not a reason for major concern. Given the likelihood of a market recovery in two or three years, and the fact that it normally takes that much time from contract signing to full production, this is actually a good time to develop a reduction project," he says.

Commercial Metals’ Draper points out that the mini-mills see the same thing as the rest of the dealers and traders in the market see. Markets are off. They are apt to take advantage of what is happening. Although located in Dallas, far from the West Coast where the initial impact of the Asia crunch was felt, Commercial has felt the effect of the world market slump. "We haven’t escaped the rest of the world," Draper says.

There is an old adage that holds that, during a bull market all news is bullish; during a bear market, all news is bearish. In short, the tendency is to over-emphasize the current situation.

"As with any investment, the most important question is not ‘how is the market now?’ but rather ‘is the fundamental business sound and are the long-term prospects good?’" Kopfle says. "Given the growth of mini-mills and their need to continue to pump iron, direct reduction faces a bright future," he adds. That, of course, bodes well for the scrap dealers who do business with those same scrap-hungry mills.

Katrak sees no advantage to emphasizing or moving from one kind of ferrous scrap into another just to try to anticipate market demand or to avoid dips in a given market segment. "I believe the way to think about his is that there is a benchmark price which is set by #1 heavy melting," Katrak says. "There is a margin above or below that price, depending on the quality of the material. Bundles will be better, shredded will be lower.

"Margins have declined and the benchmark price has declined. But prices of all the grades will continue to follow in tandem with the benchmark," he says.

Cycle Systems’ Lerner says their product mix is mostly an industrial base. "I don’t see us changing the mix. You can’t refuse to take a material. You have to look after your customer base." Still, they also are looking at things they have not done in the past.

"If the grade is low enough, it may be that we’ll have to charge to take scrap away," Lerner says. While that would be stunning to many in the ferrous side of the market, it is not unusual on the paper side of the business.

"Say the price of turnings got too low and we were providing transportation," Lerner says. "It may come that we would have to charge. If nothing else, we’ll be looking more closely at all of our dealings." But he remains hopeful that it will not come to that.

Mills to Buy More

Ferer says he expects mills to buy more #1 steel. "The current market is forcing us to pay lower prices and to be more picky on what we are taking," he says. "It’s tough to make a living, or even to exist on today’s margins."

"I’m afraid that September will be the top of the year-end market," says Parkwood’s Simms. "I wish I could say that March or May will see a turnaround. But I don’t see anything that will put a stop to the market. It will be tough – it will be survival time for a lot of people." He continues, "I can’t tell you how much I hope I am wrong."

He notes that the situation is not tied to world politics any more but is the result of the domestic scrap market being a part of the global economy. Until there is some reason for a turn-around in the global economy, Simms sees little cause for celebration.

A rebound in the world market could send ferrous scrap back into orbit, though, many in the market agree. "I’d hope the Asian markets would get their act together," Lerner concludes. "Things might look better in six months." In the meantime, his advice is classic: Buy low, sell high, adjust prices accordingly; and, don’t have much inventory on hand at the end of the month.

Whether this is a short-term or longer trough in the market, it will pay to review each marketing decision carefully. Lean times are likely to persist through the New Year, and probably early into the second quarter. Whether they will drag on through next summer, as some of the more pessimistic scrap dealers fear, remains to be seen.