Scrap prices are absolutely nuts! These are days when the police have to weld the manhole covers down tight—but not to protect against terrorism—It’s because they are worth over $200.00 per ton at the junkyard.
We had solidly passed all of history with the price of scrap steel by last November. Then, we rocked on with another big pop for December and, then again, in January. Already in total disbelief, we now know that the increase for February is the biggest one yet and another one just like it is coming for March. Now at levels triple just months ago, most of us scrap guys are in a stupor, scratching our heads for an explanation, and even more concerned for what the future will bring.
At the same time, the extra money paid for scrap is little solace compared with the headache manufacturers are now having (or will soon face) trying to buy new steel amid looming shortages, sky-high prices and surcharges. Well, opinions are like your appendix. Everybody has one and here is what this Milwaukee area scrap guy thinks is going on.
First things first! It’s a lot about China. China’s crude steel production last year was more than 220 million metric tons (according to the International Iron & Steel Institute), around 23 percent of the 962 million tons produced by the entire world. They were well over double the third place United States, and it was the first time any country ever exceeded the 200 million ton mark. The shock is that China’s production was 70% higher than only two years earlier; and that it had imported another 30 million tons over this record setting amount because it still wasn’t enough. The world’s greatest power, if you count by population, is only in the early stages of a full blown industrial revolution that will make guys like Henry Ford look like small potatoes. And, China will not be the relative “flash in the pan” that Japan was either. Japan leaped into prominence as an emerging industrial power but quickly spread to the edges of its relatively tiny borders. China is a giant in geography as well as in human resource. Its development will be the biggest single factor for industrial output the world has ever known.
Second in the mix is the re-awakening of America’s own economy. Much of America’s industry has been in the same boat as we have been here at Forman Metal Company until the last eight or ten months. Scrap prices were in the bottom of the barrel, tonnage was horrible, and we had floors that were swept every day by drivers who had little more to do. I didn’t hire anybody, I didn’t buy anything, and I watched every penny like a hawk while I tried to explain my financial statements to bankers with little patience for hearing about cyclical industries. As America’s steel industry saw roughly half its members go into (and not always out of) bankruptcy, we all just sort of sat around and waited—and hoped. The controversial invoking of the Section 201 tariffs by the Bush administration is likely the only reason that the other half of America’s steel industry didn’t tank altogether. During those years, the export market was about the only sunshine in our day. Now, as history has usually shown, what happens to industry as a whole happens to the scrap dealer 6 to 8 months ahead of everybody else. US steelmakers are charging back into the market and finding that the China buyers are not about to lie down and play dead while their imports dissolve. The result is a bidding war for scrap. It’s absolutely unprecedented, absolutely nuts—and it never lasts for long.
Lastly, and most predictive of the future, is that scrap is the by-product of production. Factories stamp, laser cut, or machine parts, and the resulting skeletons and chips are produced as a result. That scrap then becomes the feedstock for new steelmaking, and life goes on. The kicker is that when production grinds down to a snail’s pace and remains that way for years, there is nothing much in the pipeline when somebody finally says, “GO!” This actual shortage joins up with what is the “perception” of shortage, and the result is panic. Panic is what we now have as domestic producers, eager to resume production, bump into importers desperate to feed the marching Chinese juggernaut. Rising scrap inventory from renewed production will soon act to apply the brakes to that portion of the market that is unrealistic.
So, what is likely to happen next? First, China and the other developing countries will not be going away—ever! Therefore, even while production catches up with demand over the next few months and the panic buying subsides, prices will go down—but never again as far as during the recession of 18 months ago. History in the scrap iron market will have changed. Prices will rise and fall as they always have but in a significantly higher trading range. Many of us see at least a hundred dollar per ton drop in the prime grades by summer but that would still leave them nearly double what they were little more than a year ago.
The biggest of all exports, sadly, will continue to be America’s jobs unless we make serious changes in the way we protect our way of life against a 27 cents per hour labor force. Anyway, that’s more of a political discussion and this story is supposed to be about scrap.
My prediction is that prices may go up (even moderately) one more time for March and maybe April too. Then things will either level off or start to drop by May or June. I then see two or three fairly heavy-duty drops over June, July and August bringing us by September to where we were somewhere last October or November.
Those levels will still be plenty darn good and likely to last for quite some time. In the meantime, I hope you make the most of any scrap metal you have by selling at levels good enough to put two or three kids through college. Marty Forman
The author is a third generation scrap metal dealer from Milwaukee and president of Forman Metal Co. He may be reached at (414) 351-5990
The following is an opinion piece. If you have an issue that you would like to write about contact Dan Sandoval at dsandoval@recyclingtoday.com, or via telephone at (216) 961-4130.
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