Strong demand settles in for ferrous scrap market
by Brian R. Hook

Global demand for steel is keeping ferrous-metal recyclers busy across North America, from small family-owned operations to large publicly-owned companies.

Exports of ferrous scrap metal increased 13 percent in 2005 according to numbers provided by the Institute of Scrap Recycling Industries Inc., a trade group representing more than 1,200 companies that process, broker and consume scrap commodities.

The Washington D.C.-based industry group reported that ferrous scrap metal exports totaled 10.7 million metric tons in 2005 compared to 9.5 million metric tons the year before. Ferrous scrap metals are magnetic metals derived from iron or steel.

Bob Garino, director of commodities for the trade group said demand has been strong and he expects the upward trend in exports to continue. He said a lot of the global demand has come from China due to strong industrial growth. This growth consumes a lot of resources, including coal, iron-ore and importantly for recyclers, ferrous scrap.

China is not a huge user of scrap. It mostly produces new steel. Garino said the global demand for ferrous scrap, however, boils down to the level of industrial production. “You’ve got to figure that scrap is a commodity that is bought, not sold,” he said. “It is a function of the level of global economic activity and domestic activity.”

Garino said that in addition to China, there is strong demand in India, Korea, Taiwan, and Eastern Europe. “They are big buyers of shredded material,” Garino said.

World crude steel production, overall, increased by 5.9 percent in 2005 according to the International Iron and Steel Institute. The Brussels-based trade group represents more than 190 steel producers that produce more than 60 percent of the world’s steel.

Steel production totaled 1.1 billion metric tons in 2005. The IISI said China accounted for most of the increase, where production rose by 69 million metric tons. Total production in China was 349.4 million metric tons, 30.9 percent of the world’s total.

The IISI reported that in 2005 production of steel in China outstripped demand. The group said the government has now closed inefficient capacities and is concentrating a greater share of its output of crude steel under the control of several larger companies.

In North America, the IISI reported that an already consolidated steel industry reduced overall steel production in line with demand during 2005. The group said that high inventories built up during 2004 were liquidated. Total output throughout the continent fell by 7 million metric tons or 5.3 percent to 127 million metric tons.

These developments are just some of what Garino described as “tugs and pulls” of the export market. They have an impact on the demand for scrap ferrous metal and ultimately impact prices. Garino said that a composite-price benchmark that he tracks averaged $192 a ton in 2005 compared to $212 a ton in 2004. But prices in 2005 climbed as high as $237 a ton and dropped as low as $120 ton. “It can be very volatile,” he said.

Strong demand for ferrous scrap, however, should not have an impact on supply, Garino said. “When prices go up, more scrap comes out of the woodwork. We are not worried about running out of scrap anytime soon,” he said. Garino often describes the United States as the Saudi Arabia of scrap, supplying the world with scrap metal instead of oil.

The ISRI estimates that the overall scrap-processing capacity in the United States exceeds 140 million annual tons of ferrous scrap. That is more than double the current volumes being purchased in the United States for domestic consumption and export to other countries.

Richard Becker, chairman and chief executive officer of Fenster Metals Inc. in St. Louis, said the global demand for scrap ferrous metal has had an impact on his business. “The impact of export has caused our market prices to increase,” Becker said.

Fenster Metals is a family-owned operation in its fourth generation. It is a buyer and processor of both ferrous and non-ferrous metals. It sorts and sizes the metals to ship by rail from its facility to mills and foundries to be re-melted into new metal. It provides services to the manufacturing industry, including fabricators, machine shops, tool and die, demolition, construction and mechanical contracting companies in the Midwest.

“Competition is our basic problem in obtaining scrap metals. There has been somewhat of a drop in United States manufacturing and therefore a drop in scrap metal tonnage,” Becker said. He said a downturn in the auto and housing industry would hurt his business. “The metal recycling industry is a market driven by global industry,” he said.

Jeff Solomon, chief executive officer of Globe Metal Recycling Services Inc. in Montreal said the export market for ferrous scrap metal is also having a positive impact on his business with respect to pricing. “When export is busy, the domestic mills are forced to pay higher prices for scrap to secure adequate supplies,” Solomon said.

“The higher prices allow for scrap to be transported greater distances thus improving our volumes by bringing more scrap into the marketplace.”

Solomon said Globe Metal specializes in industrially generated materials. The privately held company with branch facilities in Cleveland, Los Angeles and Fort Wayne, Indiana handles a large volume of steel scrap from factories. The company also handles a large volume of steel from machine operations and it also operates an over-the-scale purchasing facility where it purchases obsolete scrap, from old equipment to old stoves.

Solomon said that so far, there is not any problem getting material. “However, if we continue this folly of sending all of our manufacturing off shore, I could see some problems in the future of adequate supplies of prompt industrial scrap,” he said.

“The only problem I see is the market taking too severe a correction, thereby bringing us back to the times of working like horses and not making any money doing it.”

Schnitzer Steel Industries Inc. is one of the nation’s largest recyclers of ferrous metals. It currently processes over 4.9 million tons of recycled metals a year. The publicly owned company is based in Portland. Operations are concentrated on the West Coast and in the northeastern seaboard regions, where multi-modal freight options provide the company with smooth access to markets and materials from around the globe.

John Carter, chief executive officer of Schnitzer Steel, told investors after the company’s latest earnings report that the overall business is growing. “The positive long-term fundamentals supporting all our business segments remain intact,” he said.

Carter said that although there continues to be good worldwide demand for scrap metal, export markets have been unsettled since the second half of 2005. Part of that volatility was with pricing in the Asian export markets. The company reported sales orders in its last quarter were an average net price per ton of between $185 and $195.