April 2004

Scrap Metal Shortage Continues  
Market Correction Expected to Surface

by James I. Miller

What do statues, bridges, locomotives, and torpedoes have in common? It’s an odd mix, but all of them have been stolen and cashed in for their scrap value over the past 12 months in various places around the world. The global shortage of scrap metal has produced opportunity for many, and created unprecedented market conditions for buyers, traders and consumers of ferrous metals throughout the industry.

Around the globe
Much of the available scrap metal in North America is being bought up and shipped overseas. Emerging manufacturing economies in Brazil, Russia, India, China and Korea are gobbling up ferrous scrap at rapidly increasing rates. Of these scrap consumers of course, China has most voracious appetite. According to the Chinese government, the 48 major seaports in China handled more than 231 million tons of goods in January of this year alone, an increase of 15.1 percent over the same time last year. It is estimated that Chinese industry today consumes about one third of the world’s flat-rolled steel production.

Hari Agrawal is president of CNA Metals, Inc. His Texas-based scrap metals exporting business has been booming of late, arranging transport of some 3,000 tons of ferrous scrap and over 800 tons of non-ferrous to multiple destinations in China each month. A lot of his product originates in South America, and half of his total volume winds up in Chinese ports.

“We make regular shipments of ferrous scrap to Taiwan, South Korea and India,” said Mr. Agrawal. “Until more recently, India was our largest customer, but over the past year, the volumes we ship to China have grown considerably faster. As a result, only about 20% of our total business comes from India today,” he said.

But the great demand for scrap has a downside as well, and nowhere is that more true than in the former Soviet Union. Political uncertainty and the fledgling economies of most republics there have caused many standards of living to fall. The resultant despair and high prices for scrap are blamed for a rash of unusual activity. Reports from the BBC indicate pieces of infrastructure including manhole covers, electric power lines and an entire bridge have come up missing. In addition, metal thieves have reportedly stolen a piece of history – the first locomotive produced there, dating to 1924 – from an open-air museum in the city of Donetsk, in the eastern Ukraine. Even more troubling is that scavenged parts from both mothballed and active warships of the Northern Fleet – Russia’s navy – have turned up in scrap metal yards throughout the region.

Logistics
The enormous volumes of scrap metal and other goods heading overseas have impacted the shipping business as well. According to Hari Agrawal, freight rates for transoceanic shipments have increased 250 to 300 percent in the past year. That means significant increases in costs of doing business, and ultimately higher prices for those goods produced.

In the scramble to meet this demand, port congestion and lengthy delays have become problems on both ends. Some industry experts suggest that over 20% of the world’s bulk shipping capacity is currently tied up in ports – either waiting to load, or waiting to berth for unloading.

The solution? More ships, larger ships, more ports and better port facilities to accommodate the volumes of raw material on the move. All of these things take time and significant capital investment. Immediate relief is unlikely.

On the home front
With pricing at record levels, aside from buyers, few people in the scrap business are complaining. Dave Norris, general manager of D&D Auto Salvage in Pittsburgh, Pennsylvania – one of the highest volume auto recyclers in the region said, “Every year, we normally get busy toward the end of March. But this year, the action began about six weeks sooner than usual. The scrap peddlers are much more aggressive, and we’re seeing material show up in our yards that people might not otherwise have bothered with. The incentive to ship as much scrap as possible is bringing more people into the market, and material from places we don’t typically see,” he observed.

It may be ironic, but increasing demand for old drums, retired farm implements or that rusted old body on blocks is a time-proven sign the economy is growing. Midwest sources report they are paying higher prices for steel, iron and non-ferrous items to fuel the U.S. economy and to meet competition for scrap products from China.

Along with robust demand come the usual headaches. Dave Norris comments, “We’re sending between 20 and 30 full loads of scrap to shredders or mills every day. The backups there to unload are getting longer and longer. It’s not uncommon for our drivers to wait two to three hours now, just to tip the load and head back to the yard,” he said.

On the supply side, there are challenges as well. U.S. automakers have a lot of clout with the mills. They buy so much steel that it’s common for them to provide raw material to their “tier one” parts suppliers. In cases where suppliers source their own steel, availability problems are forcing them to ask their automaker customers to flex that muscle and arrange for material, ensuring the flow of parts to their assembly lines. To date, the automakers have managed to avoid paying surcharges – some as large as $125 per ton – that many steel mills have applied to new orders booked for near term delivery.

What to expect
A resurging U.S. economy and competition from China and other foreign economies for ferrous scrap has driven pricing steadily upward. But recently, signs of a market adjustment are beginning to surface. As much of North America emerges from a long, cold winter, the seasonal upswing in production for most scrap operations affected by the cold is expected to increase the supply of available scrap on a regional basis across the United States and Canada.

In addition, with so much material tied up in transit to overseas customers, it’s difficult to gauge just how acute the shortage actually is. Snags in supply lines put pressures on buyers to find more material. Some analysts believe the shortage is in part, artificial. In turn, orders could be canceled when supply catches up with actual demand.

Hari Agrawal sees a correction ahead. “The scrap market must adjust to these pressures,” he said. “I expect pricing to remain strong over the next four to five months, with some slight movement up and down. But there is some skepticism in the Far East. There is just no way that pricing can stay at these levels long into the future,” he added.

Charles Bradford, president of Bradford Research/Soleil Securities in New York City sees a softening in scrap steel pricing as well. “Historically, there has always been seasonal variation, with weakening in the spring. Asian prices are beginning to fall right now in both the Chinese and Korean markets. There’s been a lot of attention focused on China, but steel imports were actually less there in 2003 versus two years before,” he said.

“In addition, whenever there is devaluation in the dollar, we typically see scrap prices soar,” continued Mr. Bradford. “With more stability in our own currency, scrap steel pricing should recede,” he said.

How good a time is it to cash in that old scrap? Bradford Research reports Ispat Inland, Inc., one of this country’s largest producers of steel, has two blast furnaces that were retired in 1991. The steel maker is currently dismantling those old furnaces – for scrap.