MAY 2010

Escalating transportation costs deflate profits for scrap metal exporters Click to Enlarge - Bulk vessels are an important link in the global supply chain of scrap metals, but containerization has grown substantially over the past several years.
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A key component of pricing any recycled commodity is the cost of transportation. Generally, profit diminishes for both the seller and the buyer according to how heavy the load is and how far it travels. By volume, scrap metal is the heaviest commodity and must deal with the heaviest costs for transport. Even moving a ton of scrap iron a short distance from a fabricating shop to a local scrap yard involves numerous expenses – labor to load the material, the wages of a truck driver; vehicle depreciation, maintenance, insurance and fuel, miscellaneous road expenses and deadhead return of the vehicle.

As inland distances increase to a port whether by truck, barge, rail or intermodal the transportation costs multiply to include costs for regulation compliance, and depending on the marine terminal, a growing number of increasingly expensive environmental, security and foreign currency exchange fees.

Obviously, the main driver of price is supply and demand, but higher transportation expenses must come out of the pockets of the exporter or the foreign importer. In a buyers’ market, the seller likely eats the lion share. “Transportation costs are quite an important component of ferrous scrap, because the product is usually free on board (FOB) mill whether it’s across town, across the state or nation or to a foreign destination,” said Greg Crawford, vice president of operations at the Scrap Recycling Institute (SRI), a department of the American Iron and Steel Institute.

The Institute of Scrap Recycling Industries (ISRI) recently released its 2009 export statistics. The volume in metric tons of ferrous (including stainless) showed that United States domestic exports rose 4.7 percent in 2009 over 2008 (21.5 to 22.4 million metric tons), but the monetary value dropped precipitously by a hefty 31 percent from $10.3 billion to $7.1 billion.

Marc Azous, chief executive officer of Iron Industries LLC, who exports United States scrap metal primarily to India and South Korea, gave his opinion on what is happening. “Prices have nearly doubled over the last year. Prices were getting up to $700 a ton delivered to many places back in 2008. I see history repeating itself right now. Prices are rising too high too fast again and I think there is going to be a correction because of what is happening in Asia. Although there’s demand, they have huge inventories of finished steel products. Until they offload the new products there’s no need to raise prices for the scrap. In South Korea, for example, they inventoried scrap when prices were low so they have supply in their yards.”

Meantime, increasing costs for transportation are tightening margins for United States scrap yards and exporters all along the supply chain. Wildly fluctuating fuel prices over the past several years have been largely stabilized by the transportation industry with fuel surcharges imposed by truckers, railroads and ocean carriers. And, fuel prices are on the rise.

“Truckers are basically making their money by killing everyone with fuel surcharges. We’ve recently had fuel surcharges as high 27 percent. There are hidden costs everywhere in transportation right now,” said Azous.

Many see the record profits of the United States railroad industry over the past several years not as a result of an increase in neither traffic nor expanded service, but largely due to high fuel surcharges.

Scott Horne, general counsel and vice president of government affairs at ISRI commented on issues with railroads: “Our role in interstate transportation has been largely focused on the railroads because so many containers go by rail to the ports. We work to make sure it’s a fair and level marketplace for our shippers. We played a role with bulk shipments as well to alleviate the shortage of gondola cars that was severe until the market dropped off one and a half years ago. We are also trying to encourage railroads to improve service; many of our members have encountered great difficulty getting the level of service they need.”

Ocean carriers have formulated complex bunker fuel surcharges. Maersk Line, for instance, one of the world’s largest container carriers, has constructed a surcharge scheme in its contracts that incorporates fuel consumption, transit time and imbalances in container flows to ensure profitability. The formula includes recalculating bunker fuel every three months based on the previous 13 week fuel price average.

In mid-February all the major ocean carriers initiated a general rate increase. They raised the price $200 dollars per container, about $10 dollars a ton for 20 tons loaded. “Can you raise your price to the customer to compensate for that price increase, or lower the price you pay for scrap?” Azous questioned. “Ocean freight is key to everything now, the most predominate factor in buying.”

In logistics, when they say they have no containers available that means either two things – they are booked solid and have no vessel space, or they don’t want scrap metal containers because they can use them for other products that they can charge more for. “Why would they give me a container for $600 dollars to China when they can sell that same container to Microsoft for $4,000 dollars?” Azous added.

Already-high container handling costs at United States marine terminals due to longshore worker and stevedore union contracts are being augmented by a range of additional costs for security measures, environmental programs and trucking fees. The Transportation Security Administration (TSA) requires all truck drivers entering a secure area of a United States Maritime Transportation Security Act-regulated port or vessel to have a Transportation Workers Identification Credential Card (TWIC). This biometric credential, valid for 5 years, costs $132.50 per driver. To date 1.5 million drivers have enrolled. Do the math and add the administration burden for the trucking industry.

Containers of scrap metal must not exceed weight limit requirements and must be loaded properly for weight distribution. Other than proper export documentation and declaring that shipments contain no radiation or chemical contaminates, there are no security requirements for scrap metal on the export side, however, increased port security for imports for things like radiation scanning equipment and open-container inspections drive up costs that are ultimately reflected in higher shipping rates.

Aggressive environmental programs to reduce air and water pollution, especially at west coast ports are laudable, but ultimately the costs are passed on to shippers. The Port of Long Beach, California, bills itself as “The Green Port” and claims that its ambitious Clean Trucks Program has thus far reduced air pollution from harbor trucks by nearly 80 percent. But at what cost to United States exports?

On January 1, the Port further banned trucks with 1993 and older engines and also barred nearly all trucks with 1994-2003 engines. By 2012, all trucks that don’t meet 2007 emission standards will be banned. All trucks built before 2003 that enter the port must pay a Green Fee of $100, unless they offload at night, but the freight-forwarder can sometimes get the fee waived.

This means trucking companies will have to replace thousands of trucks much sooner than anticipated which will inevitably lead to higher drayage rates. In addition, all truckers working at the marine terminals at the Ports of Long Beach and Los Angeles must register and pay a $100 dollar annual fee for each truck.

In February, the Port doubled financial incentives to $6 million a year to encourage ships to slow down within 40-miles of the port to further reduce air pollution from diesel engines.

The Port Authority of New York and New Jersey also has a Clean Truck program. Beginning January 1, 2011, pre-1994 model trucks will no longer be able to enter Port Authority marine terminals. And, on January 1, 2017, all trucks hauling freight from the port must meet or exceed 2007 federal emissions standards.

The further inland scrap is located, the more difficult the challenges faced by exporter. Take the case of Baker Iron and Metal, central Kentucky’s largest scrap metal processor. “For us it’s more difficult to export ferrous than nonferrous. Transportation costs have impact, but more so in ferrous. Nonferrous export is a pretty good market for us most of the time. On the nonferrous side approximately 30 to 35 percent is export,” said Greg Dixon, general manager.

Baker’s ferrous export varies every month, most months very little, but some months it ships to an export ramp in Cincinnati where it goes by barge to ports. Baker sells predominately to export brokers to reduce risk. “Surprisingly there’s not a lot of intermodal from here to the east coast and I don’t know why that is,” Dixon said.

Most major ocean shipping lines have facilities in the major inland cities, but if not near a rail head with the availability of gondola cars, container loading facilities, or not near a water route, the alternative is road hauls that eviscerate profit. “Going from Long Beach to a port like Shanghai (6,500 miles) for a 20’ container, you’re looking at $375, but to go from Long Beach to San Diego (93 miles) by truck, you’re looking at $700 to $800, which is ridiculous. It’s double to ship domestically for two hours than to cross the widest ocean,” said Azous.