Escalating transportation costs deflate profits
for scrap metal exporters by Mike Breslin
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
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
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 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
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
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.