MAY 2010

Current scrap market on upswing

The state of scrap metal is a whole lot better than it was a year ago, but not nearly as good as many would like because of difficulties in acquiring material and flat, uncertain market conditions. Nevertheless, scrap metal has rebounded to stronger levels as the economy is beginning to recover.

“The weather has improved and that has helped improve business and commodity prices are up. The bigger question unfortunately, is that there is a bit of scarcity of material out there,” commented Greg Dixon, general manager of Baker Iron and Metal, the largest scrap metal dealer in central Kentucky with yards in Lexington and Morgan, Kentucky and Seymour, Indiana.

Demand for ferrous scrap tanked in late 2008 but has returned to reasonable price levels. Heavy melting scrap (HMS) was recently in the mid $300 to $400 per ton range, about back to levels seen on 2006, but nowhere near the $700 range it peaked at just before the financial crisis.

“You should take into consideration that the decrease in the values of the metal is exacerbated because not only did prices decline drastically between 2008 and 2009, but volumes also dropped. Not only was the metal worth quite a bit less, but less was processed too,” said Tom Crane, manager of member services at the Institute of Scrap Recycling Industries (ISRI).

Recent estimates from ISRI, based on United States Department of Interior numbers for domestic scrap metals processed in 2009 as compared to 2008, not including exports, show:

Ferrous (including stainless) was down 27 percent in volume and 57 percent in value, a drop from $23 billion to $9.8 billion.

Nonferrous (including precious metals) was off 12 percent in volume and down 28 percent in value from $24.1 billion to $17.2 billion. Aluminum went down 18 percent in volume and 47 percent in value, from $7.6 billion to $4.0 billion.

Copper saw drops as great as 8 percent in volume, and 33 percent in value, decreasing from $4.9 billion to $3.2 million.

Lead was down 3 percent in volume and down 29 percent in value, down from $1.9 billion to $1.3 billion.

This dramatic drop in domestic processing is yet another symptom of the recessed economy and closely corresponds with the slowdowns in industries across the spectrum of production. Reductions in manufacturing autos, airplanes, machinery, durable goods, and the worst new housing and commercial building stats in 50 years has reduced supplies of scrap metals. Individuals and businesses are extending the life of vehicles leaving a shortfall for auto shredders.

“The run on commodities a few years ago really took a lot of the excess out of the reserve of scrap metal lying around. We starting to see fewer car bodies. We are within 100 miles of 4 different shredders and all of them are exceedingly hungry,” said Dixon, commenting on the central Kentucky area.

Exports were also down dramatically in price though not in value from 2008 to 2009. The volume of ferrous, for example, increased 4 percent but declined 31 percent in value, a drop from $10.3 billion in 2008 to $7.1 billion in 2009. Demand for American scrap metal is still refreshingly strong from Asia.

Marc Azous, CEO of Iron Industries LLC of Seattle, buys scrap metal nationally for export. He had this to say about the state of the industry, “For my company, we are booming. The markets are very hot because there is a scrap shortage. Prices have been on the rise for three straight months. We have more demand than supply available. We have several internet sites and we get more buyer inquires than we can possibly handle. Supplies are way down due to the weak economy. That’s why there is a big scrap shortfall, possibly 65 to 70 million tons right now. The only reason the price has not continued to skyrocket is because steel mills still have huge inventories of new steel that has not been sold.”

Azous also said that because of the financial meltdown, the industry has become a virtually all-cash business. Domestically, trust in banks and letters-of-credit has diminished. “Everything has to be cash in advance or cash on delivery, which ties up a lot of cash. No one will ship the scrap and wait five to seven days to get paid from a letter of credit. Everyone has been burned by payment default over the past several years,” he said.

Taking into account all exports and domestic processing comparing 2008 to 2009, we see ferrous down 20 percent in volume and 49 percent value, and nonferrous down 15 percent in volume and 27 percent in value.

But there are some encouraging economic signs. A recent poll conducted by KMPG among United States business executives found that 71 percent were optimistic and 63 percent have seen higher business activity. The volume of American manufactured goods has risen slowly, up by tenths of a percent in 10 of the last 11 months and trending positive.

Although credit is still very tight, the banking system has stabilized and the eight largest banks have paid back their TARP investments along with $4 billion in profit to the United States government. As of this writing, the stock markets have rebounded with the Dow Jones Industrial Average nearing 11,000, back from the September, 2008 low of 8,920.

Last year at this time, Kurt Rexius, CEO of P&T Metals Corporation, upon being asked how business was had only one word for it: “Terrible.”

Today, however, Rexius’ answer to the same question is not only longer, but is more optimistic as well. “Overall business has improved considerably. In speaking to other scrap metal processors and recyclers, many of their businesses have also been on an up-trend.

“Manufacturing in both large and small sized companies appears to be increasing along with their pipeline of future orders. A few companies we deal with have just started noticing small backlogs and many are going back to 2nd and 3rd shifts,” he said.

“Also, most of the metal commodities have significantly increased in price, many of them more than doubling since the same time last year, which allows for better margins in the scrap metal business.”

Rexius continued to say that, “The main challenge, as always in times like this, is finding scrap material at the right price. The material is out there, but competition is stiff as many other dealers are willing to pay top dollar to secure the material. Bidding wars drive the scrap price up from the end user, however this does not affect the overall price to the mill. This, coupled with the volatility of the metals market, weighs heavily on the likelihood of making a profit from these types of purchases.

“A further factor is the transportation costs to Asia. Shipping costs, container costs and port duties continue to rise as the struggling shippers and Asian governments look for additional revenue from an industry that is deeply reliant on the Asian market.

“The outlook for rest of year appears to be steady, but cautious. There are many factors here in the United States, and just as important abroad, which will affect the health of this currently fragile industry. We are dependent on manufacturing on both sides of the Pacific, which appears to be stabilizing and heading in the right direction.

“Construction is starting to pick up in many areas as we are seeing much more construction-related scrap compared to a year ago when we saw very little scrap coming from construction. Demo companies are also getting back on their feet as renovation projects are starting up again.

“The first quarter of 2010 is finally seeing some life for the aerospace industry again, as demand for titanium and other high temp alloys continues to build to a point we haven’t seen in quite some time. Along with demand, of course, come higher prices for these alloys from both the scrap side and the consumer.

“Overall, we are extremely optimistic for the remainder of 2010,” Rexius concluded.

In the east, business is much better according to Adam Weitsman, president of Upstate Shredding, the largest privately held scrap metal dealer in New York State, headquartered in Owego. “The higher scrap prices are good, but bad at the same time. Bad for the smaller guys that have to put out a lot more capital, and I think you will see a lot more consolidation happening. We are just going to keep rolling our profits back into the business, keep opening feeder yards and taking a larger market share.”

Weitsman sees opportunities to acquire smaller companies because the cash required at higher pricing levels is making it hard for companies that are undercapitalized.

“We’re not having a problem acquiring scrap and we are getting historically high levels of material. We have a large trucking fleet and 80 percent of our scrap comes from outside regions. We pay competitive prices, pay immediately and are open seven days per week. As of May 1, we will receive scrap 24 hours per day. I’m pretty positive going forward,” he concluded.