June 2004

Nation's Auto Recyclers Remain Optimistic
Many Believe market downturn won't last

by James I. Miller

“What goes up…must come down.” We’ve heard the expression applied to nearly everything at one time or another. While the past few months have been exciting times for metals and auto recyclers, the current cooling off has been a welcomed relief for some. Processing backlogs of material, upgrading equipment and even working a bit less top the current list of priorities for many of the nation’s auto recyclers.

Jeremy Lincoln, vice president – purchasing for Erie, Pennsylvania based National Recycling Services, Inc. said, “Volume is definitely way up. Material came out of the woodwork with the spring thaw. Like everyone else, we just couldn’t process fast enough to stay on the high side of the market. But we moved ahead with several capital projects at just the right time, before demand went through the roof. Over the next few months, the strength in the market caused us to expand our base of suppliers by more than 50 miles beyond what had previously been normal for us. Since demand has dropped a bit, inventory values fluctuate daily, and the cost of capital has gone up some. Overall, we’re in excellent shape and we’ll be ready when the market heats up again soon,” he added.

Market upturn
Timing is everything and admittedly, the recent surge in the market caught some recyclers off guard. To better prepare for the future, many are looking back at what caused the spike.

A strengthening U.S. economy drove domestic scrap steel consumption, with factory orders up sharply for manufactured goods. This came at a time when supplies were low and a good portion of the scrap industry – including a huge number of auto recyclers – was already socked in for the winter. The flow of material slowed, and then became scarce. As the winter dragged on, supplies of available scrap disappeared throughout much of the country.

That pattern in itself wasn’t so unusual. What few were prepared for though, was the impact of huge export demands. Unprecedented global demand for scrap metal took millions of tons of North American material from the market at a time when meeting needs at home was challenging enough. It was this combination of factors converging at the same time that put a knot in the supply line and pushed pricing to record levels.

Playing catch-up
At its peak, material supply had increased to the point that many auto recyclers refused any more inbound material. Some restricted their business hours to focus full time on moving material through their operations. Overtime was common, and even some weekends were spent in the yard – the scrap yard.

With auto and metals recyclers firmly on their feet again, capital investment projects that were sidelined for several years have finally become orders for new equipment. Manufacturers and distributors of both new and used auto recycling equipment report sales have been sizzling.

John Sacco, president of Sierra International Machinery, Inc. of Bakersfield, California commented, “Recycling equipment sales follow scrap prices. Now that everyone is making money again, a lot of orders for equipment that were postponed through the lean times have been placed. Our sales are very strong because recyclers that wanted the full package of product, service and support that we offer waited until they were ready to move. We expect sales and orders for new equipment will be strong at least for another six months. As long as the industry remains confident, the good times we enjoy right now should last,” he said.

In central Minnesota, Jeff Hebbert, sales manager for Overbuilt, Inc., manufacturers of auto crushers said, “Even with the current softening of scrap prices, it hasn’t affect equipment sales at all. We’re booked out through September right now. But with new steel prices moving so fast, especially on high tensile T-1 and the heavier grades we use, our pricing on new quotes is guaranteed for 72 hours. Some manufacturers have been forced to quote day by day. Others include an escalator clause that could increase the cost of equipment based on new steel prices when the build order hits the shop floor,” he said.

Looking ahead
While it’s not likely that all of the conditions that created such demand and high prices for scrap will occur at the same time again soon, lessons from the most recent rally may help recyclers prepare in advance for the next upswing.

Norm Eaton, vice president of Lincoln Metals, Inc. sees a strong market again just down the road. “Over the next few months, I expect some slight price movement in both directions, but for the most part, it should hold steady. The current supply of scrap is good for the melt rate we see at the mills. As long as that holds, pricing should remain largely unchanged,” he said.

But into the last quarter of this year, things could heat up all over again. “Exports will pull a lot of material from the market again,” continued Eaton. “That should push scrap prices right back to where they were recently – and could go higher,” he said.

Many insiders expect the industry will apply what was learned from the recent past to reduce the interruptions in supply and avoid any cost penalties resulting from a shortage. Domestic steel producers were forced to pay high prices for material to fuel their scrap-fed furnaces and aren’t likely to be caught off guard again late in the year. In turn, steel buyers faced surcharges on new coil, bar and flat rolled products also from tight supply. Purchase contracts will likely be placed sooner, giving scrap processors and steel makers a running start on meeting those commitments.

Marty Wilhelm, president of Youngstown Iron & Metal, Inc., Cleveland, Ohio observed, “Industrial scrap will be steady at best, but heavy melt pricing may slip. There’s a lot of deconstruction activity breaking loose that was postponed until pricing improved. The influx of these construction grades in the market may bring those numbers down some. But auto shred is a different story. Mills will be more aggressive with their buying this fall, and they’ll probably get started much sooner than they did last year,” he said. “That will flatten the spike in demand some, and spread it out over a longer period of time,” he added. Auto recycling accounts for about 70% of the firm’s business.

Anytime market forecasts are made, there are factors outside of anyone’s control that could ultimately impact outcomes the most. “One of those factors is the strength of our dollar,” said Marty Wilhelm. “With the current value of the U.S. dollar, a lot of foreign traders aren’t very attracted to us,” he added.

“Things are good, and overall, auto recyclers are in a much better position than they were a year ago,” said Jeff Hebbert. “The current slowdown is right on time, and it’s a great opportunity to prepare for even better times ahead.”