Ferrous in a recovering economy

If nothing else, the recent recession has engendered a new spirit of humility and caution in the American business community. Economic recovery has been steady, yet painfully slow. Many scrap metal businesses have trimmed operations in order to achieve maximum productivity from labor and investment in capital equipment. Moreover, there appears to be a reluctance to expand workforces capriciously or make large investments for expansions.

Scrap ferrous metal, however, has bounced back better than other areas of the economy in both price and demand. But the state of the commodity is fragile and highly susceptible to levels of demand for new finished goods. In October 2009, for instance, mill-buying prices for No.1 heavy melting steel delivered were approximately $240 per gross ton. This September it was approximately $350 per ton, and dipped to the $320 range in October. Early indications place the November price at close to $340 per ton.

Bob Garino, director of commodities for the Institute of Scrap Recycling Industries (ISRI) gave his overview of scrap ferrous. “It is a slow, mild recovery we are in, but we are recovering. We are seeing a softening in steel prices. End-use demand for the third quarter of 2010 was disappointing. The fourth quarter looks a little shaky as well. We are seeing lower prices on finished steel. If you look at hot rolled coil, for example, you can see there is some softness in the demand. That has lowered the demand for ferrous scrap. We saw prices drop in October and I think the assumption is that we are going to see a firmer market in November, but the increase probably won’t be as great as the decrease was for October.” 

Garino does not believe that the higher prices paid for scrap ferrous is a reflection of a shortage of material, but rather a pick-up in export orders that is underpinning the general market. “I think there’s some anticipation of better markets in the months ahead. I don’t think anyone wants to be caught short of supply. They may be thinking about upcoming winter weather and how it may affect transportation. I don’t see a shortfall of material. Mills can get what they need. We have seen a slowdown in incoming material into scrap yards, but that is a function of price not a function of availability.

“In the context of the last few months, take the case of finished steel products. You have to think of it in terms of what mills are doing. They are not going to be buying scrap unless they have orders to fill against it, and we have observed a softening in the finished goods market. We have also seen a contraction in the price of hot-rolled coil, which is a sheet product used for appliances and autos among other things. We are seeing softer numbers in October. We are seeing that trickle-down in lower prices in scrap as well. It’s just a reflection of a weaker domestic steel market.

“The prices in October dropped $30 to $40 dollars a ton. And while I think we can expect a rebound for November, it’s not going to be as great as the drop was in October. And that’s a reflection of currency considerations in export orders, and of course to replace existing inventories.”

Garino does not see a slowdown of ferrous coming into scrap yards, but believes it is a function of price, not a function of lack of material. In an elastic market, as prices respond to demand, so does the flow of scrap ferrous.

There is no question that there has been a slowdown in construction, auto manufacturing and appliance sales, but the overall manufacturing component is trending higher. According to a Federal Reserve statistical report, United States industrial production and capacity utilization rose 5.4 percent from September 2009 to September 2010.

“If there’s any concern on the supply side, clearly there may be less new industrial scrap because the level of manufacturing is not as great as it was, but it is improving, said Garino.

To get perspective on industrial scrap ferrous, American Recycler interviewed Jody Schottenfels, vice president of operations and sales at Marwol Metals, Ltd. Based in West Bloomfield, Michigan, her company has been in the scrap metal business since the 1920s. Today Marwol specializes in recovering industrial scrap from a dozen or so manufacturing plants in southeastern Michigan.

Marwol enters into agreements with plants based on published price indexes to recover scrap, supplies containers that are staged at the plants and provides pick-up service. Regarding the current state of Marwol’s business, Schottenfels said, “I’m as good as my plants are. My ferrous accounts are not generating as much scrap as they have in the past. Some of my plants are down now and have been down all this year, but now their phones are ringing and they are getting requests for proposals and putting out bids.

“Many of my plants have gotten away from automotive. They have diversified over the years because of what has been going on in the auto industry over the last ten years in Michigan. I have some plants that do military. Those are doing very well because they have good military contracts in place. I don’t have any stamping plants doing auto parts, but I do have one automotive plant that is doing quite well. I have plants that do tool and die work and plants that feed the construction, mining and forestry industries, and their production has been inconsistent all year.”

Schottenfels continued, “I would like to see more loads out of my plants. They are not generating a whole lot. Instead of getting a couple of loads a month, I’m getting one load, but there’s a promise that it may pick up and I can buy scrap as they generate it.” Marwol sells its scrap to a handful of scrap yards

American Recycler also spoke with Rich Brady, executive vice president of the ferrous commercial group for the OmniSource Corporation, a wholly owned subsidiary of Steel Dynamics, Inc. Founded in Fort Wayne, Indiana more than 65 years ago, OmniSource has grown to become one of North America’s largest processors and distributors of scrap and secondary metals. “In 2008 we shipped 5.6 million tons of recycled steel, but for 2010 we will be slightly down from that probably somewhere north of 5.2 or 5.3 million tons,” said Brady.

Supplementing its company-operated scrap collection sites, OmniSource acquires metals from industrial scrap generators, other scrap companies, peddler-dealers and construction companies. The company also manages and operates metal recycling programs for manufacturing companies and has national brokerage and trading operations serving metals buyers and sellers.

OmniSource processing facilities are located predominantly in the midwest and the southeast. “On our steel products, we are primarily a domestic supplier. We do ship some export via container for steel shred, but the majority of our steel scrap production stays domestic,” Brady explained. “I would say the state of the market is very competitive today and that will likely continue given limited volumes, but I believe the market will continue to improve as the general economic conditions, particularly in the steel business, recover.”

For the past nine months, Brady has seen an improvement in 2010 versus 2009 volume; however, margins continue to be strained. Primarily, he attributes it to availability issues due to the general economy being weaker. “There just is not as much scrap available that’s being generated, primarily from industrial sources.” As for obsolete scrap, he is seeing a much greater demand from the export market than OmniSource has experienced historically. “I don’t believe it is necessarily a shortage, but more a function of the obsolete arena today being driven by an overcapacity in shredding coupled with strong export demand,” Brady said.

Over the past 10 years, the number of shredder installations in the United States has gone from roughly 200 shredders to over 300. That does not include shredders that have been upgraded to higher capacities. “You don’t have to go back long ago, 10 or 15 years, when shredders had a capacity of 30 to 40 tons an hour. Shredders that are now running 150 to 200 tons an hour have replaced some of those older machines,” said Brady.

This explains why there is a huge demand for feedstock for shredders. There are more shredders operating at higher capacities that accept a wider range of metal inputs. Shredding operations are also using more sophisticated downstream sorting technologies for finer separation of ferrous, as well as nonferrous, materials.

Many shredding companies are looking at developing feeder-type facilities in an effort to garner larger volumes of ferrous to put into these bigger machines. These machines require tens of thousands of tons of feedstock. Brady is seeing more efforts to establish base sourcing for shredders, looking to develop locations that are complementary and regional in nature where shredders can obtain feedstock on an economical basis.

“I don’t think anyone is anticipating some huge, robust recovery, but a slow, steady improvement is probably in the works for 2010 and I think that will bode well for the business in 2011,” Brady concluded.