2003 Nonferrous Scrap Supplement - A Smaller Roster

Far too many times, metal industry publications have reported on the closing of another copper melting facility or fabricating plant in North America. Sometimes this even includes a reference to the disturbingly small number of remaining plants in a given category.

Certainly, for those who have seen their sources of income disappear with a plant closing, the consequences of such events are clear. The wider issue that is emerging is whether the series of production cutbacks is shrinking the North American red metals industry to a dangerously small size.

Americans are still buying products with copper wiring and with other copper and brass parts and components. Increasingly, though, these products are assembled overseas with copper parts sourced in East Asia, Mexico or other overseas assembly points.

OFFSHORE EXODUS. Scrap processors do not have to read industry publications to know that the red metals industry is increasingly oriented to overseas destinations.

But the Rolodex (or perhaps Outlook contact file) of potential domestic buyers is far smaller than it was 20 years ago. Consolidation and competition from overseas have resulted in less than three dozen operating brass mills in the U.S. and just a handful of primary refineries and rod mills that might melt scrap.

Another entire sector—secondary smelters—has disappeared completely from the U.S., largely because of strict emissions standards and an inability to compete with overseas facilities.

In a presentation at the Institute of Scrap Recycling Industries Inc. (ISRI) Copper Spotlight session this spring in Orlando, Ron Schumann of I. Schumann & Co., Bedford, Ohio, detailed the thinning of the red metals alloyed ingots field. "In 1960, there were more than 60 brass ingot makers in the U.S.; today there are 10 left," he remarked.

Those that are left can have difficulty buying scrap for two reasons: The difficulty of outbidding export brokers for scrap and the fact that the domestic manufacturing industry is generating less red metal scrap for purchase.

What has been created is a circle where the scrap heads overseas to Chinese smelters and ingot makers who sell their products into the North American market, thus providing competition on both the buying and selling sides for copper scrap consumers and ingot makers such as I. Schumann & Co.

Rik Kohn of Federated Metals, Bedford, Ohio, another ingot maker, says he has seen major changes in ingot-making competition in his two decades in the industry. "I’ve been in this business 22 years and there were probably twice as many North American ingot makers on the scene when I started."

His concern is that the most commonly produced ingot alloys may increasingly be made overseas, leaving just specialty alloys to the domestic market. "I see more and more of the CDA 844 plumbing brass alloy being made offshore," says Kohn. "It’s a high-volume, low-margin product used in mass produced parts."

Some of the numbers would seem to bear out Schumann’s and Kohn’s contentions. Just 683,000 tons of copper anode was produced at American smelters in 2002, compared to 919,000 tons in 2001, according to the United States Geological Survey (USGS), Reston, Va.

Meanwhile, exports of copper scrap from the U.S. to China have ballooned, rising from just 49,300 metric tons in 1998 to 290,000 metric tons in 2001 and 278,000 metric tons in 2002.

The next question to be answered is whether the dilemma seems worse than it is because of cyclical business conditions.

In 1998, the various types of copper scrap consuming facilities in the U.S. melted 1.7 million metric tons of copper-bearing scrap. In 2002, this number declined to just 1.33 million metric tons, a 22 percent drop. The decline has been steady. Even during the boom year of 2000, 1.6 million metric tons of copper scrap was melted domestically, a drop from the late 1990s.

During the year of greatest decline (2001, when the figure went from 1.6 million metric tons to 1.38 million), the entire manufacturing sector hit a tailspin. Is the decline less because of a shift to China and more because of an overall slump?

"The U.S. brass mill industry has suffered substantially in the current economic downturn, with shipments by U.S. brass mills down by 18.6 percent in 2001 from their peak level in 2000," notes Daniel Edelstein, copper commodity specialist with the USGS. But, he notes, "Shipments rose slightly (1.4 percent) in 2002. While there has been some industry rationalization, it would be premature to think that shipments won’t recover substantially with improved economic activity."

That same period was not a rousing success story for overseas copper and brass producers selling into the U.S. market either, Edelstein points out. "Imports of brass mill products in 2002 totalled 597 million pounds, compared with 695 million pounds in 2000," he comments. "The 16.4 percent decline closely parallels the drop in U.S. producer shipments. Hence we see a drop in overall market and not necessarily in [domestic] market share."

But scrap processors are not so easily convinced. Jack Vexler of Monterey Iron & Metal, San Antonio, says he became discouraged trying to serve a narrower red metals consumer field, and now brokers his copper-bearing scrap through a national brokerage firm.

At Mallin Bros. Co Inc., Kansas City, Mo., Jeffrey Mallin says he is glad his company processes aluminum cable in addition to copper wire and cable. "We’re very lucky that we handle aluminum and other metals," he remarks. "Our aluminum business is strong. If you do nothing but chop copper wire, you’ve got to be hurting today."

In part, this is because some Chinese companies can use low-cost labor to process materials (such as wire, cable and electronic parts) that must be mechanically processed at a fixed cost here in North America.

Freight rates often work in the favor of Chinese brokers as well. Using low ocean-going "back haul" rates and affordable overland intermodal rates, export brokers can pay freight rates not much different than those paid to ship by truck to a domestic consumer one or two states away.

Because of lower processing and comparable freight costs, export brokers can offer up to five or even seven cents per pound more for some types of scrap, say processors. Even for customers who want to be loyal to their long-time scrap connections, this can be a difficult to pass up.

"We’re having to pay more for scrap," says Kohn. "The challenge is to pass that on and get more for our finished goods. It’s essential to have margin. But when there is more capacity than demand, it’s a great squeeze."

Some recyclers are also wary of export broker shipping techniques, saying there are methods being devised to get around copper scrap tariffs put in place by Chinese government agencies. No recycler would go on the record, but several said they had heard of shipping instructions advising those loading containers to put higher quality material toward the back of the container and lower grades toward the front, so that a smaller tariff would be paid on presumably lower quality material.

Without question, the ability of export brokers to acquire material during a time of scarce scrap generation has hurt domestic consumers. "We’re losing our feedstock to other parts of the world; we’re losing our casting ability to other parts of the world," says Kohn. It’s a very discouraging scenario."

A cynic from the past said that patriotism is the last refuge of scoundrels. Those "scoundrels " are being joined by small business owners and labor organizations who believe America will be worse off if it keeps losing manufacturing capacity.

Recently, Dan Peters, the president of Akron Brass in Akron, Ohio, was dismayed to discover that his company had lost out on a U.S. Department of Defense contract to an importer selling products made in France.

"For over 40 years, the Department of Defense has purchased this product at an extremely competitive price from either us or two other U.S. manufacturers," Peters wrote in a letter to a regional business newspaper. "The Department of Defense has told all three U.S.-based companies that this French company qualifies as a supplier to the U.S. government. I find this extremely iron that a French company meets the requirements of the government’s Buy America Act."

Peters also notes that he has been offered little help with the situation from staff members at the offices of either Ohio senator (Voinovich-R and DeWine-R) or his congressional representative Ralph Regula (R-16). He concludes his letter to Crain’s Cleveland Business by writing, "It seems very ironic that our brave men and women are putting their lives on the line, and the fire fighting equipment on U.S. warships will be provided by a French company. It is clear to the 275 families represented by our company that Messrs. DeWine, Regula and Voinovich do not care about Ohio manufacturing jobs. We strongly urge all those fighting to save Ohio and U.S. manufacturing jobs to send a clear message to Mike, Ralph and George the next time they are up for re-election."

Such anecdotes have motivated other manufacturers into action as well. Action Coupling, Holmesville, Ohio, is another domestic manufacturer selling to fire departments. The company’s Lisa Richards has started an awareness campaign urging legislators and government purchasing officials to support U.S. businesses and manufacturing jobs.

On its Web site, the company urges purchasers to verify the nation of origin and the company manufacturing hose couplings, as these must meet certain requirements for seamlessness.

Whether it will take a renewed interest in buying American or a broader rebound of the economy, the red metals industry in North America could use a boost.

If Comex pricing is any indication, that boost may be on the horizon, as copper prices have averaged up in May and June of this year. Manufacturing index numbers may also be rebounding from their two-year skid, based on some May indexes.

Should circumstances improve, there is plenty of idled and under-utilized capacity in North America ready to come back online, most observers agree. What will be watched is whether this capacity actually comes back this time around.

"Should there be free trade? Absolutely," says Kohn. "But if you’re an exporter of raw materials and an importer of finished goods, you have to wonder whether you’re on your way to being a third world nation."