2007 Scrap Metals Supplement-- New Perspective

In spite of the concern about General Motors recently caused by the very public breakdown in the Kirk Kerkorian-sponsored "alliance negotiations" with Renault-Nissan and the potential for a brutal proxy battle over it down the road, I am beginning to think that GM is undervalued.

One of the things that the Wall Street analysts, the investment community and most small investors have not taken into account is that GM appears to be leading a "sea change" in strategic resource recovery and conservation that began near the end of 2004.

This program has been kept very quiet, quite uncharacteristic for the American OEM auto industry, which seems to issue press releases on every issue, big or small, in an attempt to cultivate favor with the media.

Resource Investor (RI) however, knows this is about to change. Not because there will be some big announcement made by GM Chairman Rick Wagoner, but because some of the changes now in process have the potential to alter the very fabric of the American scrap industry and its market.

RI learned some details of GM’s new revenue-generating program by interviewing individuals at GM, a number of scrap dealers and a steel mill in order to bring you the following first look.

In November of 2004, a financial whiz at GM was appointed to a job that Fortune 500 corporations looked upon as a dead end for a young person or a final resting place for a good soldier to safeguard him into retirement: scrap management. As one GM CEO after another has said of the job since the beginning of time: "We make cars not scrap. It’s just a cost to be minimized however and whenever possible."

This time, however, GM purchasing chose a Professional Fellow, an unclassified rating the corporation bestows upon exceptional people who don’t fit any one mold, to oversee global scrap management. The result has been to change dramatically the way in which GM handles scrap and to uncover, for the company, a fount of revenue that was in plain sight but overlooked even by most scrap dealers, the value of the alloying metals (everyone of them a strategic metal) content contained in industrial ferrous, i.e., majority iron or steel, metal scrap.

For now the program is focused on stamping, cutting, piercing, extrusion and forging dies, typically of many tons weight. These had been traditionally sold for less than the cost of transporting them away, but have now been dramatically re-priced upward by GM to reflect the market reality that their embedded alloy metal values have increased in price by factors between five and 10, that’s 500 percent to 1000 percent since 2001.

Scrap dealers used to self-congratulating gestures for being able to keep secrets among themselves and mostly afraid of the light of day shining on their transactions were skeptical and, even now, only a few have seen the light, but GM doesn’t care. If scrap dealers fail to meet the new much higher minimum bid prices set by GM then the material can be shipped directly to the end user steel mills and foundries by GM and physical swaps and/or deductions against new material prices can be taken by GM for its own account.

GM has discovered and is mining a source of strategic metals equal to the output of many new mines and smelters and it is located entirely in the United States even though some of the metals recovered are not normally found in the United States. Mining this source requires neither the use of digging tools to pierce a pristine plot of soil nor any furnaces to belch additional sulphur dioxide into the air. GM is to be applauded for the development of the greenest ever strategic metal mine.

This has occurred with no additional costs to GM at all! Those of us who worry about political cowardice and environmental extremism destroying America’s economic independence must take our hats off both to the young GM executive and his management for a job well done.

Now for the details.

A chart used by GM’s scrap team to measure die and tool steel alloy values equates to a home-drawn treasure map. (To view the chart, please visit Resource Investor at www.resourceinvestor.com/pebble.asp?relid=24563&phrase=%22general+motors%22.) Note well that many such maps can be created for any mass producing industrial company. GM has told me that it is working on adding to this chart. It is an organic process.

The chart is used to show the total value of all embedded alloy elements of metals used by the company.

It also shows the uses to which the tools and dies from particular alloys are put, so their utilization points can be identified as scrap collection points.

Few dies are made entirely from the special alloys listed in the table above. The special functions of the tools and dies are typically obtained from "inserts" bolted to the tool or die face.

Collected inserts sorted as to type can be a direct feed for specialty alloy makers such as Carpenter Steel, for example. Instead of paying as much as (currently) $56,000 a (short) ton for ferromolybdenum, for example, to make a Hastalloy, a mill can use scrap Hastalloy inserts collected as described here as a feed to provide all of the necessary alloy elements in the correct proportion and significantly reduce the need for new ferrometal alloys.

Steel mills that make bar stock (so called bar mills), for example, can utilize selected tool and die scraps as a replacement for some of the expensive virgin ferroalloys that they use now. The limiting factor for them is vanadium content.

Stainless steel makers can utilize contained nickel and chrome values in certain scraps for the same savings.

You might ask, "Why hasn’t this been done before?" There are two answers, one economic and one psychological.

American steel mills and foundries are mature businesses run by MBAs, who, more and more have no specialized knowledge of the details of the processes for making steel or iron. They are loathe to change what works particularly in the light of current fierce competition. GM’s scrap manager told ResourceInvestor.com that he had to meet with many executives of steel mills and foundries before he got the first ones to agree to review their processes in the light of GM’s approach to, essentially, creating grades of scrap outside of the traditional grades with their idiosyncratic names.

Two companies have already implemented programs using the GM identified scrap values to reduce costs. One is a major steel producer, and the other is a major foundry. They have been successful beyond their expectations in reducing their need for new ferroalloys, and this benefit immediately went to their bottom lines.

Scrap dealers, used to paying low prices for tool and die scrap because they say that their mixed metal aspect makes them incur substantial costs for separating the contents for re-use, are naturally resistant to paying more for what is now realized to be their higher value, but "the times they are a changing." One major privately held scrap dealer and processor in the Midwest is actively utilizing the new paradigm. I suspect that what I will call the "GM approach" was a topic of conversation at a conference being sponsored by American Metal Market in early November. I also suspect that the rest of the other large privately held scrap companies will shortly thereafter claim that they are being outed and have been doing this all along. I doubt however that this is true.

Portable metal analyzers have undergone a silent revolution recently with perfect timing. It is now possible to buy an XRF (X-ray fluorescence) analyzer, which safely shoots X-rays into the metal being tested and, from the returning signal, determines the alloying elements present. A readout display on the analyzer tells you what alloying elements are present quantitatively. A very nice unit that is easy to use, as is attested to by many scrap dealers, is made by Niton LLC.

Thermo Electron Corp., Waltham, Mass., which has acquired Niton, principally makes professional laboratory spectrographic equipment of very high caliber. The latest Niton branded portable models now even tell you what the ASTME alloy name and number is. This portable device costing around $30,000 replaces the large fixed installations, with their skilled operators, that as recently as 10 years ago would have cost a million dollars just for the equipment. This cost and the issue of manning the unit with highly educated and skilled technicians kept many scrap yards from even looking at the equipment. The versatility of the portable machines will undoubtedly trigger the great strategic metal scrap rush of 2007. There are untold tens of thousands of tons of abandoned dies and other sources of tool steel in the United States, either because the cost of disposing of them was greater than their value under the old, now obsolescent, paradigm or because they were abandoned in bankruptcy as worthless.

In any case the run up in commodity strategic metals prices has, in my opinion, established a much higher floor price for all such alloys. GM is the first car company that I know of to technologically audit its scrap operations and make a fundamental change, then inform its scrap dealers that it will now operate under this new paradigm of contained value.

This is a sea change. It will become a Tsunami and those who don’t react to this new reality of scrap metal valuation will be swept away.

The challenge for Ford, Toyota, Renault-Nissan, Honda, VW, Fiat and others, as well as for US Steel, AK, SDI, Acelor and Severstal and for Metal Management, Commercial Metals, OmniSource, D.J. Joseph and Sims Hugo Neu is to accept GM’s new scrap paradigm or fight a delaying action. The change is inevitable.

One thing is certain: Maximizing embedded alloy value in scrap is an excellent way to maximize shareholder value. Perhaps more dead end assignments should be given to people who specialize in multi-disciplines like GM’s current scrap manager.

Next time you see a report that ferromolybdenum imports are down unexplainably, keep in mind that another company on the list above has probably joined the program.

This is a great example of what was once called good old American know-how. It means more business for scrap dealers, more revenues for car companies, lower costs for steel companies and less dependence on imports of strategic metals from places like China (molybdenum, tungsten) and South Africa (chrome, vanadium) and from friendly competitors who produce the nickel, cobalt and manganese we use.

Consider the difference between what GM has done and the approach taken in the very recent past by the Ford Motor Co. under the tutelage of Jacques Nasser.

Ford decided, as part of Nasser’s plan for vertical integration, to get into the scrap processing business by overpaying for a shredder operation. When Ford realized that it had gone too far from its core competency, the company sold the shredder operation to a group including a former Ford insider for 40 cents on the dollar.

The fiasco made Ford eardrums impervious to any discussion of scrap. I wouldn’t be surprised if Ford is getting much less for its alloying metals containing scrap than GM. It would be a good barometer of its latest turnaround plan to see if that is true, and if it is, then Ford is unlikely to recover anytime soon.

If you are an investor in OEM automotive, steel or publicly owned scrap processors, use the new GM paradigm as a measure of the awareness of those companies in saving and making money from what used to be called "hidden value." Make sure the companies in which you invest don’t lose the value of the strategic metals in their scrap.