Consumers & Processors: Strategic Alliances

Over the years, steel mills have been steadily increasing their use of scrap. At the same time, end users of steel products, such as automobile manufacturers, have stepped up their quality requirements. As a result, mills are buying more scrap – material which must be consistently delivered and of a higher quality. In order to better control their raw material, a few mills such as North Star Steel, Minneapolis, own and operate their own scrap processing and brokerage facilities. Other mills designate preferred or even exclusive suppliers, and may even agree for a scrap processor to operate on their facilities, handling all stages of scrap preparation – right up to loading charging buckets.

"There seems to be, across the steel industry, a trend toward putting suppliers in the position to supply mills’ needs," says William Heenan, president of the Steel Recycling Institute, Pittsburgh. "In scrap, simplistically, this means they tell suppliers, ‘I’m making this kind of steel – give me scrap that provides the right residuals, etc., to make the right kind of steel.’ We’ve seen a number of companies do that. This type of effort is now being pushed by suppliers as well. The steel companies like outsourcing, in some respects. It puts the burden on the guy that has the scrap."

This trend shows the level of trust that has been building up between mills and suppliers for the past 10 or 15 years, he says, and leads to all sorts of benefits. "It builds a stronger relationship when they are that dependent on each other," he says. "Having a scrap supplier on site really allows companies to cut their inventory costs – it prevents the necessity of having two sets of inventories."

Luntz Corp., Canton, Ohio, which was on the road to being purchased by Philip Environmental Inc., Hamilton, Ontario, at press time, has a close relationship with the ARMCO mill in Mansfield, Ohio. The mill has entrusted all of its scrap handling operations to the scrap supplier, according to Eric Schnackel, assistant manager of Luntz’ Mansfield facility.

"One hundred percent of ARMCO’s scrap, and other furnace materials including coal and lime, come through here," says Schnackel. "We load the charging buckets and then send it to the furnace, and then they send the buckets back and we reload them."

The two companies negotiated the agreement about a year ago, he says. "Basically, we took over their stockhouse. ARMCO handles the purchasing, but we do the inspections and grading. If there’s a problem, we call one of their people to come and look the material over. We process all their home scrap, including slabs and coils. But we don’t handle the reclaiming pit scrap – that’s processed by someone else."

It makes sense for mills to contract out their scrap handling to scrap processors, who have the needed expertise, says Schnackel. "We handle scrap better. We have a lab where we analyze the materials, and we handle the inventorying, accounting, and rail traffic. It takes all that headache away from them." Luntz goes so far as to guarantee that the mixture in the bucket will yield the grade of scrap required. "The idea of scrap management – helping mills best use scrap – is catching on," says Schnackel.

Exclusive or preferred supplier relationships make sense from a mill point of view, he says. If mills only buy from two or three companies that are very familiar with their specifications, they can get the level of quality they need much more easily. But these sorts of relationships can be a double-edged sword for processors. "For us, some of these close relationships have been great, and some have turned sour," says Schnackel. "As brokers, we are traded like ball players. It depends on how valuable we are and what we can offer."

But close relationships with mills can benefit scrap processors, as well, says Jim Macaluso, vice president of the ferrous division of Sims Bros. Inc., Marion, Ohio. "You know exactly what they want and can give them the quality they need," says Macaluso. "Also, when you know you’re shipping a certain number of tons, it makes it easier to buy. This ties up the scrap – makes sure you have a home for it and it’s not going to just sit there."

More mills are asking for regularly scheduled deliveries, he says. "It’s a matter of knowing your customers, knowing their schedules," he says. However, that particular area of the country is not conducive to exclusive supplier agreements, says Macaluso. "Nothing is guaranteed – when mills slow down, our shipments stop."

In fact, there was a period of about a year when one major mill the company supplies was closed for repair. This had a big impact on its scrap suppliers. "When you are in a relationship and it changes, there’s a lot of tonnage you have to find a home for," he says.

Another Midwestern ferrous scrap executive agrees that it’s impossible for scrap processors to exist successfully without having close relationships with mills. His company has operated as the scrap handling department for a number of mills.

"We’ve had processing arrangements on mill property where we receive materials and load buckets for charging," he says. "It’s not an arm’s length relationship – there’s a lot of trust there."

Mills delegate the scrap function for a number of reasons, he says. For one, scrap processors may be non-union or at least operate under different unions than mills. Two, scrap processors have the experience and the equipment – such as testing labs and radioactivity detectors – to handle scrap. "We put our best people on it, whereas mills tend to put their newest, least experienced people on it. There, it is not considered a prime assignment."

The method of trade between mills and suppliers may vary depending on the market, he says. If there is a market surplus, it makes sense for mills to buy directly from dealers. "But in a market like we’ve had for the last two years, a tight market, it’s much better to deal through a third party who can check to make sure you’re getting the best price."

Providing service and value, as well as the best price, is key. "The mills need our expertise because the market is complicated by geography and the fact that scrap is not homogenous from region to region," he says. "Some grades may not move up and down with the market. If we can give mills a menu of attractive options to come out with the same product, they can make a lot of money. Our purpose is to help, not to preempt."

Similar trends are taking place in the nonferrous industry. For example, following its move designating Calbag Metals, Portland, Ore., its exclusive scrap supplier, Columbia Aluminum Recycling Corp., also based in Portland, has gone even further in its alliance with the scrap firm, according to Doug Shaw, general manager of CARCO. The two companies have formed a limited partnership which will now operate CARCO.

"In addition to the scrap agreement, we are going to put in a bunch of capital into this new venture," says Shaw. "It will melt metal, just as CARCO does, but it will give Calbag more ownership."

The first undertaking of the new partnership is the installation of a new reverbatory furnace at CARCO which will begin production before the end of the year. The new furnace will triple CARCO’s production capabilities and enable the company to remelt a wider variety of scrap feedstock, from shredded and delacquered UBCs to heavy forgings. This enable’s the company to smelt the largest array of materials in the Pacific Northwest, according to Warren Rosenfeld, president of Calbag.

The joint venture is a logical next step in the partnership between the two companies, he adds. "This venture is an outgrowth of the tighter quality and delivery control we were able to achieve through our sole source agreement," says Rosenfeld. "This follows our game plan of moving toward production of higher value products for our customers."

CARCO’s name under the new agreement will officially become Columbia Aluminum Recycling Co. LLC. The activities of the company will be guided by a board of directors which is made up of the principals from both companies.

It was advantageous for CARCO to negotiate the exclusive supplier arrangement with Calbag in order to guarantee reliability and quality of scrap, according to Shaw. "When we are running with the level we anticipate with our new furnace, we will need a steady stream of scrap," he explains. "Calbag will do the prep work – they will shred and clean the scrap. When we get it, we’ll just put it directly into the furnace."

Calbag will deliver scrap on a just-in-time basis, says Shaw. "They will give us a certain number of loads a day to meet our needs, and nothing will be sitting on the ground like it used to," he says. "These kinds of concepts drive this type of agreement."

The two companies are working on developing a grade of scrap that exactly meets the smelter’s needs. "It is based on Institute of Scrap Recycling Industries specs, but then has proprietary aspects that enable it to meet the needs of our furnace," he says. "Having this very specific grade gives us better recoveries and fewer problems – and probably allows us to use more scrap. Metal management is the foundation of the secondary metal industry. If the metal doesn’t work, you have to devote labor and time to fixing the problem. It’s a matter of economic viability."

CARCO is very concerned about shipping its customers on-spec material, says Shaw. This is made easier by having one supplier that can assure the quality of the scrap coming in rather than having multiple suppliers.

Designating an exclusive scrap supplier and then forming a new company with that supplier may seem like radical steps to take. But in fact, these types of partnership efforts are not new to CARCO, says Shaw. "The whole Columbia philosophy, since the company’s founding, has been to seek partners in various aspects of the business to help us do business more efficiently," he explains.

CARCO has not considered buying its own scrap yard, preferring to let each company stick with its area of expertise, says Shaw. "As Warren would say, they don’t have melting skills, and we don’t have the skills to run a scrap yard," he says.

Others on the nonferrous side agree that partnering with the scrap industry is catching on. "I do see this as a trend as consumers are concerned about getting a steady, consistent supply of materials, and quality needs are higher," says John Beach, trading manager for the David J. Joseph Co.’s Frank H. Nott Division, Richmond, Va. "This is not a regional trend; it is more a philosophy on the consumer’s part – their approach to supplying raw materials. Price is just one factor. You have to look at quality, delivery, packaging – all those are factored in."

Some mills want fewer suppliers because they can get more consistent supply and more consistent quality, says Beach. "Quality specs are tighter these days since the product the consumer is making has to be of higher quality," he explains. "They have to meet strict ISO 9000 standards – they need better quality on the raw material end so that they can produce a better product."

The David J. Joseph Co. works with consumers to find better ways for them to use scrap, identifying which materials are best suited to various uses, he says. "We’re trying to achieve an open relationship, understand the challenges, put our heads together, and come up with solutions that are satisfactory for both parties," says Beach. "It’s more open than it used to be, although this is on a case-by-case basis."

There is an increasing interdependence between the two industries, he says. "The use of scrap is increasing, so mills have to work with suppliers to get what they need. There are cost advantages to using scrap over prime."

Few nonferrous consumers own their own scrap yards, says Beach. "There is a tendency for mills to move away from the recycling end of it," he says. For example, Golden Aluminum, which used to handle aluminum beverage can recycling for Coors, recently closed its recycling operations.

On the other hand, some nonferrous consumers such as TIMCO, Fontana, Calif., prefer to have many suppliers, according to Jeff Arrow, account executive for TIMCO. Arrow says the company has long-term agreements with certain suppliers, but is unlikely to designate any exclusive supplier relationships.

"We like to do business with a lot of people – we need so much scrap, we can’t have preferred suppliers," he says. "If someone can put out a good package, that’s fine. But we need a high volume of scrap. If we are too picky, we could be put in the position of not finding the scrap we need."

In his experience, suppliers generally prefer not to negotiate fixed long-term agreements, he says. "In a down market, they are very optimistic and don’t want to be locked in because they feel it will go back up," he says. "Then in an up market, they are optimistic it will go up even higher."

Another nonferrous consumer that prefers to work with a number of suppliers is Kaiser Aluminum, Heath, Ohio. The company has a core group of about 10 different suppliers it does considerable business with, but it does not discourage others, according to Robert Abel, commodity purchasing agent.

"I would buy from a new supplier as long as they could meet our specs and requirements," he says. "We are limited by geography and the cost of freight. The distribution of scrap generators tends to be centralized. Our producers tend to be in Greater Detroit, in auto applications."

Steel involves much larger tonnages, as well as alloying materials that are more forgiving than those contained in aluminum, says Abel, so it may be more practical for steel mills to establish preferred supplier agreements. He says the best thing a supplier could do to assist his company would be to keep their scrap separate by alloy. "This makes it more valuable," Abel explains.

But exclusive supplier relationships definitely are the future, for nonferrous as well as ferrous scrap, according to another Midwestern ferrous and nonferrous scrap processor. In aluminum, this may increasingly be in the form of a tolling arrangement where processors handle materials for mills that want materials returned.

"Mills want someone who can give them the quality and dependability they need," he says.

As the aluminum industry develops, price plays a smaller role, and service plays a larger role, he says. "More and more we’re seeing consumers that want to deal with a few people they can depend on rather than buying material a little more cheaply."

The author is editor of Recycling Today.