Ferrous Department

SOME REASONS FOR HOPE

March came in like a hungry lion for ferrous scrap processors, eating away price increases from the previous two months that had prompted the first optimism in the market for some time.

“In the early March market sequence, ferrous scrap basically lost what it gained over the January and February time periods,” says Jeffrey N. Cole, president of Ferrous Processing & Trading Co.(FT&P), Detroit.

But Cole feels that the rude beginning to the month of March will not necessarily set the tone for scrap prices in the spring and summer of 1999. He sees a number of factors at work that should prompt a healthy increase in ferrous scrap pricing over the course of the next six months.

“The good news is our federal government has reached a definitive agreement with the Russians and has imposed considerable duties on Brazil and Japan with respect to steel imports,” says Cole. “The Russians in 1999 will be severely limited as to the tonnage of steel they send into this country. The bottom line is that we are going to see a drastic reduction in what was a tidal wave of imports.

“Concomitantly, what we’ve logically seen is an increase in operating rates at steel mills in this country,” Cole continues. Some mills are even testing the water with price increases for some grades of steel, he notes. “I don’t know whether those increases will stick, but what’s important for them to do is stop the backsliding.”

Another factor that may help scrap prices in the first eight months of 1999 is the pending negotiations between integrated steelmakers and the United Steelworkers of America. “Whether there is a strike or not, the integrated mills can be expected to produce as much as they can before the contract ends as a hedge against that possible downtime,” says Cole. “That would tend to strengthen the demand for scrap iron and steel.”

Cole also counts the ongoing robustness of the U.S. economy and its automotive sector (and the construction sector) as factors in favor of ferrous scrap price increases. “I believe with all of these factors considered together, some time between now and August there will be a significant adjustment upward in terms of price.”

There is at least one caveat, Cole notes. “The publicly-traded scrap companies find themselves in positions where they must sell the vast bulk of their materials pretty much irrespective of price, just to maintain cash flow so they can pay their creditors,” he remarks. “If their inventory volumes are high enough, that could detract from what would be a very attractive price increase.”

Restoring street trade or peddler traffic back to early 1998 levels will be one of the challenges for ferrous scrap recyclers, notes Cole. “I believe that in our area, peddler traffic has fallen 30% to 40%, and in some locations even more.” The decline in buying affects “every secondary grade,” he says, noting that a range of items from auto hulks to demolition scrap can be considered discretionary to sellers.

Despite the difficulties in the scrap markets, Cole still maintains his office at FT&P’s yard in southwest Detroit rather than moving into an office building owned by Soave Enterprises, the 50% owner of FT&P. “Like Ulysses Grant said during the Civil War, ‘My headquarters is in the saddle’,” says Cole. “I like being near the production equipment and spending time with the production and maintenance people. Those are my roots and I’m happy staying in that soil.”

APPLIANCE RECYCLERS REPORT $3 MILLION LOSS

Ferrous scrap pricing woes contributed to a $3 million loss in 1998 for Appliance Recycling Centers of America Inc. (ARCA), Minneapolis.

Part of the loss was attributed to a $500,000 one-time write-off related to the closing of an appliance shredding operation in Minneapolis. The company also closed a retail facility in St. Louis.

The company collects and purchases appliances, either offering them for resale at Appliance$mart stores, or recycling them for scrap metal. ARCA president and CEO Edward R. Cameron says sales were up at the retail stores, but not profitability. After noting that “same-store appliance sales grew strongly in every quarter of 1998 in comparison to corresponding year-earlier periods,” he adds, “growth at this rate affirms the basic validity of our appliance retail strategy. However, as evidenced by our weak bottom line performance, it is equally clear that we have not effectively executed this strategy.”