Ferrous Endures a Tough Hangover

The United States ferrous scrap market is slowly awakening from its “passed out” state as processors around the country say they are now feeling the effects of a severe hangover – a hangover that was primarily caused by sick Asian economies and the dumping of foreign steel.

With new mini-mills coming online and the long-range prediction of increased demand for steel products, many scrap processors could not imagine that those two external forces could really crash the party.  So huge shredders were purchased, mergers consummated and big cigars were lit. But the continual dumping of steel by Russia, Brazil, South Korea and other countries took its toll on the U.S. steel industry, with the adverse effects trickling down to the associated scrap markets. Some shredders now lie idle, many yards are closed, and the wave of mergers has halted as deals continue to fall apart.

One recent example is Recycling Industries Inc., Englewood, Colo. The company filed for bankruptcy protection just last month. Recycling Industries had been one of the major scrap metal consolidators in the industry, but claimed it could not remain solvent with the flood of imported steel hitting the U.S. and the resulting drop in scrap prices that remained depressed.

 “It’s going to take time for a sustained recovery in this market,” says Stuart Simms, president of Parkwood Iron & Metal, Cleveland. Another scrap processor laments, “I don’t think the ferrous scrap market can get any worse than it was in November and December of last year.”

DUMPING DONE

Others in the ferrous scrap industry agree, as here and there signs of a better market briefly appear, then melt away. “It truly is like coming out of a wild night of [alcohol] drinking,” says one Southern processor. “Except you feel as if you have been passed out for months. Now, it is going to take months, or even a year for the industry to come out of this depressed state. It won’t happen overnight.”

Simms acknowledges that assessment, commenting on the recent agreement between the U.S. and Russia to cut back Russia’s steel exports by 75% to match 1997 levels. “While that is good news for us,’ says Simms, “the reality is that it takes time to shut off the flow. There’s obviously steel in route, and it may be 60 to 90 days before we get to the levels agreed upon.”

Joel Beren of A. Edelstein & Son Inc., Toledo, Ohio, a division of OmniSource, says the recent agreement with Russia and any future agreements simply are “too little too late.” Overall, he says that the ferrous market is the worst he has seen in his 20 years in the industry. “Will we snap out of it? I hope so,” he says.

But Beren does not point to Asian economic woes or foreign steel dumping as the main reasons why some shredders have gone idle. “I think that there are just too many shredders out there right now. There’s plenty of scrap, but not enough scrap for all of those shredders.”

“We have had some price gains as of late, but I think we are going to need another year to look back on all of this and see what the trend actually was – either up or down.”

Peddler traffic is still slow. Some of the slowdown may have been weather related and not entirely price related in the Midwest.

Simms hopes that when the weather finally breaks, peddler traffic will pick up. And Simms also notes that some sort of price increase may be needed to give peddlers a boost.

Another processor in the South says that peddler traffic has “continually and gradually slowed during the past eight months.” In the case of one yard, volume was down 70% from January of 1998.

Simms is not so sure that there are too many shredders out there. “You look in the Cleveland area, and we still need shears and torches to process the big stuff,” he says. The nearest [super-sized] shredder is in Detroit, about four hours away. Luria’s shredder by the Cleveland Airport is shut down, but that may not be entirely because of the market, but rather due to a decision by Philip Services Corp., the owners of Luria Brothers,” he adds.

Processors who own super-sized shredders know the exact cost to operate them, says Simms. “I have been told that it’s about $40 a ton to process material with a [super-sized] shredder. So, you can figure it out from there where the profitability line lies,” he says in regard to the margin.

Another processor in the South, who asked not to be mentioned by name, says the ferrous scrap market was recently hit a triple whammy. “It is a combination of many factors. Foremost having to do with the Asian/South American economies and the flood of steel and scrap from foreign markets. Yet, one specific local condition is the excessive inefficiency and production problems that some of the new mini-mills are having.”

DOWN SOUTH

“Asian scrap is hitting our ports with a vengeance,” proclaims Edwin Cloud, CEO of Oconee Metal Recovery Inc., Watkinsville-Covington, Ga.

Cloud says that due to the bad markets, foundry grades have been down 30% in price, No. 1 and No. 2 Heavy Melt Scrap down about 50% and shred down 50%.

Even with the price dives, peddlers are keeping the faith in Cloud’s region. “They are not happy, but stoic as usual,” he says. “Most are saying that they have seen this before and so what?”

Cloud seems content in letting the natural forces of the market run their course. “It [the market] doesn’t need to be jump started,” he says. “The natural market will take care of itself without unnatural support.”

Ferrous scrap in Cloud’s area is mostly flowing to domestic mills and foundries right now, but he sees that slowly shifting back to more exports as the Asian markets begin to recover.

Cloud, who has been in the scrap business a long time, watches the maneuvering of other larger scrap operations in his area with caution. He thinks there’s plenty of scrap for all “sensible” operators, but says big-time operators should beware of what actions they take.

He points to a recent super-sized shredder addition coming to Atlanta by Newell of Atlanta. “We shall see,” he says. “There’s already a shredder in Athens operated by Loef, and Newell has one in East Point near Atlanta.” The new super-sized shredder will give Newell two in the metro Atlanta area.

OUT WEST

In California, the ferrous scrap picture is not any better, as processors point to the same reasons as others proclaim. “The ferrous scrap market on the West Coast remains at very low levels in both price and volumes,” says Mike Gold, general manager of Golden State Metals, Bakersfield, Calif. “The major factor is a lack of buying interest by consumers. Poor Asian markets and the massive imports of low-priced steel have taken the market to 30-year lows.”

Gold says that the price drop was felt across all commodities, but No. 1 Heavy Melt Scrap took the biggest hit.

As for peddler traffic, Gold says that it is a fraction of what it was prior to the downturn in the market. “With the prevailing scale prices, the average peddler can’t even make enough money to pay for gas.”

But while the Midwest and other parts of the country can rely on domestic mill buying to keep the flow of scrap moving, the West Coast does not have that capacity and is more reliant on the export markets. Gold says, “We need to get the imports slowed and wait for the Asian economies to begin to turn up again.”

And Gold does seem to think that there are simply too many shredders in the market already. “Competition is quite stiff for shredder feed grades,” he says.

Another processor in the western half of the U.S. echoes Gold’s statement saying, “We do think the [shredder] market is overcrowded and that they have created their own competition.”

Still another Western scrap processor, who also asked to remain anonymous, says that his market has improved since hitting the bottom about a month or two ago, but it still is a long way from reaching the top again.

“Generally, all grades were hit equally, but there are some anomalies in the marketplace, depending upon how bad consumers wanted to purchase scrap,” says the processor.

In addition, the scrap processor says that the steel industry operating capacity rate must remain high to maintain demand for scrap, while imports of finished scrap need to decline in order for the market to jump-start. However, he thinks that “inventory imbalances will continue to cause some chaos and confusion in the ferrous markets. It’s going to probably take years for this market to achieve its past demand levels.”

NORTHWEST DOWN, TOO

“All ferrous grades have taken a hit,” says Lois Young, of Skagit River Steel & Recycling Inc., Burlington, Wash. Young’s company doesn’t produce shredder scrap, but the industry veteran says “the composition of our incoming scrap indicates that it has probably taken a severe hit. No. 1 and 2 Heavy Melt Scrap are still priced percentage wise in a higher bracket.”

Not only does Skagit process ferrous and nonferrous metals, plus other commodities, the company also operates a steel service center with more than 800 items.

The price slump in the Pacific Northwest has had a devastating effect on peddler traffic. “It has dropped off considerably,” comments Young. “Many of the scrappers have gone by the wayside.”

The consensus among processors is that scrap is now moving more to domestic markets than overseas, and Young verifies that in her area, even though Skagit is strategically located near Interstate 5, 60 miles north of Seattle and 60 miles south of Vancouver, British Columbia – two major Puget Sound shipping ports serving mainly the Pacific Rim. “We are currently moving exclusively into domestic markets with the exception of a small percentage to Canada.”

FERROUS FALLOUT

If prices remain low in the ferrous scrap market, will the industry see a slew of closings on the horizon? Probably so, says a major processor in the Midwest, but it will be the smaller yards that will suffer.

A longtime processor in the South has already seen the effects of the market around him. “Our company has had no closings, [but] at least two very small dealers have closed their doors, [and] two others say it is imminent.” The processor also says that another processing yard closed in the state [Mississippi], but this was not directly related to the poor market.

Processors in states ranging from Washington to West Virginia also report that some yards in their regions are out of business.

The poor market for ferrous has hurt several players in the Southeast. “In the Atlanta area, Dynamic Metals, Recycling Industries (Central Metals) and Philip Services (Southern Foundries) all have closed their doors,” Cloud says.

In California, Gold sees the effects of the poor market, too. “Two smaller companies have closed in this immediate area,” he says. “In addition, a company with a shredder within 200 miles has closed.”

RELIEF AHEAD?

The curbing of steel dumping in the U.S. is welcome news, but Washington,  D.C.’s late actions have already angered not only those in the steel industry, but scrap processors as well.  “Much too little too late,” says a processor in the South. “Before those weak-toothed measures take real action, the market forces will have already reacted. A weakened dollar will do more for the problem than any promise from Washington.”

Young of Skagit River Steel & Recycling adds, “Supply does seem to be out there regardless of the price. There are some who hoard, and I think market movement could see some negative effects if the price changes too dramatically. However, you do have to make hay when the sun shines.”

The author is a Recycling Today contributing editor based in Parma, Ohio.