Ferrous Processors React to Forces of Change

You’re only as good as your last…

For a major league pitcher the statement might end with the word “start.” For a ferrous scrap processor, “quality of the last shipment” is appropriate. In 1998, quality of scrap will surely play an increasingly larger role in the highly competitive ferrous scrap industry.

“The single biggest challenge will be to try to improve scrap quality,” says Alan Crouch, vice president of ferrous operations and engineering, The David J. Joseph Co. in Newport, Ky. “Steel mills are demanding more separation in scrap and less tramp metals.”

This view is supported by Stuart Simms, chief operating officer, The Parkwood Iron and Metal Co., Cleveland.

“Demand for quality scrap is going to increase,” says Simms. “Scrap processors who don’t understand this are going to be out of the loop. You can’t string 10 cars together and hope seven are going to get through. That may have been okay 10 to 15 years ago, but it’s not okay today.”

TRAMP ELEMENTS

 One of the most egregious problems affecting ferrous scrap quality is contamination by tramp elements.

Dr. Richard Burlingame, a Cleveland-based steel consultant, points out that tin cans are finding their way into shredded auto scrap. Tin, notes Dr. Burlingame, acts as a severe stiffener and hardener in steel, thereby compromising steel making for automobiles and appliances. Tin also works synergistically with copper.

“Of the tramp elements found in scrap, copper is the worst, followed by nickel, chromium, tin, molybdenum and several others,” says Dr. Burlingame.

Consumers, particularly mini-mills, are becoming more militant in demanding higher quality scrap. As such, the mini-mills are using suppliers who can “guarantee” them a certain quality of scrap.

By using a select group of suppliers for their scrap, mini-mills “know they will get the right quality and density,” says Phillip Sacco, president of Sierra Iron & Metal, Co., Bakersfield, Calif.

“Mills want quality,” says Simms. “They don’t want cracker jack scrap—a surprise in every box.”

“A reason to try to create a quality product is that a steel mill will wants to buy from us month in and month out,” says Crouch.

CHANGING RELATIONSHIPS

The demand for quality scrap has affected the relationship between processors and consumers in positive ways.

“The partnership between scrap processors and mini-mills is greater now than at any point in history,” says Michael Coslov, chairman and CEO of Tube City, Inc., King of Prussia, Pa.

This is seconded by Alan Ratner, executive vice president, Simsmetal America, Richmond, Va.

“Processors are going to produce a better grade of scrap in response to the marketplace,” says Ratner. “There is an ever-growing relationship between consumers and processors born out of necessity and mutual interests.

“People are smart enough to realize that the processors and mills have a common goal. The relationship between the two will continue to improve. The mindset with scrap dealers is that we must produce a higher quality product so that our consumers can make money.”

Added to this mindset is the practice of tailoring product to a particular mill’s needs.

“Some operators are custom shredding,” says Frank Goulding, vice president of the ferrous division, Newell Recycling of Atlanta, Inc. This will continue as long as it’s mutually beneficial to both the processor and the mill.

Ratner notes, however, that the relationship between the processors and mills cuts two ways.

“If we’re going to give you a quality product, we’re going to need some support,” says Ratner. “This costs money. We’re not a charity. We’re in business to make money.”

DOMINO EFFECT

Processing quality scrap to keep mills satisfied assumes that there will be an adequate supply. But as processors well know there are forces at work—some they can control and some they cannot. We’ll look at each in turn.

Few U.S. industries will be able to duck the Asian economic debacle. And, the scrap processing industry is no exception.

“The Asian situation is quite dramatic,” says James Cowan, general manager of North Star Steel, Kingman, Ariz. “We’ve seen scrap prices become depressed.”

Three things are happening to cause the drop in prices. First, Asian companies are selling scrap to the U.S. in a desperate attempt to secure American dollars. These dollars are quite enticing to Asian businesspeople given the devaluation of their countries’ currencies.

Second, the Asian countries are not importing U.S. scrap. And third, the Asian countries are not buying steel products from the U.S. anywhere near pre-crisis levels. All of this has led to a greater supply of scrap. (Please see the accompanying chart for recent data showing U.S. exports of iron and steel scrap.)

Cowan points out that whereas West Coast processors used to export scrap to the Pacific Rim and Korea, many are now looking inland for a new home for their scrap.

Marty Forman, president of Forman Metal Co., Milwaukee, notes that the Asian crisis has had a devastating effect on non-ferrous metals.

“Ferrous, because of its value, has taken less of a hit,” says Forman. “However, it’s foolish to think the crisis won’t catch up with ferrous. The inability to sell to Asia reduces the generation of scrap and new steel in this country.”

What has become apparent throughout the Asian crisis, and what President Bill Clinton alluded to in his State of the Union address, is that the U.S. economy and that of the Pacific Rim are intertwined.

“We don’t live in a state or U.S. economy,” says Forman. “An ailing economy in Indonesia will affect U.S. steel plants and the demand for scrap.”

RAILROAD BLUES

Processors can have all the high-quality scrap they want, but if it can’t be moved economically and efficiently to a consumer, there are going to be big problems. Most of those we spoke to see transportation issues as being major concerns in 1998.

“Transportation will be an ever-greater and critical aspect of scrap processing,” says Ratner.

Railroad car shortages appear to be a continuing problem. Jim (Mac) Macaluso, vice president, ferrous division, Sims Bros., Inc., Marion, Ohio, notes that processors can’t get enough cars.

“We’re fortunate that we own our own fleet,” says Crouch. But he’s quick to add “it’s a finite, not infinite number.”

To exacerbate matters, not only are there shortages of gondola cars, but transportation costs are going up. And, the increases are not restricted to the rails.

Marty Forman points out that he recently bought a new truck for $110,000. The truck it replaced had cost $80,000 and the truck before that cost $65,000. Forman says that it’s also a continuous challenge to get drivers.

And then there’s concern about labor strikes. Crouch notes uneasiness in the industry about possible strikes later in the year by truckers and riverboat pilots.

LESS WITCH HUNTING

Of no lesser concern to scrap processors than those discussed above are environmental issues. There appears to be two trends that are weaving themselves through the scrap industry.

First is the belief that the scrap industry is responding in a responsible fashion to meet and exceed environmental regulations.

“Environmentally responsible procedures have become more a part of the typical working plans of scrap operators and our industry,” says Forman.

Adds Simms, “Processors have to understand it’s not like ten years ago. You have to be in compliance with EPA and OSHA.”

With respect to environmental compliance, “the industry has done a very good job of stepping up to the plate,” says Ratner. “Each processor has a responsibility to be a good citizen. More and more processors are going to take environmentally responsible actions.”

The second trend in the environmental area is an apparent toning down of the friction between scrap processors and government regulators.

“There is less witch hunting,” says Forman. He adds that there is at least one person on his company’s staff who deals with environmental regulators. That person has good rapport with the various agencies.

Frank Goulding emphasizes that the Occupational Safety and Health Administration (OSHA) has become more of an associate than an adversary to the scrap industry. He points out that OSHA will come in and do an audit and give a scrap processor time to correct any problems. Depending on the problem, the time given to make corrections can range from 24 hours to up to 3 months. Importantly, OSHA will give the scrap processor a chance to correct the problem without penalty.

“ISRI (Institute of Scrap Recycling Industries) members have a good work-ing relationship with the regulatory agencies,” says Forman. “They are actively working to come into compliance with air, water and safety regulations. It’s a part of what you do each day.”

Sims’s Macaluso puts a coda on environmental compliance: “To be in business tomorrow, you have to be in compliance today.”

THE “R” WORD…

There are few things more unnerving to a scrap processor or scrap consumer than having to deal with a “radioactive incident.”

“Scrap processors and consumers must constantly scrutinize scrap with radiation detectors,” says Dr. Burlingame.

“It’s very detrimental when you melt radioactive material,” says North Star Steel’s Cowan. “There are seven to ten incidents per year nationwide.”

Cowan notes that cleanup costs per incident can run to eight figures.

…AND THE “C” WORD

Another word ping-ponging throughout the scrap industry is “consolidation.” But it appears that there isn’t a consensus on what effect consolidation will have on scrap processing.

Macaluso believes that consolidation will eventually affect the smaller yards. Ratner prefers to take a wait and see attitude. “It’s hard to say what the effect of consolidation will be,” he says. “I don’t see much change so far.”

It could be that independent scrap dealers are using consolidation as an exit strategy, according to Crouch. On the other side of the coin, stockholders want to see a profit.

Tube City’s Coslov sees things differently. “There will always be a place for the independent scrap processor who wants to provide a quality product and service to his customers,” says Coslov. “The scrap industry doesn’t lend itself to consolidation. Out-of-state ownership doesn’t work.”

Marty Forman sees people in the business wanting to reach out farther and seek out economies of scale by consolidating. The effect will be that the casual relationships of the past will become less so. As the industry becomes more competitive, notes Forman, it will become more difficult for the small operator to hang on.

EFFICIENCY IS CRUCIAL

One way for scrap processors – both small and large – to hang on is to become more efficient.

“You have to do things more efficiently and you do it with equipment,” says Macaluso.

Crouch points to the efficiencies gained when a processor switches equipment. For example, although hydraulic cranes are more expensive to operate than crawler cranes, the gain in efficiency is considerable.

Equipment built specifically for scrap processing also enhances efficiency, says Goulding. In the past, he notes, equipment was frequently adapted from other functions for use in the scrap industry.

One promising area of technological development involves sand media separation.

“Sand media technology can separate zinc and other metals out to get to the aluminum,” says Crouch. He also notes that eddy current technology is getting better at separating the various metals.

Computerization of scrap processing facilities will also do much to keep track of material and costs and keep tabs on equipment, notes Goulding.

Not to be overlooked is cleanliness and organization.

“The cleaner and more organized the yard, the more efficient it will be,” says Crouch.

NOT A DOWNER

With all the forces from within and without swirling around the ferrous scrap processing industry, what kind of year will it be?

“It looks like ’98 will be a year of continuing, steady growth,” says Sacco.

Crouch agrees. “1998 will be a pretty decent year. Not a downer at all. And, if copper comes back, everyone will be happy.”

 

A RAVENOUS PARADOX

Perhaps no other piece of machinery has provoked more opinions recently within the scrap industry than the mega shredder.  These machines have a ravenous appetite, processing about 250 tons of scrap per hour compared with the 60 to 100-ton per hour capability of the standard shredder.  And, with some predicting a glut of ferrous scrap on the market, it is indeed ironic that these machines may not be able to get enough scrap to run profitably.

“I’m not convinced, unless you’re in a large metropolitan area, that there is enough scrap out there to keep mega shredders running,” says Alan Crouch, vice president of ferrous operations and engineering, The David J. Joseph Co., Newport, Ky. “I don’t think that there is enough scrap out there to keep every shredder viable.  To add the capacity of a mega shredder, people are fooling themselves.”

Alan Ratner, executive vice president, Simsmetal America, Richmond, Va., concurs.  “There is not sufficient supply of scrap to keep all the shredders on line and those to be installed,” he says. “We’re reaching the saturation point.”

Dr. Richard Burlingame, a Cleveland-based steel consultant, voices another concern about mega shredders – again in the area of quality. 

“The only way the mega shredder operators will be able to get enough input tonnage is to dig deep into the heavy section grades such as no. 1 and no. 2 heavy melting and plate and structural,” says Dr.  Burlingame. “This should increase the bulk density and melting yield of the product.  Unfortunately, heavy melting scrap contains a higher level of tramp elements than does shredded auto scrap, and most of these tramps are dissolved in the heavy grades and cannot be removed by magnetic separation.”