Generation Gap

The current recession has served as a reminder that no industry segment operates in a vacuum. Rather, industries are part of a complex puzzle, with many sectors relying heavily on the success of others to thrive—and feeling the impact when they struggle.

Scrap metal as a traded commodity seeks a balance between supply and demand. In the midst of the current recession, a number of macro-economic factors are keeping the market down on both sides of the equation. Scrap yards are facing fewer loads of material coming from formerly reliable manufacturing and demolition sources while simultaneously facing sluggish demand.

Only a year ago, scrap metal traded at such high prices that demolition contractors had to take extra precautions, securing their job sites against thieves with designs on the valuable commodities. Contractors built scrap revenue into their bidding process, counting on the high prices to cover their operating expenses and to generate profit.

Now, contractors are faced with postponed or nonexistent projects, which means they are not generating as much scrap—nor are they seeing the same revenue for the material they do generate.

"The recession is impacting the demolition industry significantly," says Drew Lammers, of Cohen Brothers Inc., Middletown, Ohio, and president of the National Demolition Association. The recession and sudden drop in scrap metal prices in the fall of 2008 put many demolition jobs on hold, he says. When metals prices were soaring, many demolition contractors calculated the expected revenue from recovered scrap into their bids, putting them in a bad position when the market dropped. Lammers says some companies had taken on jobs that contained high volumes of scrap and had to reevaluate when the prices dropped. "Now, these jobs that would have been done for nothing or created revenue, the company would have to pay for, so they have been put on hold," he says.

Scrap yards are suffering on both sides. With slowdowns in manufacturing and demolition, less material is coming into yards. "[Generation] is down noticeably in both," Lammers says of scrap flow from industrial and demolition sources.

Compounding the situation is the lagging demand for what little material does find its way into scrap dealers’ hands. "From the scrap end of it, manufacturing has also subsided," Lammers says. "They’re not making cars, they’re not making washers and dryers, because nobody’s buying them. The mills aren’t getting the orders, so they don’t need as much scrap."

The amount of the decline and the speed with which it hit the market had a devastating impact, Lammers says.

"The Cohens [family members who are owners of Cohen Bros. Inc.] have been in the business a long time, and they’ve never seen the scrap prices from last March or so skyrocket so fast and then within three months completely drop," he says.

Much of the problem with current supply and demand lies with the industries that consume scrap—construction and manufacturing.

Total construction spending in the United States fell 3.3 percent in January, according to monthly statistics released by the U.S. Census Bureau. January’s total is 9.1 percent below January 2008’s spending.

Construction in the private sector fell 3.7 percent, with residential construction coming in at 2.9 percent below December’s level. Nonresidential private construction also declined, with spending falling 4.3 percent from December.

The public sector has performed little better—spending has declined 2.3 percent from December.

With building activity slowing dramatically throughout late 2008, demand for demolition projects also has declined, as services are not needed to clear space for new construction. Some projects that were on the books have been postponed because of lack of credit or cash flow, though the number of postponed projects varies by region, Lammers says.

Prices for scrap have rebounded some since the end of 2008, though those who had hoped to see significant improvement by the end of the first quarter might have to wait a little longer.

In January, mills paid on average $260 per ton for prompt industrial grades, $250 for shredded scrap and $201 for No. 1 heavy melting steel (HMS), according to transaction pricing compiled by Pittsburgh-based Management Science Associates Inc. (MSA) for its Raw Material Data Aggregation Service (RMDAS).

However, a slow pace of activity at the nation’s steel mills helped move ferrous scrap prices lower in February, as mills paid from $10 to $33 less per ton on the spot market, depending on the grade and region.

National averages showed mills paying $32 per ton less for prompt industrial grades and $30 per ton less for No. 2 shredded scrap.

No. 1 HMS lost less of its value compared to prompt industrial grades, dropping $12 per ton in value nationally in the spot market and losing just $10 per ton in value in the North Central/East region (which stretches north to south from New England to northeastern North Carolina and west to Ohio, Michigan, Kentucky and much of Indiana).

Regionally, scrap prices held up most closely to January levels in the South, where per-ton average price drops for the three major grades ranged from $16 to $23 on the spot market.

Lammers says the nonferrous side might see a quicker recovery than ferrous because of activity in the Asian markets. "Now we’re starting to see the Asian companies buying some nonferrous. Copper is starting to recover a little bit from its low," he says.

Lammers says, "It’s worse off than we thought it would be by now," adding that he thinks it could be the end of summer before the market enjoys a return to form. "We’ll be the barometer though. We’ll know when the market is going to start returning," he says.