Signs of a healthier manufacturing sector are being seen in increased demand and pricing for ferrous scrap.

Revenues have been down and margins have been thinner for many ferrous scrap dealers the past two years, but Spring 2002 seems to be bringing a breath of fresh air.

Published ferrous scrap prices actually started rising this winter, and dealers say those rising indicators are accurate. The steel industry’s figures for domestic mill capability utilization rates demonstrate that stronger demand for steel has set in, and this has helped jump start the scrap market.

“All our indications are that mills have pretty strong order books going through into the second half of the year,” says John Marynowski, president-ferrous, with OmniSource Corp., Fort Wayne, Ind. “I think the conditions are there for prices to go up a little more. The demand is pretty strong.”

STEEL RESURGENT

The condition perhaps most important to the ferrous scrap market is that of the industry in which a large percentage of its products are melted—the steel industry.

The North American steel industry has spent the last four years on the defensive, with integrated steelmakers in particular facing difficult circumstances. The number of blast furnaces operating in the U.S. continues to decline, providing a smaller scrap market for shippers accustomed to selling to that consuming segment.

But even the hard-hit integrated steelmaking segment has started feeling a little more confident, especially after the Bush Administration levied Section 201 tariffs of up to 30 percent on imported steel products that were deemed to be unfairly competing in the U.S. market. 

Bankrupt integrated steelmakers such as Bethlehem Steel Corp., Bethlehem, Pa., have continued making steel, and are now able to charge more for their steel products, possibly allowing them to achieve some profits for the first time in several quarters.

Integrated steel mills operated by the former LTV Corp., Cleveland, were idled and appeared to be facing the end of their road. But a New York-based investment group has purchased LTV’s integrated mills in Cleveland and East Chicago, Ind., (as well as some other plants) and will soon be melting iron ore and scrap again under the name International Steel Group (ISG).

In general, the electric arc furnace (EAF) segment of the industry did not suffer as long or as much from adverse conditions as did the integrated segment. But by 2001, even EAF steelmakers were complaining about the global overcapacity situation that was suppressing prices of all steel products. But a few EAF mills have closed down as a result of the prolonged steel slump, and Birmingham Steel Corp., Birmingham, Ala., an operator of several EAF facilities, is negotiating to find a suitor to keep its mills open.

The good news for the scrap market is that the comparative health of the EAF mini-mill segment means this scrap-intensive steelmaking process continues to capture a larger share of the steel production market.

As one ferrous scrap dealer notes, “When an integrated steelmaker like LTV goes offline, that’s a plant that uses about 800,000 tons of scrap to make four million tons of steel. That volume is picked up by EAF steelmakers like Nucor, who may use four million tons or more of scrap to make that same four million tons of steel. The more of that business that is picked up by the mini-mills, the higher the demand for scrap.”

Indeed, those EAF companies that weathered the 1998-2001 period are poised to capture an increasing share of the domestic market at a time when the domestic market is heating up.

According to statistics gathered by the American Iron and Steel Institute (AISI), Washington, as of mid-April, steel mills in the U.S. were melting at 90 percent of their capacity. The 90 percent rate has not been visited by the domestic steel industry for some time. In mid-April last year, the rate stood at just 78 percent, and as recently as this January, there were weekly capacity rates of 73 percent.

“I think the Section 201 measures have had a positive effect on the steelmakers,” says Michael Collins, president of Metal Management-Ohio, Cleveland, and national director of ferrous sales for the Chicago-based scrap company. “I think the true demand for steel has increased for everyone from flat-rolled producers to the bar mills. I think everybody’s activity levels have changed.”

A scrap buyer at one Great Lakes region steel mill concurs. “We have been on full production since the beginning of the year,” he remarks. “Our end customers, the rebar and merchant market, have increased their demand.”

And happily, pricing levels are changing also. “Steel companies are finally getting more money for their steel today,” says Collins. “Not that long ago, hot band was $210 per ton. Now they’re getting $330, and they’re willing to pay a little more for scrap.”

Dealers in virtually every region of the country report that they are fetching more for ferrous scrap in April than they were at the start of this year, with increases matching pricing levels tracked by publications such as American Metal Market. “We’ve seen grades that go to domestic mills up five to seven dollars in April,” says one California scrap dealer. “Some of the premium grades are even moving up $10.”

If it holds, an increase in both demand and pricing would be just what a lot of ferrous scrap dealers have been waiting for since January of 2000.

HOME AND AWAY

Many of the woes that have affected the ferrous scrap market were laid at the feet of overseas economies. With the globalization of the world’s economy having made itself clear to scrap dealers, many are wondering how events globally will again affect the demand, supply and pricing of ferrous scrap.

Right now, it looks like overseas demand for U.S. scrap may have picked up, possibly because East Asian steel mills are also melting at a higher rate than they were during the prolonged slump.

“I think changes in the world market for scrap have helped domestic markets get strong,” says Collins. “Unlike a year ago, when we were bringing scrap off the East Coast back into the Midwest and South to send to domestic mills, I’d say since last October or November, probably 90 percent of what is generated in the Eastern U.S. is going offshore. That’s in contrast to last year, when a good portion was being railed to domestic mills.”

Collins also believes that healthier scrap demand in Europe is reducing levels of scrap imported into the U.S. from there, adding further balance to the U.S. ferrous market.

The signals from America’s NAFTA (North American Free Trade Agreement) trading partners are mixed.

Collins calls the Canadian market “strong,” and says that demand north of the border is more than strong enough to consume scrap generated in Canada.

The Mexican steel industry, on the other hand, is still trying to recover from being hit hard during the second half of the 1998-2001 slump. “Mexican mills are pretty much on the sidelines,” Jack Vexler of Monterrey Iron & Metal, San Antonio, says of the ferrous scrap demand he is witnessing. “That could improve a year to 15 months from now, especially if you have a lower dollar then, and their domestic economy strengthens by then.”

Another Texas scrap dealer, Manny Bodner of Bodner Iron & Metal, Houston, says, “There are inquiries being made from Mexico—not necessarily sales, but some inquiries.”

While demand has increased nicely, and prices have risen a little, the buy side of the equation will depend upon finding enough ferrous scrap at the right price.

DRAWING OUT SCRAP

For the past several months, there have been factors curtailing the flow of both industrial scrap and obsolete scrap. A revived manufacturing sector will be needed to increase industrial scrap flows, while higher scale prices may help increase the inflow of scrap autos and appliances.

Howard Lincoln is a co-owner of National Recycling Services Inc., an Erie, Pa., firm that rents out portable ferrous balers complete with a one-person crew. The balers and operators are sent to sites where scrap is either being freshly generated (like demolition sites), or where it has accumulated (such as an auto salvage company). According to Lincoln, when prices started rising late this winter, his phone started ringing.

“We’re getting calls from all over the country,” says Lincoln. “When they could only get $40 to $50 per ton, there wasn’t any money in it for them, so a lot of them weren’t baling. Now, as the market moves up, they can calculate a profit.”

As of mid-April, ferrous scrap dealers were not unanimous concerning the positive signs on the buy side. “The only people bringing in obsolete ferrous scrap are those that have to,” says Vexler. “Peddlers can’t move it at a profit, especially with the cost of gasoline being high. You’ll have to see almost a doubling of the scale price before you see anything extra coming in.”

The California scrap dealer notes that it is unlawful in that state to landfill auto bodies or appliances, so the flow into his company’s yards did not decrease dramatically during the slump. On the other hand, he is among those who are concerned about the lack of industrial scrap being generated.

“Generation is weak in our state, and manufacturers are leaving in droves. They’re going to Mexico, Arizona, Nevada and New Mexico,” he remarks. “This state has costs that are too high for regulatory compliance and for workers’ compensation, and the electricity increases in 2000 were the straw that broke the camel’s back for a lot of companies.”

In Texas, Vexler expresses similar concerns. “There seems to be a flight from these shores of metalworking companies,” he states. “The cost of production is so high here compared to overseas. So I think up the line, there is going to be a problem, and there is not going to be enough scrap around.”

Others are hopeful that an end to the down cycle will shake off some of the gloom. Further increases in price may bring out more obsolete scrap, while an overall better economy may promote more generation on the industrial side.

“I think you’ll see the increases in price will get the obsolete scrap to flow a little better,” says OmniSource’s Marynowski. “Toward the end of last year we reached such low levels that the obsolete scrap really dried up. As far as industrial scrap, there is only so much anyway. Certainly it helps to have contracts in place with industrial generators.”

Metal Management’s Collins is also hopeful concerning an uptick in scrap generation. “When scrap was way down in price, it didn’t draw out the auto wrecker bodies. They’re better off letting that hulk sit in their yard, and maybe they can sell a fender or a hood for what they could get for the hulk,” Collins says of some dismantlers.

And referring to a sign that could be good all the way around—for generation, demand and pricing—Collins believes conditions in the manufacturing sector are starting to pick up. “For the prior nine months there has been less industrial scrap, but we’ve seen it pick up from 10 to 12 percent over the last 60 days,” he said in mid-April.

It is still too early to declare a boom, but the spring of 2002 seems to be offering more hope to ferrous dealers than the previous two springs. “I think hopeful would be the word,” says Bodner. “We’ve had a very rough three years in terms of markets, the economy, pricing, the cost of production—every phase of our business. It could be time for it to try to turn around.” 

The author is editor of Recycling Today, and can be contacted via e-mail at btaylor@RecyclingToday.com.