Scrap Shortage: Fact or Fiction

For at least 20 years, there has been a waxing and waning debate between the scrap industry and the steel industry about whether or not there will be enough ferrous scrap to meet mill demand. Today, the debate has generally shifted to a discussion of whether or not there will be sufficient supplies of low residual scrap to meet the needs of the ever-increasing number of electric arc furnaces producing flat-rolled products. Many say the issue is old news, and that there couldn’t possibly be a shortage, but a few loud voices backed by solid research still raise some doubts.

Although an actual shortage of scrap is probably unlikely, under the right combination of circumstances, the supply of metallics – both scrap and scrap substitutes such as direct-reduced iron, hot-briquetted iron and pig iron – needed to supply EAFs around the world could become very tight, and prices are likely to be high.

Scrap demand has steadily increased as the number of mills producing steel using scrap-fed electric arc furnaces has increased. Last year, for the first time in history, EAFs produced more than 40 percent of the total steel produced in the U.S., and that percentage will likely be higher this year. More EAF capacity is planned through the year 2000, both in the U.S. and abroad. Between 1995 and 2000, as much as 25 million tons of EAF capacity may be added in the U.S. alone.

In rapidly-developing Pacific Basin countries especially, the need for steel to develop infrastructure will result in a number of EAFs, which are less capital-intensive and generally more efficient than blast furnaces or basic oxygen furnaces, being sited. If there is a shortage of metallics, it will be most acute in that region.

There are some well-researched arguments that demonstrate the real possibility of a global shortfall in metallic units needed to feed EAFs. Two people in particular who never tire of talking about the subject are Peter Marcus and Karlis Kirsis, directors of PaineWebber Inc.’s World Steel Dynamics information service. Marcus and Kirsis recently published a 103-page study titled "Ironies in Steel," which was presented at last month’s Steel Survival Strategies XI conference in New York.

In their study, Marcus and Kirsis argue that the outlook for global steel demand is excellent. There will be increasing steel making capacity across the world over the next few years, and this capacity will be dominated by the scrap-fed EAF, they say.

"EAF steel makers can now make a broad range of steel products on an effective basis," say Marcus and Kirsis. "Hence, EAF steel making no longer has significant restrictions when it comes to the markets that it can serve. In developing countries, the substantially lower capital costs and smaller economies of scale are promoting the installation of EAF units over the BF/BOF route."

At current scrap prices, the incentive to build scrap substitute facilities is "very good." If steel scrap prices increase another $20 per ton, as they are predicted to do, the incentive would become "outstanding," say Marcus and Kirsis. They predict that from 1996 to 2004 there will be extensive commercialization of a number of new scrap substitute processes.

But even as global demand for steel leads to more EAFs being built, and high scrap prices lead to the development of new scrap substitute facilities, there will still be a shortage of metallic units to feed the mills.

"World Steel Dynamics’ ongoing analyses indicate that a global metallics crisis will be a factor dominating the steel cycle over the next decade," say Marcus and Kirsis. "On an after-the-fact basis, there is never a shortage on a physical basis in the real world. The price of the product rises to ‘clear the market.’ This is what has happened in the past year with respect to steel prices. High steel scrap prices are expected to produce a continuing frenzy to build steel scrap substitute plants."

Marcus and Kirsis predict a scrap shortfall of 62 to 118 million tonnes by 2010, depending on the amount of obsolete scrap which can be recovered. This assumes that the global demand for finished steel products grows at a rate of 2.86 percent annually, compounded, from 1995 to 2010. At the same time, they predict that there will be a reduction in the percentage of scrap used in EAFs from 88 percent in 1995 to 82 percent in 2010. The difference will be made up by pig iron and scrap substitutes.

Evidence of the development of a longer-term metallics shortfall includes the strength of ferrous scrap prices in the last two years relative to export prices for flat-rolled and long steel products. "This pricing relationship, which has never before occurred in the history of the steel industry, appears to provide meaningful evidence that steel scrap prices will be relatively higher in the future than in the past 20 years," say Marcus and Kirsis.

But most observers disagree with Marcus and Kirsis, arguing that, in the U.S. at least, there is more than enough scrap to meet the demand. However, most admit there will be some challenges supplying the new EAF capacity, such as the availability of adequate railcars to transport the material from scrap yards to steel mills, geographical distortions in which supply is available in one region but demand is in another region, and record high prices as the supply of low-residual scrap becomes tight.

The Institute of Scrap Recycling Industries, Washington, has commissioned studies researching the amount of scrap in the U.S., and found plenty. As a result, the association is not concerned about the possibility of a shortage, according to Robert Garino, ISRI’s director of commodities.

"Someone called the U.S. the ‘Saudi Arabia of scrap,’" says Garino. "It’s true – there’s just an enormous inventory out there waiting to be recycled, and it will get recycled. The issue really is those mills that are looking to make specific products and need specific quality scrap."

If there were really serious concerns about an actual shortage of scrap, the current flurry of investments in EAFs would not be occurring, argues Herschel Cutler, ISRI’s executive director.

"It seems to me there’s a great disparity between what people are saying and where people are putting their money," says Cutler. "There are some glaring inconsistencies between the statements of a few people and the continued movement forward in terms of the investment."

The real issue is that of price and availability of scrap, says John Jacobson, president of Jacobson & Associates, Rochester, N.Y. "My problem with the word ‘shortage’ is that it gives the impression that somehow someone’s not going to be able to run their steel shop because they can’t find scrap, and I don’t think that’s going to happen. I do believe prices will continue to rise for quality scrap at a rate greater than the inflation rate and greater than they had for the last few years."

What will prevent an actual shortage of metallics is that steel makers are becoming more flexible in the type of metal they are willing to melt, he says. Steel cans no longer need to be completely detinned, and some mills are using used oil filters and aerosol cans. "That kind of flexibility and innovation is going to continue, and really pay off," says Jacobson. "Also, the recycling mentality that’s out there in consumer recycling is going to get more materials flowing into the mills."

In addition, scrap prices have reached a point at which it has become affordable to site more DRI and other scrap substitute plants.

"It’s a little ironic – DRI has been around so long, and it’s always been a technology that people have thought highly about, but it’s always been too expensive," says Jacobson. "Now we’re entering a zone of scrap pricing where DRI will appear very affordable and will be very attractive in comparison with scrap. And the other big advantage is the issue of purity and quality. The quality concern is just going to increase over time, and so a big challenge for the scrap industry is assuring quality of their product – monitoring what’s in the scrap and if it’s acceptable."

But the use of DRI and other scrap substitutes will be limited by the amount of merchant tonnage available, argues one Midwest broker. "Most of the tonnage out there is captive. Georgetown has their own plant, TRICO is going to have their own facility, Tuscaloosa is going to have theirs, BHP will have one – but that’s captive tonnage, so it’s not merchant material. So I think there’s still going to be a shortfall of merchant material. That’s going to trade very aggressively, just like pig iron."

The use of scrap and scrap substitutes will serve to keep prices at a reasonable level, he says. "When the price of scrap gets out of line, people will try and bring more of that material in to try and hold the price of scrap down. Conversely, when the pig iron gets too high, they’ll go back to scrap. Until there’s a real viable merchant DRI or HBI industry in this country, I think the two – both low residual scrap and the substitutes – will be very volatile."

With all the new EAF capacity coming on line in the next few years, some are asking whether there is enough demand for finished steel to support it. "Steel demand is strong right now," says Jacobson. "Although we’ve seen a cyclical peak, the automotive market continues to look pretty good, and there are new markets such as construction that promise to keep demand strong."

But while demand is currently firm, there is little likelihood of growth, and there is a greater risk of recession once 1996 is over, as it is an election year.

"Something’s going to have to give," says Gerald Houck, a scrap and steel industry consultant in Washington, D.C. He suggests that some of the new steel will be exported to Europe, where steel production has been down this year and there is starting to be unmet demand.

"If all of the capacity comes on stream that everyone’s predicting, and it’s all really viable, then I think that we’re not going to see sufficient scrap – not just low residual, but any scrap," says Edward Hollander, president of Hollander Metals, Glenview, Ill., another outspoken proponent of a shortage of scrap. "That’s why I think this country could become a net importer of scrap after the year 2000."

Even if higher scrap prices bring more scrap to the marketplace, there may be a lack of railcars to transport the scrap, says Hollander. Railroads are looking for ways to increase revenues, and transporting scrap is not one of them.

"Why should they have a gondola used one turn a month, when they could use that car somewhere else and make three or four times the revenue with another commodity?" he asks. "That’s what the scrap industry and the steel industry has to realize – that there may not be conveyances enough to get the scrap from point A to point B."

The other variable is whether the new capacity will lead to the closure of older, less efficient mills, especially BF/BOF operations. To date this year, EAF production is up from last year and BOF production is down, according to Houck.

But although there probably will be another round of rationalization in which some of the older mills close down, there aren’t many left except for integrated mills that have worked hard to remain competitive, says the Midwest broker. "It could take three to five years before that happens," he says. "And unfortunately old steel mills are like old soldiers – they don’t die, they just fade away."

Fade away they will over the next few decades, claim Marcus and Kirsis. "Blast furnace output will not surge," they say. "Most BF/BOF producers are in trouble on a long-term basis. The cost curve for the BF sector of the industry is steep; many facilities will be abandoned in the next 15 years."

Traditional scrap flow patterns will be disrupted as the new mills, built for the most part in scrap-deficit areas, attempt to buy scrap from scrap surplus areas such as Chicago, Detroit and Cleveland, says the Midwest broker. And even though there will be a great deal of demand for U.S. scrap from Pacific Rim countries trying to feed their own EAFs, the U.S. may keep much of the scrap it has traditionally exported to supply domestic demand.

But the problem with doing that is the geographical distribution of the material, says Houck. Scrap has traditionally been exported from places where it’s not convenient to ship it into U.S. steel mills.

"Everything in the interior country that would be geared toward export out of New Orleans is being kept home," he says. "But it would be difficult to keep the scrap from New York, Boston, Portland, Philadelphia home because it has to be shipped such a long distance and it probably would be more convenient for mills that would be receiving that material to receive direct reduced iron or pig iron through New Orleans instead."

The scrap that has traditionally been exported is not of the highest quality, adds Jacobson, so keeping it home would not help with a shortage of low-residual scrap.

Some have said that higher scrap prices will lead to more scrap coming out of the woodwork. But the Midwest broker says that the pool of obsolete scrap is smaller than it once was, as the big steel-containing facilities were demolished in the 1980s.

During the Steel Survival Strategies conference last month, Albert Cozzi, president of Cozzi Iron & Metal Inc., Chicago, made the claim that No. 1 bundles will hit $220 a gross ton within the next 12 to 18 months. While some would argue that higher scrap prices are an indicator of an impending shortage, ISRI’s Cutler says they are merely a sign of a temporary supply/demand imbalance.

"A shortage is when you can’t get scrap, no matter the price," he says. "If the amount of scrap that’s available at a given moment isn’t enough, then the price should go up and it will bring more out. And the reverse is also true – if there’s more than enough scrap on the market, then the price goes down and it will stop the glut from getting worse. It’s a commodity that’s really market driven."

Scrap processors can take initiatives to increase the use of all types of scrap while scrap substitute plants are under construction, according to Steve Wulff, vice president of planning for the ferrous division of The David J. Joseph Co., Cincinnati.

"This represents a window of opportunity for scrap processors to enhance the value of their material so that the mills don’t need as much of the scrap supplements," he says.

The David J. Joseph Co. is working closely with mills to do this. "We are working with steel mills to optimize the available supplies of scrap, to select scrap, sample it, and blend it for the furnaces to chemistry specs," he says. "By applying some process control technology, we are able to help mills use more of the lower priced scrap, if we can reduce its variability and not destroy the specification of steel being made."

It remains to be seen whether demand will exist for all the new steel making capacity coming on line and, in turn, whether there really will be a shortfall of metallic units to feed that capacity. Most in the industry are skeptical.

"I just don’t buy it that there is a scrap shortage," says ISRI’s Garino. "There may be a statistical shortfall of the highest quality scrap, but that’s really different."

The author is editor of Recycling Today.