Tapping the Breaks?

Parties debate whether the United States should impose export controls on ferrous scrap.

You can’t escape the talk about the Chinese market, with discussion surrounding the growing appetite for scrap from Chinese buyers. China’s growth as a consumer of ferrous scrap has largely caused the price of the material to soar.
For some commodities, prices have climbed by more than 100 percent during the past several months. According to Morgan Stanley, China’s steel consumption has more than doubled in the past five years to almost 290 million tons. By comparison, U.S. steel consumption is estimated to be at around 119 million tons.

The spike in price and demand is causing significant repercussions on both sides of the supplier/consumer equation.

For scrap processors, prices have recovered from the steep price declines seen during the past several years. By reclaiming some of the price and demand that disappeared during the economic slump, many scrap metal processors report much healthier balance sheets.

Conversely, for many consumers of ferrous scrap, notably mini-mills and ferrous foundries, the higher price, along with the tight market for available raw material, is creating tremendous stress on their businesses.

During the past several months, most steel mills that consume large amounts of ferrous scrap have imposed surcharges to compensate for the higher prices they are paying.

At the same time, in light of the strong demand, some ferrous scrap consumers are expressing concern that a shortage of material may create even greater problems for the steel industry.

THE DEBATE RAGES ON. Recognizing that price and demand are undergoing an unprecedented surge, the Emergency Steel Scrap Coalition, Washington, D.C., has formed.

This group has appealed strongly to the federal government encouraging it to impose some type of restrictions on the outflow of ferrous scrap. At the same time, the newly formed group has sought to bring a number of other companies and associations on board to help support its position.

The group, as well as a number of other speakers, presented its case in front of the House of Representatives Small Business Committee March 10th.

Don Manzullo (R-IL), chairman of the House Small Business Committee, held the meeting to investigate the recent dramatic surge in prices for steel and other metals. The focus of the meeting was to look at the impact the recent swing in price is having on small manufacturers and the potential for damage to jobs in the country.

According to a spokesman for Rep. Manzullo, lifting the steel tariffs late last year should have trigged a drop in steel prices for U.S. manufacturers that had experienced as much as a 50-percent hike in prices during the tariff period.

Instead, prices have continued to surge as higher raw material prices, including ferrous scrap, coke and iron ore, have all jumped in demand.

Robert Stevens, president of the Emergency Steel Scrap Coalition, as well as CEO of Impact Forge Inc., a Columbus, Ind., ferrous consumer, noted that the cause of the sharp jump can be attributed to the surge in ferrous scrap exports from the United States, in light of surging foreign demand. He added, "At the same time, other countries are limiting or even prohibiting their own scrap exports. This fundamental imbalance must be corrected."

Highlighting his company’s dilemma during his testimony, Stevens noted, "Since January 1, 2004, our company has been hit by steel surcharges amounting to $10,000 per day. These surcharges are based upon the prices of scrap in the fourth quarter of 2003.

"Due to the rapid scrap price escalations in January, February and March," he continued, "we expect the steel scrap surcharges starting next quarter to be approximately double, or $20,000 per day."

The testimony itself was basically an acknowledgement of the situation at the present time. However, the outlook was quite different depending on who was testifying.

Stevens noted that domestic steel scrap exports have almost doubled since 2000, climbing from 6.3 million tons in 2000 to close to 12 million tons last year. "This constitutes a substantial increase in steel scrap exports, both absolutely and relatively, to domestic supply—which is relatively inelastic. Meanwhile, U.S. domestic scrap demand has remained steady since 2000 and is increasing as the U.S. economic recovery improves.

Manny Bodner, president of Bodner Metal & Iron Corp., a scrap metal recycling company based in Houston, spoke on behalf of the Washington, D.C.-based trade association the Institute of Scrap Recycling Industries Inc. (ISRI), which is strongly opposed to any restrictions in the flow of ferrous (or nonferrous) scrap metal.

In his testimony, Bodner said that the call to restrict exports of the material is a view that is "misguided and miscalculated. It is a protectionist view that fails to account for the anomalies created by artificial interference with the free market."

In acknowledging the strong market for ferrous scrap at the present time, Bodner noted that the improved markets closely follow years that "were some of the worst years on record for the scrap industry, with both price and demand at or near historic lows."

Addressing evidence showing the huge increase in ferrous scrap prices being posted now, Bodner noted that "using the year 2000 as a baseline for scrap would be like this Committee going to Death Valley, Calif., and declaring it sea level."

As to the possibility of imposing some form of restriction on the flow of ferrous scrap out of the United States, Bodner noted, "history shows that it could exacerbate the problem."

In support of this statement, Bodner pointed out that the last time the U.S. implemented export controls on scrap was 1973-1974. During the time when the controls were in place, ferrous scrap prices soared.

The result, according to a study by Dr. Robert Shriner published in The Business Economist, was that U.S. steelmakers "spent nearly $2 billion more for ferrous scrap during the time export controls were in place than they would have had there not been export controls."

While the high price is one of the biggest concerns for the scrap ferrous consumers, a growing consensus appears to be that prices, while very high, could soften. Some sources note that prices may already have peaked. "It is a matter of time before prices start to come down," one processor notes.

While a decline in prices will give some relief to many mini-mills, the reality is that over the next several months, higher prices are likely to be seen throughout the U.S.

In response to the testimony, as well as a look at the market conditions, the Small Business Committee is expected to "closely monitor the situation," a spokesman for the committee notes. "If the situation continues without a let up, we may look to take action."

While the testimony addressed the issue of higher scrap metal prices, the more pressing issue, and one most everyone at the recently held committee hearing acknowledged, is the shortage of finished steel. This creates sizable problems for all parties involved.

A QUESTION OF CAPACITY. According to Robin Wiener, executive director of ISRI, "The real problem is the recognition that there is a capacity problem. There is a shortage of finished product."

How to remedy this, however, is a much larger issue. With the world economy improving, it will likely take time to bring in enough capacity to ensure that it is balancing a pick up in demand.

While the issue of job losses and the problems with the manufacturing industry are front and center right now, Wiener says that at every point ISRI will make people aware that the scrap recycling industry is a huge industry, with tens of thousands of employees. Further, she adds, there are many thousands of other people who depend on the scrap recycling industry for their livelihood.

The emotional discussion on the growing roll of China may seem unprecedented for many people. However, some may remember that a similar issue took place years ago. But, at that time, Japan was the cause for worry.

According to testimony by ISRI at the meeting, roughly the same percentage of scrap metal was being shipped to Japan several decades ago. While many domestic companies were complaining that the Japanese market was going to end up with all the scrap, it did not happen. In fact, exports of ferrous scrap to Japan have cooled significantly since then.

Acknowledging the differences between China today and Japan 30 years ago, Wiener does note that the activity is very close to the same. This further cements ISRI’s position that scrap metal markets are cyclical in nature.

While concerns about higher scrap prices are creating pressure on domestic scrap steel consumers, if export controls are put in place, the World Trade Organization could pass retaliatory tariffs.

To clarify, while the heading for the testimony was a look at the high cost of ferrous scrap, the reality is that, for the most part, the attendees at the committee hearing are more concerned with the high cost of the finished steel.

In his testimony, Lester Trilla, president of Trilla Steel Drum Corp., a small steel producer in Illinois, noted that, "Our steel supplier informed us within the last three weeks that they will not honor quoted prices, but will determine the price of an order by the market price in effect at the time of the shipment.

"Basically," he continued, "they are rescinding all price agreements. We asked how they were going to determine this price at the time of shipment. The company’s representative told use that he was not sure because they did not yet have a system in place by which they could do daily pricing changes"

In discussing the higher costs, Trilla added that his company’s customers have been reluctant to pay the higher prices that "were necessitated by steel tariffs—we lost 30 percent of our longstanding customers when we imposed a 20 percent price increase in response to the steel tariffs last year. We are concerned that we will lose still more customers when we have to raise prices again."

While the committee is taking a "wait-and-see" approach to the situation, Wiener feels the chief concern—higher ferrous scrap prices—is already abating.

While some sides wrangle about the repercussions of an export restriction for scrap metal, other companies look at the indirect impact that passing some type of restriction would have on the business.

Wilbur Ross, CEO of International Steel Group (ISG), a large integrated steel mill headquartered in Richfield, Ohio, in his testimony expressed concern that imposing any type of restriction on scrap metal would result in retaliatory strikes by other countries, notably China.

What effect this would have on the steel industry is uncertain. While opinions differ on whether or not some type of scrap metal export restriction would help or hurt the domestic industry, most everyone agrees that concerns about a shortage of ferrous scrap are unwarranted.

In his presentation before the committee, Bodner said there is no shortage right now. "The current, and we believe temporary, price pressures are being caused by global demand for steel rather than an assumed lack of domestic supply of scrap," Bodner testified.

While most industry watchers feel that the upward trajectory will start to come down in the near future, Morgan Stanley’s Wayne Atwell, who also spoke at the hearing, noted that it is possible the market already has crested. There are some signs that markets are starting to come back down, at least as far as price is concerned.

If the ferrous scrap market continues to cool off, one problem for scrap metal recyclers will have worked itself out. Sadly, the positive news to reduce the threat of export controls would be a slower market, something most scrap metal recyclers are not that thrilled to experience.

The author is senior and Internet editor for Recycling Today. He can be contacted via e-mail at dsandoval@RecyclingToday.com.