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Feed a Cold Mill, But Don’t Starve a Shredder: Commentary on the State of the Metals Market

The automotive recycling industry has been waiting anxiously for the value of scrap to rise back to “normal” levels. But as we all know in the post-housing crash economic era, there is no normal anymore. Unexpected twists and turns in business are the new normal, if anything, and business owners must think differently to make up for projected income that isn’t delivering to the bottom line.

Many automotive recyclers are holding onto their auto bodies longer than they have planned, and the cars are piling up. The issue is making national newspapers, as one auto recycler reported in the January 13, 2016 Great Falls Tribune, part of the USA Today Network, “I have 27 acres of ground and can continue to stock and stack the wrecked and non-functioning vehicles that people bring in,” he said. “But I’m not sure how much longer I can continue doing that. If I actually have to start stacking car bodies higher than the shielding fence, I’ll get complaints from the public.” This strategy is hitting recyclers hard in their books. “Selling the leftover car bodies as scrap metal used to be what would determine our profit level,” he said. But with low scrap prices discouraging this, he’s lost part of his business profit wiggle room. “This is the worst price for scrap auto bodies that I’ve seen in 32 years in the business,” he said. This is being echoed by others.

In the Great Falls Tribune article, the problems are clearly spelled out by Patrick Kons, Scrap Operations Vice President for Pacific Steel and Recycling. He is quoted as saying:

“Reduced growth in the economy of China, which had been importing a lot of scrap metal to supply its industrial, commercial and residential growth. Strengthening of the U.S. dollar, which made it more expensive for U.S. companies to export goods, including both raw materials such as metals, and finished products overseas and beneficial for foreign competitors to import goods into America. And, overproduction from new ore being mined around the world, lowering the price of raw iron ore, copper and ores that make aluminum. Historically, such raw ore sold for more than reclaimed, scrap metals, but the surplus brought the price of raw ore closer to scrap prices, creating more competition for recycling companies.”

Automotive recyclers continue to tighten their belts, hoping for good news any day. Only time will tell when prices will rise but Kons noted, “We think prices have hit rock bottom and will rise again incrementally,” he said. “But it took 14 months for prices to fall so much and it might take that much time or longer for them to come back.”
– Caryn Smith, Editor

Insights on The Back Story

Facing challenges from cheaper imported steel products, and needing to cut their prices to maintain market share, domestic steel mills were forced to lower their buying prices for shredded scrap month after month in the second half of last year.

This put the shredders in a double bind. They not only faced eroding inventory values and shrinking margins, but also a diminishing supply of shreddable material. The mills’ scrap price cuts provided some of them with some help in competing against imports, but these also exposed how vulnerable electric arc furnace (EAF) steelmakers are to scrap shortages, even for those mills that own scrap yards.

Auto recyclers are still the main source of feedstock for the nation’s scrap shredders, and shredded scrap is now the price and supply benchmark for many in the scrap and the steel industry. Last year’s hard fall for steel prices made it clear that there is a price floor for steel scrap.

Cutting prices in half last year didn’t simply discourage a few small peddlers to provide some feedstock to shredders. It cut the intake throughout the entire supply chain. Trips to the shredders’ scales by smaller scrap dealers, demolition contractors and auto recyclers slowed to a trickle. Some seasonal price decline was anticipated as a result of the onset of winter when both colder temperatures and snowstorms affect the intake of shreddable materials, but this past winter was not that bad.

How critical shredded scrap is to steel mills became apparent in the past two months. Domestic steel mills had challenged steel importers and several foreign steelmakers through a series of petitions to the U.S. Commerce Department. They alleged that foreign steel was being sold unfairly in the U.S., often at below the cost to produce it in the country of origin. The federal government agreed and decided to impose duties on the imported sheet steel products. The government’s action effectively lowered supply, and in some eyes, did more to bolster domestic steel sales than could be accomplished by selling cheaper steel and demanding cheaper scrap from suppliers.

That rebound in demand for domestic steel products, especially sheet steel, forced many mills to scramble to find additional scrap to fill those new orders. In the past, sheet products were made mainly by integrated mills. Iron ore and coking coal were their main raw materials. EAF steelmakers now make much of the sheet steel used in the U.S. They rely heavily on ferrous scrap. It accounts for as much as 90 percent of the material used in their furnaces.

To make sheet steel in EAFs, the scrap mix is usually weighted toward prompt industrial steel scrap, mainly sheet steel clips from automotive and appliance industry stamping plants. This includes grades like No. 1 busheling and No. 1 bundles, which traditionally command a modest premium over shredded scrap. Industrial steel scrap is regarded as cleaner than shredded and provides a higher metallic yield. The busheling premium is usually about $15 to 20 per gross ton, but in the boom year of 2008, it soared to more than $200 per gross ton.

Nonetheless, industrial steel scrap is a limited commodity whose output and availability is determined by the number of new cars or appliances being produced. Offering higher prices for this scrap won’t encourage General Motors to make more Chevrolets or Whirlpool to produce more washers and dryers. When steel mills need more of this scrap, they have few choices. They can pay more and take supplies away from rival mills; import prime scrap from western Europe or Japan, or buy more expensive substitute materials like imported pig iron and direct-reduced iron.

Unfortunately when the steel mills cut their scrap prices last year, they didn’t simply reduce prices by the same amount for all grades of scrap. In some months they slashed the prices of busheling and bundles more drastically. Price cuts, however, have no impact on the output of industrial scrap. Roll-off after roll-off container filled with busheling and bundles continued to arrive at dealers’ yards. The automakers and other manufacturers generating this scrap expected to get paid regardless whether it was or was not sold to a steel mill.

That spurred some scrap dealers to offer this prized scrap to mills that make other products like structural steel and reinforcing bars for concrete. These mills normally don’t use much industrial steel scrap. They prefer shredded and other obsolete grades which are usually cheaper and meet their specifications.

Since busheling and bundles were cheaper than shredded and readily available each month, the bar and structural mills scooped them up. It improved their furnace yields and lowered raw material costs. But it also lowered their consumption of shredded scrap. Dealers reacted by lowering their buying prices for shredder feedstocks. Prices for flattened cars were downsized to about $75 per gross ton in many regions. Offers for other shreddables slipped to as low as $40 per gross ton.

For the professional automotive recycler, offers of $75 per ton for junked and wrecked cars was hardly enough to pay the cost to buy that end-of-life vehicle from the insurance company or the auto with the leaky transmission from the owner. Even after the catalytic converters and copper/aluminum radiators had been removed and sold and other desirable components had been parted out to collision repairers and mechanics, many auto recyclers were still looking at a loss if they sold to the shredders. Some instead simply flattened car bodies and stacked them in the back of their yards.

An executive with one multi-state self-service recycler said those decisions violated the corporate policy of turning inventory every 60 to 90 days, but nevertheless had to be done because the losses would have been much steeper had they sold the inventory as they normally do. “We didn’t hold back everything,” he said, “we sold enough to provide cash flow to pay the bills and provide cash to buy more cars. Turning inventory is critical to our success, but we won’t accept big losses in doing that.”

Another auto recycler in the midwest said he believes that some scrap buyers at steel mills and the scrap dealers also don’t realize that auto insurers don’t give away totaled wrecks, that they also hope to offset some of the money they have paid to the car owners. Likewise, he said recyclers have costs for disposing of the hazardous fluids drained from cars before they can be shipped to shredders.

Auto recyclers were not the only shredder suppliers feeling the pain. The so-called “peddler trade” disappeared. This group is largely composed of retirees or part-timers who own half-ton pickup trucks. They make the rounds of their own networks of small auto repair shops and dumpsters picking discarded parts and other unwanted metallic items. But a half-ton load in the back of their trucks only netted them about $20 last year, hardly enough to pay for the gasoline used to gather that scrap. Many parked their trucks and found other more profitable endeavors.

Likewise, demolition contractors were squeezed out by the unrelenting decline in scrap prices. Instead of offering building owners a share of the profits from the sale of the metals and other materials gleaned from tearing down an old, abandoned factory or apartment building, some told the building owners that they have to pay to demolish it. Unless there was new construction planned for the site, many building owners choose to postpone the work until sales of the recoverable metals and other materials would offset the demolition costs and the disposal of unwanted or hazardous materials.

Shredded is the most widely used grade of ferrous scrap, consumed by EAF-based mills, iron foundries and even integrated steelmakers. Some mills have their own shredders as captive operations for individual mills. There are perhaps only one or two mills that don’t use shred, and that is for technical reasons.

The steep price cuts last year crippled supply lines and now some are scrambling to restore those flows. Some shredders are paying as much as $190 per net ton for car bodies that still contain the engines, said a northern Ohio-based scrap trader. Given the likely yield of about 75-80 percent ferrous metal from that “hulk,” most estimate that the cost even before the car is dropped on the in-feed conveyor to the shredder box will be about $260 per gross ton. Shredding it and shipping to a steel mill or foundry will top $300 per gross ton.

Delivered to the mill prices were averaging about $255-260 per gross ton in late April. They were expected to rise by as much as $30 per gross ton in May. That, according to one shredder operator in the south, may be the motivation for the new offers. “They can’t process and ship it against current prices,” he said. “They must be selling it based on forward prices.”  Not all shredders are paying such prices for feedstock, but several said some of the more scrap-competitive regions are paying that much to auto recyclers. There are several reasons for this.

First, they are the only segment of the obsolete scrap supply stream with enough material to feed those huge 10,000-horsepower machines that tear even the biggest and brawniest SUV into pieces of metal the size of a deck of cards.

How long this shredded buying binge will last is uncertain. Feedstock flows into scrap yards normally rise in mid-April. Warmer temperatures inspire smaller dealers and peddlers to scour the countryside and alleyways. Shredders were first designed to process old cars and make them easier to melt in electric arc furnaces. But shredders have gotten bigger, more powerful and their numbers have grown. At the same time cars have downsized. Thus, without enough feedstock, as was the case earlier this year, shredders might be running only two days a week and idle the rest of the time.

Michael Marley is a vice president of World Steel Exchange Marketing (WSEM) and author of the weekly ferrous scrap market newsletter Mike Marley’s Shredded Power. Marley has more than 35 years’ experience in the metals industry, reporting ferrous and nonferrous scrap prices and news. He worked at Iron Age magazine from 1997 to 1990 and followed that with 21 years as the scrap editor of AMM. WSEM is an Englewood Cliffs, NJ-based steel consultant and its primary mission is to develop futures trading platforms for shredded scrap, hot-rolled steel coil and iron ore. The company has a strategic partnership with The Nasdaq OMX Group, Inc.