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Skyrocketing scrap prices have changed service center attitudes, and approaches, to handling waste material.
By Dan Markham,
Senior Editor
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There was a time when service centers viewed scrap in a way the name suggests: as leftovers from the main course of business. But with demand for scrap far outpacing the supply sought by metallic-hungry mills—and prices of steel, aluminum and copper scrap at record highs—service centers suddenly see all those remnants, skeletons and shavings produced by their processing operations as icing on the cake. Dessert rather than debris, if you will.
Since early 2003, the price of steel scrap has jumped more than 300 percent, to a high of over $400 per ton for No. 1 bundles in 2004, according to historical data from American Metal Market. Steel scrap reportedly has sold from the mid $200s to the mid $300s throughout 2006, reflecting both its higher price and higher volatility. The story is similar for high-quality nonferrous scrap, where the price for copper has risen from 60 cents per pound in late 2003 to a high over $2.50 this summer, while aluminum scrap has doubled to more than 60 cents per pound.
With mills from the Midwest to the Far East bidding up scrap prices to such new heights, it’s no longer sensible for processors to ignore what has become a valuable asset. “Twenty years ago, we didn’t care what we got paid for it; it was something we threw away. Today, it’s a core component of your overall cost equation,” says Stuart Ray, president and chief operating officer at Mi-Tech Steel, Louisville, Ky.
Scrap merchants around the country report a similar shift in attitude. “[Service centers] are more aware of it today than they were a few years ago because the scrap they are selling is such a huge fixture on their financial statement,” says Richard Gertler. “They’ve always concentrated on the core business, and looked at scrap as a secondary commodity. But with prices as they are today, they should be looking at every single pound that leaves their facility, including scrap.”
Gertler is a veteran of the scrap industry, starting in the family business, Industrial Scrap Corp., which was purchased by Fort Wayne, Ind.-based OmniSource in 1999. He and brother Jeffry Gertler recently formed Scrap Metal Services LLC and opened a 30-acre scrap site in Burnham, Ill.
Alan Postel, president of the recycling division for Commercial Metals Co., Irving, Texas, agrees there’s been a shift in thinking, though he says it actually predates the recent rise in scrap prices. He first noticed a change six or seven years ago when market conditions were weak and struggling processors were striving to get the most out of every aspect of the business.
Maximizing scrap requires an effective plan for segregation, handling and storage, among other factors. Reputable scrap dealers will work with service centers to devise the optimal scrap plan for their operation.
“We go in and assess their scrap handling program. We tell them if they’re segregating properly, review internal record keeping and ensure that the proper-sized containers are in place,” Gertler says.
Effective segregation of various alloys is the biggest factor in maximizing scrap dollars. “The further they segregate, the more money they’ll get,” Postel says. Strips measuring three feet or smaller can go directly to the mill. Larger pieces must be cut up by the scrap dealer, which adds cost and reduces what he will pay for the material. “Some service centers have two or three containers, and they throw strictly smaller pieces into one. We pay more [for that material]. If you keep different alloys segregated, you’ll get more money than mixing it,” he adds.
Service centers should also shop around to a number of scrap dealers in their geographic area, says Kent Kiser, a staff member at the Institute of Scrap Recycling Industries in Washington, D.C., and the publisher and editor-in-chief of the association’s magazine, Scrap.
“That’s the only way they can make sure they’re getting the best deal and the best advice. With one person, you’re not sure they have your best interests at heart,” Kiser says, adding, “The scrap guys are the experts. They know how to collect, store, process and ship material to get the best value out of it.”
In the end, experts say, an open relationship works best for all parties. Even a scrap dealer that has to pay top price will benefit from a relationship with a service center that has an efficient scrap program in place.
As in virtually all industries, the information revolution has brought new transparency to the scrap market. “As the Internet began to take hold and the flow of information was so prevalent, the idea of playing hide the ball, which is what old traders used to do, was gone,” says William Larson, chief financial officer at Commercial Metals. “Now, everybody from the guy who collects aluminum cans up to the sophisticated recycler knows the price. Trading has become, if not obsolete, much harder to get a decent margin.”
Such activity forced Commercial Metals to expand into scrap distribution, where it adds value through cutting or repackaging scrap—such as crushed automobiles—before selling it to the mills. It was an easy progression for the company, which began as a scrap recycler and now also operates minimills at several southern U.S. locations, another in Poland and a service center in Australia, among other holdings.
Commercial Metals has no domestic service centers. “It’s not a market we’re fond of in the United States,” Larson says. Indeed, few companies operate both service centers and scrap operations. One that does is DeKalb Iron and Metal Co., DeKalb, Ill. The scrap operation has been in place since 1918, while the company opened its service center in 1954.
“Over the years, it’s been very advantageous at times because the businesses seem to complement each other. Where maybe we weren’t having such a great year on the scrap side, the new-steel side was making money, or vice versa,” says President Jeff Gorman. Pointing to the overall strength of the metals industry, he notes, “The last couple of years, they’ve both been doing very well.”
Atlas Metals & Iron Corp., a nonferrous metals company in Denver, gains some operational efficiencies from running both scrap and service center divisions, Vice President Jerry Simms says. On occasion, the company can realize a slight cost advantage on conversion of its scrap to new metal. “It’s never going to be a huge differential, but once in awhile we’re in a better position,” Simms says.
Though there may be limited opportunities for scrap-service center synergies, the same isn’t true for mills and scrap yards. While Commercial Metals and Schnitzer are the rare major companies with both scrap and steelmaking capabilities, that may change in the future. At least one mill is reportedly interested in bidding for PSC Metals Inc., the scrap metal division of Philip Services Corp. with facilities in the Midwest, Southeast and Pennsylvania. More ventures into scrap facility ownership by mills wouldn’t surprise Larson.
“I don’t know if it would necessarily be by purchasing them or starting their own from greenfield, but there has been, over the last five years, much more of a focus on mills controlling their raw materials,” Larson says. “We owe that to the integrated mills, who saw the price of iron ore shoot up and said, ‘having control of the mining operations is not a bad idea.’”
According to ISRI, two out of every three pounds of new steel produced in the United States is made from ferrous scrap. Approximately 60 percent of the metals and alloys produced in North America are made from nonferrous scrap. Last year in the United States alone, scrap recyclers handled 70 million tons of scrap iron and steel, 4.1 million tons of scrap aluminum, 1.5 million tons of scrap copper, 1.1 million tons of scrap stainless steel, 1.4 million tons of scrap lead and 248,000 tons of scrap zinc.
Reuse of this scrap conserves vast amounts of energy and natural resources and diverts millions of tons of material that would otherwise be destined for landfills. According to the Environmental Protection Agency, for example, recycled aluminum saves the nation 95 percent of the energy that would have been needed to make new aluminum from ore. Recycled iron and steel result in energy savings of 74 percent, and recycled copper, 85 percent.
Today in the United States, for domestic consumption and export, at least 70 million tons of ferrous scrap is shredded, sheared, baled, crushed, briquetted, broken and torched each year by a scrap recycling industry that has gotten continually more sophisticated and capital intensive.
While some scrap industry consolidation has occurred before and more may be forthcoming, it likely won’t happen on the scale of the mill consolidation, scrap operators believe. “There was a big consolidation in the late 1990s and we’re seeing it again today. But I think there’s going to be a niche for owner-operators,” Gertler says.
Investors attempted a major rollup of scrap operations in the late 1990s, Larson recalls, but it failed because the business model assumed there were nationwide synergies in scrap. “The M&A activity occurring now is best characterized as a regionalization. If you’re strong in Florida, Georgia, Alabama and Mississippi, you’ll look to those markets to acquire. It won’t do you any good if something shows up in California.”
Though most scrap dealers are local, scrap itself is a global commodity. As in virtually every other industry, China is a key player in the scrap game. China’s booming economic growth has created vigorous demand for scrap metals. In 2004, China imported 68 percent of all U.S. copper exports, 50 percent of all aluminum exports and 27 percent of all ferrous scrap exports.
“China’s been buying up huge quantities of scrap. That’s what’s been driving the market and creating these high prices,” Kiser says. “If it weren’t for China, there wouldn’t be huge competition for the material.”
Using data from the U.S. Department of Commerce, AMM reported that exports of scrap in May exceeded $800 million for the first time. China accounted for almost 55 percent of the total.
China’s appetite for scrap actually dropped off in recent months, though that is expected to be short-term. “China’s not going anywhere,” says Simms. “They may be in and out of the market from time to time, but they are a huge developing country and all their people will want the things we have.”
“You have to have a strategy on dealing with China for the next 10 years, and the forward thinkers are saying, ‘I need to have a strategy on dealing with India,’” Larson says.
Anticipating the issue, ISRI conducted its first trade mission to China in September 2005, and will follow that up with a mission to India in January.
Risk of Theft Rises
Along with Scrap’s Value
Scrap metal has become so valuable, it has caught the attention of thieves.
Experts warn that service centers and other scrap handlers should keep a closer guard on their material to protect it from crooks, both inside and outside the company.
Scrap dealers are also urged to be more conscientious about any material they buy. Communities have begun cracking down on thefts of manhole covers, light poles, plaques and other publicly owned metals, which the thieves attempt to turn into cash at the local scrap yard. Local governments are demanding more authentication from scrap sellers and buyers, which may add cost to scrap operations.
Cities are “trying to get some control over the over-the-scale sales,” says Kent Kiser, publisher and editor-in-chief of Scrap Magazine, a publication of the Institute of Scrap Recycling Industries. “All kinds of wild stuff is stolen by all kinds of people and brought to a scrap yard under the guise of being legitimate. The law enforcement people are looking to control that kind of fraud.”
Regulations enacted to curb this kind of theft do not directly affect service centers, which have their materials picked up by the scrap operators. Still, Kiser says, service centers are not immune to the threat posed by scrap theft.
“They have to worry about protecting the scrap they’re generating. They have to make sure it’s picked up by the right person and that it’s not left outside susceptible to theft,” Kiser says.
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