7-2009 Business Topics
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Cash for Clunkers to Have Modest Effect on Steel Scrap Market

By Tim Triplett, Editor-in-Chief
The so-called “Cash for Clunkers” automotive stimulus bill passed by Congress last month may help the auto industry sell a few more cars, but it won’t have much effect on the scrap market or scrap prices, say industry executives.

The measure—which is supported by the American Iron and Steel Institute and the Steel Recycling Institute—encourages the early retirement of inefficient, high-polluting vehicles by providing consumers with incentives for the purchase of more fuel-efficient automobiles, while requiring that dealerships send the inefficient vehicles to be recycled.

Every year, the scrap recycling industry processes 12 to 16 million vehicles. Each vehicle saves the equivalent of 502 gallons of oil and reduces nearly 9,000 pounds of greenhouse gas emissions in the manufacturing process. “[Passage of this act] will support the domestic auto industry at a time when it desperately needs it, while also having a positive two-fold effect on the environment by both reducing emissions and saving energy,” AISI officials say.

Under the measure, owners of vehicles that get less than 18 miles per gallon can receive a voucher worth up to $4,500 if they scrap their car and buy a new one that gets better mileage. The $1 billion appropriated in the bill is enough to fund about 250,000 vouchers for new car purchases.

To qualify for the $4,500, customers trading in an old SUV or pickup must see an improvement of 10 miles per gallon for a new car, 5 mpg for a new light truck or SUV, or 2 mpg for a large light truck. To qualify for a $3,500 voucher, customers need an improvement of 4 mpg if they buy a new car, 3 mpg for a light truck or SUV, and 1 mpg for a large light truck. New cars purchased with a voucher must get at least 22 mpg, light trucks at least 18 mpg and large light trucks at least 15 mpg.

Will this measure send consumers rushing to their new-car dealerships and cause a surge in automotive scrap to hit the steel market? Not likely, say many experts. With gas prices relatively good these days, and such widespread worry about job security, many people are likely to stick with their old vehicle despite the government incentive.

Bill Heenan, president of the Steel Recycling Institute, notes that automotive scrap contributes a relatively small portion, perhaps 10 percent, of the steel that is recycled under normal circumstances, and probably considerably less today given the current economic environment. Retired vehicles first go to parts resellers who dismantle them and sell much of the metal as replacement parts.

Heenan expects the benefits of “cash for clunkers” to be relatively modest and to take some time. Not everyone will jump at what appears initially to be free money from the government. “First, you have to be eligible,” he notes, based on the age and poor mileage of your vehicle. “And not everyone is going to want a $4,500 voucher rather than the trade-in value. Plus you have to replace it with a new vehicle with significantly better mileage.

“We will get some extra scrap, and we will sell more steel, because more people will buy cars. It will create jobs for the scrap and the auto industries. But it won’t create enough additional scrap that it will have an impact, either short term or long term, on the scrap price,” he adds.

Though North America’s steel mills have cut production capacity in half and are not consuming as much scrap, exports to such countries as China and India remain fairly strong, Heenan notes, helping to stabilize the scrap price.

—Tim Triplett, Editor-in-Chief



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