It's our scrap bed to lie in.

Is it a scrap crisis or just the laves of supply and demand playing themselves out? In four articles this month, we try to detail the current ferrous scrap issue facing today's metalcasting industry.

As we were interviewing experts for these articles, a few opinions stuck in my head. The first is from a ferrous raw material supplier and describes why ferrous metalcasters are in such a pickle today:

"Metalcasters got themselves into trouble three to four years ago when they signed contracts with their customers and gave away the store. They said 'not only will I give (the castings) to you at a dirt cheap price, but I will cut the price by 3-5% a year for the next three years to keep your business.' When we were reaching those big shipments a few years ago, they were cutting the price o[ castings, and that violated the laws of supply and demand. The demand went up so the prices should have gone up."

According to this supplier, most metalcasters had a surcharge for metallics built into their pricing, just as they would for electricity of natural gas. However, many metalcasters gave up that surcharge to keep business. While this philosophy worked out when scrap pricing was low, when it shot to $270-300/ton, metalcasters had nowhere to turn to pass on the charge except to look inward. Even when a new surcharge is passed on, a delay of three to four months is the norm before this surcharge takes effect.

Do we only have ourselves to blame for not being able to take these skyrocketing scrap prices in stride of was there no other option than to give away the store three to four years ago so we could hang on to work and survive? Time and again I hear stories about metalcasters taking jobs for production but not for profit. Rarely do I hear of metalcasters turning down jobs because of low prices of because they don't fit their capabilities.

When I visit the elite metalcasting operations, one of the common threads between these plants is that they truly understand their costs. They only bid on work that fits their operation and is ensured to be profitable.

One casting buyer pointed out to me recently how several of his casting suppliers don't bother to alter their casting pricing throughout the initial design process when design changes are being made. Instead, changes will be accepted and made under the initial price quote, and the casting suppliers will wait until the beginning of production of (even worse) after a year of production before telling the customer there is a price increase. Is this an inability to understand costs or bad business management? It really doesn't matter which it is because both can spell financial ruin in the long run.

Who is the cost king in your operation? Who can tell you to the penny the percent increase a casting will undergo if steel scrap prices rise 10%, electricity costs increase 20% and the casting/mold design was altered to include a filter? Do you readjust your casting costs when ever a change to design of production is made?

While the current ferrous scrap issue is exaggerated compared to any normal cost changes that may occur during casting design and development, it clearly illustrates the importance of winning jobs based on profitable casting prices. It is time for you to determine your cost king and give them the power to accept and reject jobs based on profitability. The unforeseen always is bound to happen and we must make sure we are prepared for it.