Scrap pressures continue.

Many factors have caused a dramatic increase in ferrous scrap prices, and there little indication that these pressures will ease soon.

Improving business conditions have their cost. In the case of ferrous foundries, that cost is coming in the rising price of raw materials. The most noticeable and disconcerting at this time is that of iron and steel scrap. And, if nothing else, the current ferrous scrap situation provides a good lesson in the economics of supply and demand.

For the first 12 months of 1993, the price of heavy melt scrap rose from $87 a ton to $133--a staggering 65% increase. Beyond a short-lived drop earlier this spring, the upward pressure on scrap demand has continued through the first six months of 1994. With the current economic situation there are few signs that the ferrous scrap supply and demand situation will change much in the near future.

Several factors are feeding the current scrap crisis, some are of which are more obvious than others. Chief among these is the high production levels of the two major scrap users, steel mills and ferrous foundries. In addition, quality and transportation shortages have contributed to the run-up in scrap prices.

The Demand Factor

The rising price and demand for iron and steel scrap is being driven largely by increased raw steel and casting production. In 1981, U.S. steel mills produced 121 million tons of raw steel. By the following year, production levels dropped dramatically to 75 million tons. Sluggish production levels were characteristic of much of the early and mid-1980s. By the end of the decade, the manufacture of raw steel grew at a steady pace, reaching 89 million tons in 1989.

While production slipped in the early part of this decade, raw steel production has continually grown from 92 million tons in 1992 to a projected 100 million tons this year.

Iron and steel foundries have followed a similar path during the past 15 years. In 1993, U.S. ferrous foundries shipped about 10.4 million tons of castings. That is expected to rise to 11.1 million tons this year. While forecasts for 1995 indicate a slight drop for both steel mills (95 million tons) and ferrous foundries (10.7 million tons), these slowdowns aren't expected to significantly affect the current tight supply of quality ferrous scrap.

Supply and Quality

Equally as significant as the growing demand, for iron and steel melting stock has been the increasingly tight supply of high quality scrap. Growing pressure for higher quality end products has caused mills and foundries to search for iron and steel scrap with known chemical composition and low residual elements.

The need for higher grades of scrap has been fueled, in part, by the growing trend toward electric melting. Today, nearly 40% of raw steel production in the U.S. is done with electric furnaces. Foundries, too, have moved increasingly toward electric furnace melting. Generally, the most desirable grades for foundry melting operations are steel punchings and plate, cut structurals and rail, and iron castings. As a result, these factors are contributing even more pressure on supplies of the top grades of iron and steel scrap.

According to El Hoeffer, editor of the Iron Age Scrap Price Bulletin, "There is just less and less of these grades available." He explains that much of the scrap steel grades come from the demolition of buildings and general infrastructure. As the government has cut back funding for road construction, bridge repair and general construction, and industry has been reluctant to tear down obsolete plant and structures, the supply of structural scrap has dwindled. At the same time, the supply of premium cast grades has also shrunk. Thus, the prices for the most desirable foundry scrap grades has been pushed upwards, some to historic highs.

As mills and foundries look to hold down costs, they have sought out secondary scrap sources, such as obsolescent grades (auto hulks, appliances, etc.). These types of scrap are especially preferred for use in melters like electric furnaces in steelmaking and foundry cupolas. With everyone now competing for just about any type of scrap they can get, price pressures have been pushed down the line to even the lowest grades of iron and steel scrap.

Hoeffer describes the typical scenario in scrap collection today: "We've all driven through the country and seen rows of used cars or old appliances sitting around wasting away. It makes lousy scrap, but if the price gets high enough, the incentive is there for someone to go out there, pick it up and bring it in for processing. Rusting metal may not help the quality situation but it somewhat helps the supply situation."

Alternative Melt Stocks

Tight supplies and rising prices have also fueled the drive for mills and foundries to search out alternatives to traditional melt stocks. Some of the substitutes under scrutiny include direct reduced iron (DRI), pig iron and steel cans.

Currently, DRI appears to be a better alternative melt stock for steel mini mills than for foundries. Pig iron, on the other hand, has been a traditional feedstock for ferrous foundries. According to Hoeffer, "There's a pretty good supply of pig iron out there right now, and it can be much cheaper than scrap. But this pig iron is more of a steel mill grade and foundries need something better [see modern casting, August 1993] to get the metal chemistries they need. The type of pig that foundries need is out there, but it's more costly than the basic pig iron that the mills use."

The use of steel cans has garnered a fair amount of attention during the last two years (see modern casting September 1993). "I expect we'll see more and more steel cans used in both mills and foundries but there are some problems in processing them fight now," Hoeffer said. "Cans need to be segregated properly and the biggest source for cans is through municipal recycling. Municipalities just don't know how to handle them in terms of keeping them clean and avoiding contamination.

"You'll see more steel cans being used for melting as soon as we can overcome these and other problems like detinning, and how much compacting of the cans needs to be done. They're a great source of good steel."

A Transportation Crisis

Hoeffer said when the transportation industries were deregulated in the 1980s, many expected lower freight rates and an expanded, more diverse marketplace. "Those benefits developed, but instability also arrived," he said. Freight rates and other transport problems are becoming a larger part of what mills and foundries pay for scrap.

By and large, most scrap in the U.S. is moved by rail, and according to Hoeffer, "Right now everybody's fighting for freight cars. Last year there was a real shortage of freight cars and gondola cars, which are used to haul scrap. This, together with dwindling supplies, scared a lot of buyers who overbought and overbid just to make sure they were going to get what they needed."

Freight car production trends over the last decade bear out his contention. The overbuilding of freight cars in the late 1970s was the start of a very tumultuous decade for the freight car industry. In 1979, for instance, 90,000 freight cars were built and shipped. This was followed by 86,000 cars in 1980.

But by 1983, only 6000 new freight cars were built, throwing the railroad freight car industry into a deep depression from which it has only recently began to climb out of. In 1993, some 32,000 new cars were built and this is expected to increase to 35,000 this year, nowhere near the record levels of the late 1970s and early '80s.

"Foundries, even the small and medium shops, need to become more diligent when it comes to freight and transportation," Hoeffer said. "When it comes to commodities like scrap, they aren't just competing with other foundries 30 or 100 miles up the highway. They're competing with steel mills and other foundries all over the country, many of whom have become increasingly sophisticated in their procurement and shipping operations. Some have complete departments set up only for the purpose of purchasing and controlling the freight costs of commodities."

International Pressures?

With shrinking scrap supplies and spiraling prices has come speculation that one of the significant factors affecting scrap availability and pricing is that dealers are increasing their exports of the these commodities. Shipment trends lend little credence to this speculation.

According to Hank Sattlethight, statistical analyst for the U.S. Bureau of Mines, "Through April 1994, U.S. exports of iron and steel scrap were about 2.6 million metric tons. This represents about 14% of the total scrap shipments during this four month period. This is down about 2% from the January through April period last year."

The largest export markets through April, according to the Bureau of Census, were Korea (800,865 metric tons), Canada (563,920), Turkey (279,829) and Malaysia (208,316). Together, these countries represent more than 70% of the total scrap exported during the first four months of 1994. But Sattlethight also points out that Korean exports have dropped some 388,093 metric tons since last year. So, despite some thinking that scrap exports are having a negative impact on domestic supply and prices, this doesn't appear to be the case.

Little Relief in Sight

A short-lived drop of between $5-$10 a ton earlier this month didn't last long. "The perception now," Hoeffer said, "is the freight car situation is straightening itself out, and the steel and foundry business is still booming, so the price has already begun to head back up and may go even higher.

"In June, the composite scrap price was running about $106 a ton. By early July it had risen to $112.17 a ton. And while I don't like to make predictions, we could be looking at another $3-5 ton increase going into August. We're just about where we were or a little higher than last year at this time on most grades of scrap."

Getting a Handle on Foundry Scrap Use

In 1993, the U.S. Bureau of Mines initiated a program aimed at developing a better statistical base for more accurately determining foundry use of iron and steel scrap. The following tables represent the preliminary data developed so far.

According to Hank Sattlethight, statistical analyst for the Bureau, the project is ongoing Further results will appear in upcoming issues of modern casting.

Estimated 1993 Ferrous Scrap Purchases And Consumption By Manufacturers Of
Steel Castings. By Company Size(*)

(Scrap data are in short tons)

Company size            Number            Estimated         Estimated
(Number of                of                scrap             scrap
employees)             companies(**)      purchases        consumption

  1 - 9                     15                  300               500
 10 - 24                    28                 9300            14,100
 25 - 49                    59               23,300            35,200
 50 - 99                    61              164,100           248,300
100 - 249                   53              272,100           411,600
250 - 499                   27              368,900           558,100
500 - 999                    8              321,000           485,600
Greater than 1000            3              100,900           152,700
Totals                     254            1,260,000         1,906,000

* Data are preliminary and contain estimates.

** Does not include investment casters that do not consume ferrous scrap.
Estimated 1993 Ferrous Scrap Purchases And Consumption By Manufacturers Of
Iron Castings And Company Size(*)

(Scrap data re in short tons)

Company size            Number          Estimated         Estimated
(Number of                of              scrap             scrap
employees)             companies        purchases         consumption

  1 - 9                    56                1300               2200
 10 - 24                   72              10,900             18,600
 25 - 49                  204             196,600            332,800
 50 - 99                  132             490,400            830,300
100 - 249                 157           1,685,500          2,853,700
250 - 499                  51           1,732,100          2,932,600
500 - 999                  20           1,978,900          3,350,500
Greater than 1000          12           2,145,400          3,632,500
Totals                    704           8,241,000         13,953,000

* Data are preliminary and contain estimates.

Source: U.S. Bureau of Mines (from voluntary industry surveys)