Supply and Demand Still Dominates Ferrous Scrap Outlook: Two foundrymen and three scrap processors offer their insight into the purchasing outlook for ferrous scrap.

Ferrous scrap metal prices a e low. Will prices remain at way? Will recent events cause them t rise sharply?

During the first week of October, the ferrous scrap market price was estimated at $75. 0/ton. That's the lowest it has been since 1986 (Table 1). That market price estimate, which the U.S. Geological Survey uses to track ferrous scrap pricing refers to the composite No. 1 heavy melt steel sales from Chicago, Philadelphia and Pittsburgh. No. 1 heavy melt, s defined by the Institute of Scrap Recycling Industries (ISRI), is wrought iron and steel scrap that is at least 0.25 in. thick with individual pieces no more than 60 x 24 in. Other common foundry grade include No. 2 heavy melt (wrought iron and steel scrap, black and galvanize, at least 0.125 in. thick), No. 1 and 2 bundles (new black steel sheet scrap, clippings and skeleton scrap, compressed and hand-bundled/ old black an galvanized steel sheet scrap, hydraulically compressed), No. 1 busheling (clean, steel scrap, not exceeding 12 in. any direction like sheet clippings an stampings), shredded auto scrap an cut structural/plate.

Those grad specifications will differ from those developed by a foundry. Each foundry uses the ISRI specifications as its bass for defining grades, but usually veer away to a description more specific to its needs. Every scrap processor realize this.

Differences of grade specification (which can vary by region as well) combined with recent events like the terrorists attacks and war in Afghanistan make those who deal with ferrous scrap hesitant about for casting. In this article, foundrymen Joseph Ward, Indianapolis Casting Corp. (International Truck and Engine Corp.), Indianapolis, and Michael Becker, Intermet Corp., Troy, Michigan; and scrap suppliers Bob Brewer, OmniSource Corp., Fort Wayne, Indiana, Fred Smith, PCS Metals, Cleveland, and David Borsuk, Sadoff Iron & Steel Co., Fond u Lac, Wisconsin, paint a tentative financial outlook for purchasers of ferrous scrap. They do so by offering their insight about trends in purchasing ferrous scrap.

Market Prices: Up or Down?

Barring another national tragedy, the common response from the experts is that the price of ferrous scrap should remain relatively stable--meaning no sharp incline or decline during the year is foreseen. That is good news for foundries considering prices have declined since 1995 (Fig. 1).

"It could be stable because there doesn't appear to be much growth on the horizon and there doesn't appear to be a lack of melting materials in the U.S. either," said Brewer.

Ward added, There's no strength in the market to drive the price up as far as scrap material goes."

Smith said despite recent events economic recovery still is anticipated because the American dollar remains strong.

According to Becker, a price spike may occur during the winter months because historically steel mills reduce the scrap inventory at year end that they built up in the previous months and then re-enter the market in January. Weather can also play some role in Winter pricing due to transportation delays or disruptions, Becker said.

"What determines the market price comes from knowing how much the scrap trades are being done for," said Becker.

The common market price for scrap to which most foundries and scrap suppliers refer is established by American Metal Market (AMM) magazine. In its daily report, AMM lists the consumer buying prices of 25 different grades (based on ISRI specifications) in 12 U.S. cities and two Canadian regions. It also offers weekly scrap composites of No. 1 heavy melt (as listed above) and shredded scrap. As of Oct. 5, shredded scrap cost $89.10/ton; the composite price based on sales in Birmingham, Chicago, Houston, Philadelphia and Pittsburgh. In the same period last year, No. 1 heavy metal was $92/ton and shredded scrap was $102.40/ton.

Recycler's World, a worldwide trading site based in Canada, listed its scrap steel market price at $85/ton during the first week in October. It uses the average prices of mixed scrap iron and steel, which it defines as assorted iron and steel scrap up[ to any maximum size, free of white goods and light gauge materials, and less than 0.125 in. thick.

Intermet uses its scrap broker as its market price resource. Its broker has 35-40 traders to track the transactions with offices in 11 U.S. cities including Birmingham, Chicago, St. Louis, Cincinnati, Philadelphia, Pittsburgh, Houston and Salt Lake City. That provides a leveraged knowledge of the market for Intermet, said Becker.

Supply and Demand

Although market price sources may vary, all agree that the main factor in pricing is and will be supply and demand. Foundries ask for a set amount of ferrous scrap despite the fluctuating cost of which they have no control. When more scrap is available, prices tend to drop to entice foundries to buy more than their usual stock. If a specific grade of scrap becomes scarce, scrap dealers may increase prices because they may have to pay to have more scrap shipped to them from other suppliers.

To those interviewed, supply was not a concern because a scrap shortage is not foreseen, but a decrease in certain grades is emerging. Some iron and steel scrap is generated within steel mills and foundries (home scrap). Industrial plants are the source of prompt (or industrial) scrap. Obsolete scrap is created from discard objects like automobiles and appliances. The most recent report by the U.S. Geological Survey shows that recycled ferrous scrap consists of 31% home scrap, 25% prompt scrap and 44% obsolete scrap.

Foundries tend to use prompt scrap because the chemistries, densities and cleanliness are more consistent, but prompt scrap is limited to manufacturing schedules.

"Prompt scrap is being produced every day. As long as there's a manufacturer working in the metal working industry, they're going to be generating some type of scrap," said Borsuk.

Intermet, whose largest market is the automotive industry, receives its prompt scrap (No. 1 busheling, No. 1 automotive shredded and plate/structural) from the automotive stamping industry and vertically integrated steel mills.

"The recent economic problems in the vertically integrated steel mill industry could have an impact on certain prompt grades, but the automotive stamping industry is still generating a large volume of busheling," said Becker. "If automotive were up, we would have a more adequate supply but we also would be consuming more."

Indianapolis Casting Corp., which melts 160,000 tons monthly, buys prompt (2 ft plate and structural, forging flashing and busheling) and obsolete scrap (track material like 2 ft rails and cast scrap) for its coreless induction melting.

"The biggest issue is that the automobile production schedule is shrinking. The steel scrap that gets generated when you manufacture an automobile isn't being generated. We're finding that some of the things we're used to receiving are becoming a little hard to come by. It's mainly because people aren't building as many cars as they have been. That reflects on a schedule 2-3 months down the road," said Ward.

Indianapolis Casting Corp.'s prompt scrap comes newly generated from stamping plants and forging operations. The foundry buys obsolete when "the price is right."

The availability of obsolete scrap is tied to the economy "When it comes to automobiles or appliances and if people aren't working, they're not going to buy a washer, dryer, lawnmower or an automobile unless they have to. They may repair theirs or buy a used vehicle or appliance instead of a new one," explained Borsuk.

Low Demand

Ward said if the steel mills are not working hard and demand for scrap remains low, then prices can stay relatively low.

A report by the U.S. Geological Survey shows hat the estimated consumption of iron and steel scrap on a daily basis was 5% lower in July than in June. The daily average of home scrap in July was down 5% and net receipts of purchased scrap decreased 6% from the previous month.

According to the American Iron and Steel Institute, domestic raw steel production from January to September dropped 12.1% from the same period last year. For the first six months in 2001, steel sale were 10.7% lower than the same period in 2000.

The Wall Street Journal reported that key metal-consuming industries continue to halt production and steel plants have been operating at less than 75% capacity for most of 2001.

No one can anticipate whether demand will increase. The earliest a reliable economic forecast can be made will be January, said Ward.

Other Factors

Supply and demand doesn't mean each foundry is paying the market price, could pay a premium on top of that. Foundries have to consider ho location, government regulations, special needs, customer specifications and other melt material sources can affect pricing.

Location--Borsuk points out that in the past a scrap yard was usually within a couple of blocks of the foundry. As cities redevelop and transportation becomes less of an obstacle, the proximity of a scrap yard is not a concern. Scrap dealers also must accommodate some foundries that operate on a 24/7-delivery schedule with +/-30 mm window. As a result, freight costs are included in the scrap price. If freight costs increase, so will a foundry's scrap prices. Availability of specific types of grades may limit the option of which scrap yard to use, regardless of distance from the foundry.

Government regulation--Some foundries require the ferrous scrap to be free of oil because of local environmental regulations and that adds cost, said Brewer.

Indianapolis Casting Corp. cannot tolerate any scrap that has been painted because obsolete scrap might have lead paint on it. "We have a big issue with lead contamination in both the plant environment and the baghouse dust going out of the plant," said Ward. "We don't allow painted scrap in here and there's a cost for that."

Borsuk added that direct environmental costs also are caused by making sure that mercury switches or capacitors that have polychlorinated biphenyls are not in a scrap mix. "We have to comply with stormwater and Title V regulations, and that has become a significant cost," he added.

Special needs--Each foundry has its own grade specifications. Using the ISRI specifications as a basis, every foundry veers from that to develop its own. Even Intermet, which has 7 iron foundries in North America and three in Europe, has grade specifications that vary from foundry to foundry.

"We can have a plant that is picky about the density of the busheling it receives or about a supply of scrap that is 2 ft and less when it wanted 12 in. or less. That foundry is telling me they are willing to pay more," said Becker.

Different grades of scrap also work better in various types of furnaces. Cupolas can accept a wider range of scrap grades, including obsolete material. Careless induction methods are more restricted to prompt scrap because of its smaller size and cleaner properties. An additional concern when melting in an induction furnace is to avoid scrap with grease in its mix.

Customer specifications--Customer specifications may allow the use of lower cost material.

"Our cupola tends to use more shredded but there's a reason for it. It's the customer specifications. It has to do with the type of product--whether it was a safety-critical suspensions part vs. an engine component," said Becker. Customer specifications may allow more residual elements.

If 0.4% of manganese is allowed in the scrap, 0.45 or 0.5% may be permitted if the customer specifications allow it. That may result in a lower scrap price as well, he added.

Other sources--Direct reduced iron and iron carbide as substitutions for ferrous scrap are not considered feasible in the foundry business anymore. However, different grades of pig iron may be used on a price competitive basis, according to Borsuk.

"It is an alternative charge material that does have benefits like a consistent chemistry and meeting certain melt needs of the foundry. It can be used as a pricing mechanism; an iron unit cost if scrap casts go up," he said.

Intermet might use competitive materials, like pig iron, in a melt mix depending on pricing.

"If pig iron was competitively priced, we might use a little bit mare, especially if busheling was a higher price," Becker said.

Cloudy Future

Ferrous scrap purchasers prefer to evaluate scrap dealers and scrap on their quality and availability rather than on prices. That is what a foundry can control rather than prices in a cloudy economic future.

If prices remain the same or increase, foundries will buy and dealers will sell. If prices drop further, scrap dealers may not profit and have the option to withhold scrap until the market improves.

One final note to keep in mind: Smith said that when the scrap prices were highest, foundries were the most profitable.

[Figure 1 omitted]

Table 1

Annual Average U.S. Steel Scrap Price (dollars/metric ton)

Year   Price

1961   35.80
1962   27.89
1963   26.47
1964   35.92
1965   33.73
1966   30.18
1967   27.19
1968   25.53
1969   30.08
1970   44.24
1971   33.92
1972   36.05
1973   56.76
1974  106.13
1975   71.37
1976   76.74
1977   63.05
1978   75.92
1979   97.41
1980   91.42
1981   91.86
1982   62.72
1983   71.76
1984   86.52
1985   68.93
1986   73.00
1987   84.41
1988  107.26
1989  105.61
1990  105.46
1991   91.79
1992   84.67
1993  112.44
1994  126.82
1995  135.03
1996  130.60
1997  130.45
1998  108.30
1999   94.15
2000   95.89

Source: American Metal Market/U.S. Geological Survey

The U.S. Geological Survey tracks scrap metal pricing, but the dollars
are not adjusted for inflation. The table uses the composite price of
No. 1 heavy melting steel scrap as defined by the Institute of Scrap
Recycling. The composite is based on a three-city (Chicago, Philadelphia
and Pittsburgh) price average.

RELATED ARTICLE: Long-Term Agreements Benefit Both Parties.

Ever since foundries and scrap yards have been doing business with each other, the market price of scrap has fluctuated. Long-term, fixed price contracts could build stability within the industries.

"A long-term purchasing agreement is a good thing if you want a consistent supply of material," said Ward. "We know we're going to be buying 4000-5000 tons and they know they have a market so they don't have to go all over the Midwest to sell it."

Also, if inclement weather or a sudden need for charge material occurs, the scrap dealer may have an emergency supply on hand for the foundry, Ward added.

Brewer said, "Scrap processors buy scrap metal because they know of a consumption that would require that type of metal. In most cases, it's tied to a regional consumption point."

A 5-yr contract eliminates the monthly bidding of services so the scrap processor can focus on delivery and obtaining enough material to satisfy demand, he added.

Borsuk said that foundries can avoid scrap processors that may have environmental problems or liabilities through long-term contracts. Also, those contracts give scrap processors the chance to learn more about the foundry business so they can provide less expensive material or grades that can work just as well.

Long-term purchasing agreements take out the spikes of availability in the short-term basis, he said. "It's not only that the material is there, but that you can get the material to where it has to go, Borsuk added.

Intermet's long-term agreement is with a broker. The broker, not Intermet, regularly searches for new scrap yards that may offer a more competitive market price or a yard that may be closer to a foundry so the freight costs would be lower, said Becker.