Surviving the scrap crisis: what can you do?

It was about a year and a half ago that signs started to point toward escalating prices and diminishing availability of ferrous raw melting materials. Dan Torzewski, senior corporate buyer for Indianapolis Casting Corp., Indianapolis, remembers seeing those signs but admits he remained skeptical.

"We saw that in early 2003 the signs were pointing to today's situation (raw material prices reaching $250-300/ton)," he said. "But nobody believed it would get that high. We saw that it might go over $200 a ton, and we thought if it did, we would be in trouble. Now we are approaching $300 a ton--and that is big time trouble."

Now, every ferrous metalcaster is realizing what it means to be so heavily dependent on a commodity that thrives on the laws of supply and demand. There were several factors influencing the meteoric rise of steel scrap and pig iron. Over the past few years, the U.S. had been exporting about 10% of its scrap. From 2001-03, exports increased 100%. At the same time, steel production had been down. And if there is less construction, there is less scrap to draw from. Once the steel mills saw their business starting to pick up, they started ordering more scrap along with everybody else. And if that wasn't enough, a producer of pig iron in Russia had an outage that limited the quantity it could ship and politics in Brazil further limited shipments.

"It is the purest of supply and demand markets," one raw material supplier said. "The hardest pan is that this all comes at a time when casting demand is on the rise."

Now that the full scale of the problem has set in, what can metalcasters do to survive this trying time? MODERN CASTING talked to several suppliers and metalcasters to gain insight into what could be done. The solution? There isn't one, but according to the experts, there could be some ways to weather the storm.

What Do You Do?

There is no way around it--metalcasting facilities are dependent on raw materials. So, when an essential ingredient of your charge mix has nearly tripled in price, how do you counter that?

One solution may be to tap into your metallurgist's creative side. While prices are soaring, switching to a lower grade of scrap can help case part of the strain, said Daniel Pflaum, Gamma-Tech LLC., Cincinnati.

"Foundries tend to get locked into a charge percent, and for good reason," Pflaum said. "But times like these require you to revisit those mixtures. You have to communicate with your supply base to see what they have available. Foundries have landed on a charge design they like for certain reasons, but you may have to go back underneath those same rocks looking for something you missed."

Necessity truly is the mother of invention. And in trying times, new options must be explored in order to survive. According to Pflaum, it takes planning and foresight, but by simply tweaking the make up of charge material, metalcasting facilities can be better equipped to deal with problems such as this.

Each metalcasting facility must put in the time to see what its specific needs are, but Table 1 shows a hypothetical solution for a gray iron facility, with the given charge make up, in 2003, the firm was spending $125 a ton on its scrap, in 2004, that number swelled to $232. By substituting a few other materials into the melt make up, Pflaum figures the operation could save $14.17 per batch.

For a ductile iron firm (Table 2), the price of charge material was $223 in 2003 and jumped to $356 in 2004. Pflaum was able to offset that $133 increase by changing the charge make up and saving $10 a batch.

Because of the unique characteristics each operation needs, there is no universal answer out there to help every facility. But the examples serve as a way to point out that options do exist. In both cases, the new make up does not completely cancel out the effects of rising scrap prices, but it helps cushion the blow. And even when scrap prices return to a more normal level, this same thinking can help cut costs to free up money for other areas of a metalcasting facility's operation.

"I think the current political mantra is 'We live in a new world,'" Pflaum said. "Scrap is a part of that new world economics. The reality is that we need to be creative and that should continue to be a part of the thought process. When scrap is $100 a ton, we tend to get a little lazy and nobody worries about it. This could serve as a lesson learned."

Intermet was able to secure some shipments of steel at a reasonable price. But the two barges of steel it got are only a drop in the bucket. That has the firm looking for alternative solutions.

"We have actually purchased some West Coast steel, which is cost prohibitive to ship," said Todd Heavin, vice president of the ferrous charge group for Intermet. "Most of the scrap out (West) goes to Asia. But we were able to secure favorable pricing on West Coast buys and freight it into the Southeast at a savings. And we are purchasing more pig iron. That is a substitution we can make."

Another option, said Pflaum, may be technology and automated scrap and raw material analysis. By running real time analysis, metalcasters may be able to use lower grades of scrap, but know the composition of it in greater detail. This knowledge can then allow metalcasters to become masters of their charge make up.

Creativity in a melting department may be a metalcasting facility's best option. But it comes with one problem--it requires planning. It may take up to six months to gather data and implement changes. Metalcasting facilities need relief now. And that is easier for some firms than others.

Pass It On

Not every metalcasting facility has the luxury of having surcharges available to pass on to customers and help cushion the How. But As those that do have that option must explore it--and even those that don't, may want to plead their case.

"Raise your prices to your customers," said Raymond Monroe, Steel Founders' Society of America executive vice president. "Many purchasing agents have grown up in a culture where they have never had to deal with price increases. [t is important, especially if you have a good working relationship with your customer, to give them enough warning that their components are going to cost more."

But many firms do not have that luxury. In this day and age of long-term contracts, many metalcasting facilities are locked into reducing the cost of a particular component each year. And many times, there is no sympathy from the customer. But that's where Monroe thinks steel facilities may have an advantage.

"If your customer says, I'm not going to accept any price increase," say to them, 'Who do I ship your patterns to?' One of the dirty little secretes is that we (steel operations) are operating at near capacity," Monroe said. "There is some panic about the availability of steel castings. Don't get me wrong, it is not wonderful, but business has picked up sharply."

Intermet is one firm that has the luxury of being able to slap on a surcharge in an attempt to compensate. But even that is not a perfect solution.

"We do have surcharges with most of our customers and those surcharges are in effect," Heavin said. "The only issue we have as a company is that surcharges just lag the market. We are one month behind the power curve. We may be paying $300 a ton this month, but we are only getting paid from the customer on $275 a ton. And some of the major tier ones are on quarterly formulas that put us four, five or six months back."

If surcharges are not an option or are not helping enough, Monroe suggests looking within.

"You can do as many steel foundries have already done--melt everything that is iron in your plant that you are not using. Clean up the old lot in back and find everything that is collecting junk and remelt it."

Plan Ahead For Next Time

This is not the first time ferrous raw materials have nearly tripled in price over a two-year period. And abiding by the laws of supply and demand, it most likely won't be the last. Some thought now could prove beneficial in the future when this happens again. Putting the time and money into the chemistry of your melt mix now could save plenty more in the long run. But even simpler than that, one supplier said creating good relationships could be just as beneficial.

"All we can do is stick by the customers who have been loyal to us," a raw material supplier said. "A lot of places are coupon clippers. But if you would have developed a relationship with your supplier, if at all possible, I believe that supplier would stay with you.

Over the long haul, if they stuck with me, when material gets tight, I would make sure those 10 guys that consistently bought from me get preference over the 40 that didn't. If you shop around, you roll the dice and you get what you get."

Bob Stevens of the Forging Industry Association (FIA) created the Coalition to take action on how the increasing scrap costs affect metalcasters, forgers and stampers alike. He noticed that due to the high volume of exports, prices in creased and suppliers have tacked surcharges on their products to compensate for the lost business overseas, thus encumbering domestic scrap users because of difficulties in meeting demands.

As of mid-March, a number of groups have joined the Coalition, such as the FIA, the Steel Manufacturers Association (SMA), the American Iron and Steel Institute and the National Association of Manufacturers. The Coalition has hired the law firm Wiley, Rein & Fielding to oversee its actions, and the firm has hired Charles River Associates Inc. to conduct an economic study to determine the causes of, and possible solutions for high scrap costs. The Coalition seeks to construct and file a petition to Washington.

"We've participated in trying to educate the customer, Congress, our membership and others in this," SMA President Tom Danjczek said. "If there were controls on scrap exports, one would hope that the availability of domestic scrap supply would increase."

According to federal law, the U.S. Dept. of Commerce is entitled to limit the scrap exports subject to U.S. jurisdiction if five statutory tests are met:

* there has been a significant increase in scrap exports over time in relation to supply and demand;

* there has been a significant increase in the domestic price of scrap of a scrap shortage relative to demand;

* scrap exports hold the same importance as any other cause of a domestic price increase or shortage;

* the domestic price increase or shortage has or may significantly adversely affect the national economy of any sector thereof, including a domestic industry;

* monitoring and/or controls are necessary to carry out the policy established in the law: to "protect the domestic economy from an excessive drain of scarce materials and to reduce the inflationary impact of foreign demand."

The Coalition stated, 'If these legal tests are met ... the Secretary (of Commerce) may impose relief only if he finds that the failure to take action 'would result in irreparable harm' to the petitioners (of the Coalition), the national economy of a segment of the economy."

Stevens noted that due to excessive scrap exports, purchasers, such as steel mills and, in-turn, forgers, have been hit by surcharges of up to $10,000. The surcharges were based on scrap prices in the last quarter of 2003. With the sharp price increase in the first quarter of 2004, Stevens said surcharges could climb to $20,000.

"(The Coalition) is not looking to control the price of steel scrap," Stevens said. "What we're trying to do is eliminate the surcharges."

If the government agrees on export control imposition, America would not Ice the first country to do so. Russia, Belarus, Ukraine, Venezuela and even South Korea, a country that relies heavily on U.S. scrap imports, have already suspended much of all of their scrap exports. The Kenya Association of Manufacturers is strongly urging its government to inflict a total bah on exported scrap, which would follow the actions of Tanzania and Uganda. These controls worldwide could likely strike U.S. manufacturers further as the global market's demand for scrap will focus significantly on American exports.

Amid the Coalition's proposed petition plan, ISRI has created a blue-ribbon industry panel and retained the firm Patton Boggs, L.L.P. to counter the Coalition's more for government intervention. The panel includes many U.S. scrap exporters and plans to provide guidance to ISRI and federal officials.

ISRI President Robin Wiener said the Institute is staunchly opposed to all control proposals. "We should be working as a government to remove barriers wherever they exist and advocate that the U.S. Trade Representative work with those countries to create a more perfect marketplace," she said.

ISRI Chairman Charles Williams stated that such controls aren't the answer to improving the steel industry's situation of helping the U.S. economy. "As the voice of the recycling industry, ISRI will vigorously defend free and fair trade practices in scrap metal," he said. "Such controls have not helped in the past and may, in fact, have contributed to problems, leaving us to wonder whether the complainants are actually seeking to use export controls as an unfair means of price control."

Williams was referring to a report conducted by Robert Shriner in The Business Economist in 1977. Shriner stated that the export controls from 1973-1974 actually caused U.S. steelmakers to spend $2 billion more for ferrous scrap than if there were no controls.

Emanuel Bodner, an ISRI representative, stated that historical statistics reveal that the scrap market can, will and does freely regulate itself in the absence of trade barriers. "Since 1970, ferrous scrap exports from the U.S. have approached current levels no less than seven times," he said. "A price volatility study over the past 30 years revealed that only once during that time did the price of ferrous scrap have a sustained rise for three years."

The Coalition, however, considers the current situation not relevant to the past. "We don't care what happened 30 years ago," Stevens said. "We're talking about today. One thing (ISRI) overlooks is that (in the past) China wasn't highly involved in the international steel market."

Currently, China and South Korea consume nearly half of U.S. scrap exports, even though more than 50 other countries purchase U.S. scrap. Several industry members note that there have been spikes before in the scrap prices, but the current situation is something previously unseen. Since President Bush lifted the Section 201 import tariffs on steel in December 2003, the gradually increasing scrap prices subsequently skyrocketed up to and past $300 per ton.

The House of Representatives Committee on Small Business held a hearing March 10 to investigate the increase in metal prices and how they are affecting small businesses. Nine associations, including the Coalition and ISRI, delivered testimony. Committee Chairman Don Manzullo (R-IL) said before the hearing, "These recent dramatic price surges in steel and other metals are pummeling our small manufacturers who are trying desperately to hold on to their businesses. We must get to the bottom of these price surges quickly."

During his testimony, Bodner stated, "Attempts to resolve these issues domestically and artificially (by imposing export controls) will, at best, not work. At worst, they could do harm. The best way the U.S. can assist in resolving this situation is through global leadership, not through domestic protectionism."

Stevens delivered a counter argument saying, "The sharp steel scrap price increases and the tight supply problem are having significant, harmful effects on all manufacturers, buyers and consumers of steel of steel products. When we have sharply higher prices for steel products ... we threaten the viability of all metal-working industries."

ISRI claims that even though demand and prices are high, there's no physical shortage of obsolete scrap. ISRI members report that they're able to fulfill the needs of domestic steel workers and haven't seen any documentation addressing a scrap shortage in the U.S.

Stevens agreed that high prices allow other types of scrap, such as obsolete scrap, to be brought on to the market, but the quality isn't always adequate, with the numerous grades of scrap, all cannot be substitutes to produce a sufficient end product, He said that automotive OEMs have also taken a significant amount of scrap off the general market and use it to supply their own mills. This has decreased the availability of high-quality scrap for other users.

As of mid March, the government's stance on controls had not been stated, though Bush said in his State of the Union address in January that the administration promotes "free and fair trade to open up new markets for America's manufacturers." Despite those comments, the Coalition remains persistent in its push for federal action as more members continue to join. Even though ISRI claims scrap prices have already begun to descend, the quandary that the scrap industry and the government face is yet to be resolved. As Raymond Monroe of the Steel Founders' Society of America said, "It is really a dicey, political thing."

Inside This Story:

* Ferrous raw material prices are reaching record highs and forcing metalcasters to find ways to counter the skyrocketing costs.

* MODERN CASTING interviewed metalcasters and scrap suppliers in search of answers for how your operation can weather the scrap storm.

Table 1. Gray Iron Scrap Costs Versus New Charge Make Up

Baseline Gray Iron Scrap Charge

Grade                 % of Charge   Scrap Costs
                                    2003   2004

Home returns              40%         NA     NA
Clean Auto Cast           10%       $125   $230
2-ft. Foundry Steel       25%        $99   $195
2-ft. Rail Crops          10%       $155   $290
Shredded                  15%       $150   $255

                         100%       $125   $232

New Gray Iron Scrap Charge

Grade                 % of Charge   Scrap Costs
                                           2004

Home returns              40%                NA
Clean Auto Cast            5%              $230
2-ft. Foundry Steel       15%              $195
2-ft. Rail Crops           0%              $290
Shredded                  10%              $255
Briquettes                 5%              $215
Cuploa Cast               15%              $180
Gamma Shred               10%              $265

                         100%              $218

Savings versus Baseline Gray Iron
  Scrap Charge                           $14.17

Table 2. Ductile Iron Scrap Costs Versus New Charge Make Up

Baseline Ductile Iron Scrap Charge

Grade                  % of Charge   Scrap Costs
                                     2003   2004

Home Returns               35%         NA     NA
Pig Iron                   25%       $295   $355
Slitter                    20%       $160   $320
Busheling                  20%       $140   $305

                          100%       $223   $356

New Ductile Iron Charge

Grade                  % of Charge   Scrap Costs
                                            2004

Home Returns               35%                NA
Pig Iron                   25%              $355
Slitter                    10%              $320
Busheling                  20%              $305
Shredded Black Scrap       20%              $300
2-ft. Plate                 5%              $285

                          100%              $346

Savings versus Baseline Ductile Iron
  Scrap Charge                               $10

For More Information

"Gaining Insight into Ferrous Raw Material Trends," AFS Melting Methods and Materials Ferrous Charge Materials Committee (8-G), 2002 AFS Ferrous Charge Materials Conference.

Ferrous Scrap Guide, American your Foundry Society Inc., Des Plaines, IL (2003).