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The decision wasn’t ours, an option to consider is yours

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No less a figure than Lakshmi N. Mittal sounded a warning note in his otherwise upbeat speech at AMM's Steel Success Strategies XXIII conference in June. Surging input costs are "unsustainable," he said, and risk hurting the steel industry's customers.

But what happens if accurate information on the price of raw materials isn't readily available? For those in the scrap and steel industries, that's become a pressing question in the past two months. As many of our readers are aware, AMM's No. 1 factory bundles price—widely used as an indicator for countless monthly purchases of prime industrial scrap—has been unavailable since early June.

This absence was not of AMM's making. In late May, Steel Dynamics Inc.'s scrap subsidiary, OmniSource Corp., and Chrysler LLC announced new plans to market the automaker's bundles. Instead of month-to-month auctions with successful bids that become widely known, bidders were encouraged to commit to longer periods with a monthly price adjustment and were required to take an oath of secrecy not to tell other buyers, and publications like AMM, whether they bought the bundles and what they paid for them.

The change comes at a crucial time for the steel and scrap industries. Prices, which surged to unprecedented levels in the first half of 2008, are now showing signs of stabilizing—although whether this is due to a normal summer slowdown or a more fundamental change remains to be seen.

Chrysler was the last of the Big Three U.S. automakers to offer its bundles at auction each month. These now reportedly will be sold on a formula price. General Motors Corp. has been doing that for 20 years. Ford Motor Co. likewise sells much of its bundle output directly to steel mills, or swaps them back to mills for a discount on new steel coils. Ford had continued to offer a few thousand tons of bundles from its big Chicago-area stamping plant each month as a test of the steel scrap market, but it has been a long time since Ford generated more than 10,000 tons of bundles in a month, which it sells under contract to a Midwest mini-mill. Thus, there have been no Ford bundles on the auction block for close to two years.

None of the so-called transplant automakers, or "new domestics," generates enough factory bundles to be seen as a representative price. For example, one Japanese automaker's bundles were sold to a single Midwest steelmaker in June, but that was only 500 tons, a volume that some might argue would be even more unrepresentative as a sample than Chrysler's bundles.

For many in the scrap and steel industries, the auto bundle prices are a familiar indicator even though most months less than 25,000 tons were sold at auction. Still, they were—and perhaps one day again will be—a gauge to measure the strength of demand for industrial steel scrap. Although many complained about how few were sold and how unrepresentative these bundles were—vs. some 60 million tons of ferrous scrap sold in the United States each year—the results of the auctions were keenly watched.

There is no direct substitute for the auto bundles price. While it is not AMM's place to make recommendations, we would like to draw our readers' attention to another price that we list that provides an indicator of the industrial steel scrap market.

The AMM No. 1 Busheling Composite is published each weekday on the scrap news page with our more familiar AMM No. 1 Heavy Melting Steel Composite and Shredded Scrap Composite. This price is the average of three cities in the nation's industrial heartland—Chicago, Cleveland and Pittsburgh—on a delivered-to-mill basis. And like our other two ferrous scrap benchmark prices, it is averaged for the week from Friday through Thursday so that is available for publication in AMM each Monday.

We believe the No. 1 Busheling Composite offers a more representative sample of the prices paid for such industrial steel scrap as No. 1 busheling. We have been publishing this composite price for about two years, giving anyone who is so inclined the opportunity to measure it against the auto bundle price movements and those of other industrial steel scrap grades. Also, by averaging prices from three cities, we feel we have minimized the impact of a buying binge in one area and its influence on the steel industry's scrap surcharges. By offering it as a weekly average, we hope to mitigate dramatic gains that can occur within one day in any one of the cities that make up our composite price.

David Brooks, senior vice president


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