Auctions, like futures exchanges, sometimes
seem like the magic bullet for price discovery. They let a
commodity's value be demonstrated by disclosing actual
transactions that can be cross-checked, free of bias. No human
conversations needed to coax information from biased
That's part of the reason there's such a fuss
about the possible disappearance of the auto industry's factory
bundle auctions, which have served as a pricing signal for
industrial scrap. The controversy seems like a flashback to my
first AMM stint in the mid-1970s.
The late Bob Himelfarb of Luria Brothers, a
dominant scrap company of that era, hated the monthly table on
rail scrap auctions. He didn't challenge the accuracy of the
figures. What bothered Himelfarb was that some scrap suppliers
would view the auctions as an objective measure of the rise or
fall of steel scrap prices in general.
When rail scrap auction prices rose,
suppliers would expect Luria Brothers to raise buying prices
for other grades of scrap. But Himelfarb argued that railroad
discards were exotic grades of scrap, signifying nothing about
other materials, and maintained that AMM would be
doing recyclers a favor by dropping the month-by-month series
on rail scrap auctions.
Now the auto bundles auction is in
At one time, all of the Big Three U.S.
automakers had semi-public auctions of baled steel production
scrap from stamping plants. General Motors Corp., Detroit,
dropped out in the mid-1980s, routing factory bundles back to
the mills it buys steel from and to in-house foundries. And
Ford Motor Co., Dearborn, Mich., gently faded out of the
picture in late 2006, when scrap generation at its Chicago
stamping plant fell below 10,000 tons a month; since the first
10,000 tons are committed to a certain mini-mill, winners of
the Ford auctions found themselves no longer actually receiving
Now Chrysler LLC, Auburn Hills, Mich., seems
to have adopted a viewpoint reminiscent of Bob Himelfarb's,
although it won't discuss the matter.
One interpretation among recyclers is that
the automaker was upset by recent auction results. Price
increases for arguably comparable grades of scrap were steeper
than the increases in auction offers for factory bundles.
A subtler interpretation came from steel
industry analyst Michelle Applebaum. She said Chrysler
traditionally negotiated its steel costs annually while selling
its scrap every month. Such a calendar made high bundle prices
good for Chrysler, helping revenue without having an impact,
most months, on steel costs. However, now that steelmakers have
begun imposing midyear surcharges on auto steel based on raw
material costs, Chrysler no longer enjoys a net benefit from
maximizing the bundle prices, Applebaum said.
So Chrysler has begun experimenting with a
system that allows scrap suppliers to bid for periods up to
seven months, with monthly adjustments pegged to published
prices. Whether that's a permanent change isn't clear yet.
The elusive hope for auctions to be a magic
bullet for setting prices is probably unquenchable. However,
the result is sometimes ironic.
After I returned to AMM, I wrote a
story on a GM briefing about arrangements for pricing some of
its materials (AMM, Nov. 25, 2002). The main speaker
was Daniel Bealko, then global commodity manager for
lightweight metals. The story ended "Bealko also advocated the
increased use of electronic auctions for setting metals prices.
He said that GM used CMXchange for this 'almost every day' to
buy and sell metal. Even when electronic competitions can't be
used for hedging, they furthered transparency, according to the
GM manager. 'Purchasing has been historically wracked with
scandals and debacles,' he added."
According to a federal indictment unsealed in
March this year, Bealko and the owner of CMXchange were accused
of an aluminum sales scam at GM's expense. Bealko dropped from
sight during the investigation and spent several months as a
fugitive from justice.
The dream of auction transparency sometimes
runs afoul of technical obstacles, too.
The most systematic auction system for U.S.
scrap is a platform run for the U.S. Defense Department by
Government Liquidation LLC, Scottsdale, Ariz. The auctioneer
said it sold 271 million pounds of scrap metal last year and
claimed a 5-percent market share.
But putting auctions on the Web can lead to
flaky outcomes. An April 2 auction of 1,308 scrapped computer
monitors drew a winning bid of $720,000. Not surprisingly, that
bid of $601 a pound wasn't followed by a check. (The bidding
period spanned April Fool's Day, which may be significant.)
Split into two lots for a second try, the defunct equipment was
valued at $2.10 and $2 a pound.
Government Liquidation has a way to limit
such nuisance outcomes, of course-many of its more important
auctions require deposits to participate. But keeping out
vagrant bidders via a deposit limits how many participate. In a
May 20 auction, nobody appeared to want a lot of discarded air
conditioners weighing 170,000 pounds, and one participant who
bid a derisory $663.22 won the material for $9.34 a long
Possible moral There's no magic bullet for
ascertaining the market value of anything.
Whatever the method, Frank Morgan will be
lurking somewhere. Pay attention to the man behind the Emerald
City's famous curtain.