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Been there, done that, don’t have time to look back

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And so it came to pass that the last of the U.S. Big Three proclaimed that auto factory bundles would no longer be sold openly. And was there great wailing and moaning throughout the land?

Nope.

There were a few dealers and scrap buyers who wondered aloud, "How will we know what to sell or buy scrap for?" Then they went back to their usual monthly go-rounds of haggling and bargaining. That's the way the buying and selling of scrap metal has been done for decades. Sure, the auto bundles did provide a starting point for some, but it was never carved in stone that grades like No. 1 dealer bundles and No. 1 busheling would rise or fall by the same dollar amount.

There have always been measures of give and take in ferrous scrap transactions, sometimes not in the most polite terms. An irate buyer or seller may suggest that the person on the other end of the phone line was descended from a canine mother or born out of wedlock. Or if not aloud on the phone, then to others in the office after the conversation. Maybe this is not as tactful as Miss Manners would recommend, but deals got done and the same buyers and sellers would be back on the phone again the following month exchanging pleasantries.

The bundles, both auto and dealer, were sold in July, and so was busheling as well as heavy melt and shredded scrap. Steelmaking did not come to a screeching halt because scrap sellers and buyers no longer had factory bundle prices. Over the years, the bundles benchmark had emerged as a "comfortable" yardstick and was widely used but the indicator also was criticized as outdated and often unrepresentative of industrial steel scrap prices.

Twenty years ago, General Motors Corp., Ford Motor Co. and Chrysler Corp. all sold their upcoming monthly output of baled sheet steel scrap—averaging a total of some 150,000 long tons—within a day of each other. Normally, this occurred about five working days before the month ended—a five-day span in which buyers and sellers haggled.

GM halted its auctions in the mid-1980s and set up buybacks or contract sales with steelmakers. Ford slowly cut back the number of plants from which it sold bundles until only a few thousand tons were sold from its big Chicago plant each month, but Ford has not sold a single bundle on the open market from that facility for almost two years now.

The last to abandon the auction block was Chrysler LLC, which announced a few months ago that it would no longer auction its bundles each month. Instead, the automaker said it would sell them on a formula tied to a published price. Whether that will continue to be its practice is uncertain at this time. What is clear, as one of its managers said during the Steel Success Strategies XXIII Conference in New York in June, auctioning the bundles was not part of its plans.

But if the ferrous market has no benchmark for transactions, junk vehicles won't pile up on city streets and old refrigerators and stoves won't be tossed in creeks. The market participants will find or devise new mechanisms. It has happened before in the past decade. When the auto bundle sales were shifted to the last day or into the next month, buyers and sellers complained but the veterans already had done some polling and had a fair idea what they would pay for, say, shredded.

But the most critical issue was never pricing. It was supply. Today, unlike several decades ago, few steel mills carry much inventory at the mill. Some may have only a few days' worth, others a week or more, but none carries what was the traditional one-month's supply or more. That practice prevailed in the 1960s and 1970s, but better inventory management practices and freight scheduling have allowed many to operate without huge piles of scrap amassed outside their melt shops.

That also has put more stress on the cardinal rule of being a scrap buyer at a steel mill never run out of scrap. You can pay more for it, but don't run out. They'll fire you for that, and for good reason. No executive wants several hundred workers standing around waiting for a rail car or a single truck full of scrap to arrive.

So many buyers at steel mills and their most trusted scrap suppliers have come to what lawyers like to call a "meeting of the minds." They hashed out a mechanism to use when ferrous scrap prices are gyrating wildly and no one is sure what the final price will be. It's called the "price-to-be-determined" purchase order. Few may be pleased with the process, since they would prefer to know what they are paying for 10,000 tons of busheling, but that mechanism—and not the price of a factory bundle—has kept scrap flowing to the melt shops.


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