Countries that use export taxes to hoard raw materials are
disruptive to international trade, and the consequences worsen
when a government can adjust them easily, reacting to
short-term market conditions, one analyst said.
"A lot of damage is done when those taxes go down and up. It
makes for an extraordinarily volatile situation," Michelle
Applebaum, managing director of Michelle Applebaum Research
Inc., Chicago, said, commenting on the American Scrap Coalition
(ASC) campaign against trade barriers involving ferrous
The ASC's beef isn't that other countries impede U.S. scrap
exports-just the opposite. The issue is whether, for instance,
India's 15-percent export tax causes Turkish mills to source
scrap from the United States when, in a freer market, the
source for such metallic units might be India.
Applebaum assumes the arena for knocking down such barriers
will be the World Trade Organization (WTO). "I think we're
going to have to make a lot of noise. It's at least as
inflationary on steel as on steel raw materials," she said. In
a commentary earlier this year, she labeled such taxes form of
"Russia has made it clear on the world market that they view
scrap as a strategic resource, something that's necessary to
support the re-industrialization of the Russian economy, so
their scrap has become less available," said Mark Parr, steel
industry analyst at KeyBanc Capital Markets Inc.,
The broader context is steep growth in world steel
production during the past five to 10 years, which has strained
supplies of many steelmaking raw materials, he said. Scrap is
just one part of that picture.
The nature of scrap supply, particularly obsolete scrap,
obliges developing countries to source their recyclables from
the mature industrial countries, Parr said. The flow depends on
how many vehicles were sold 10 years ago and refrigerators 20
years ago. The weak U.S. dollar makes the United States a
particularly attractive source, he noted.
Setbacks to U.S. manufacturing might lead to reduced
availability of industrial scrap, Parr allowed, but he doesn't
see that as an imminent threat.
"For the time being, the U.S. will remain a very scrap-rich
environment," Parr said, but there will be increased world
demand for U.S. recyclables. "When exports are growing as
rapidly as they have in the past five years, the magnitude of
excess scrap available to U.S. producers is reduced."
Increased concern over the sourcing of metallic units has
prompted mills to integrate vertically, Parr said. Electric
furnace steelmakers have acquired large scrap companies and
integrated producers have invested in facilities making iron
"When I see the U.S. being a willing supplier of scrap into
the global market, it feels like we're becoming a developing
economy. That scrap is going to get turned into steel that will
find its way into products for our Wal-Marts and Home Depots
and K-Marts," he said. "Wouldn't it make more sense for U.S.
industry to export more steel as opposed to exporting
The Chinese government, faced with similar trends, would be
much more upset than the U.S. government seems to be, he
"China is really not interested in exporting raw materials
to somebody that can turn around and compete with them. From a
pure economic perspective, it would be better for our economy
perhaps if instead of exporting the scrap to others we'd
convert more of it here to steel and ship steel instead of
scrap," Parr said, adding that the United States has some
competitive advantages in steelmaking, particularly the
abundance of coal-based electricity.
Parr said he isn't in a position to offer policy
prescriptions. "It doesn't surprise me that there's increasing
interest in monitoring the outflow of scrap, given the strength
of our steelmaking industry right now," he said. However, "I'm
not aware of any scrap shortages. I'm not aware of anybody
saying publicly 'we can't find scrap.' People have been able to
get supply, but clearly they've had to pay a high price for
The ASC agenda is viewed more skeptically by Charles
Bradford, president of Bradford Research/Soleil Securities Inc.
in New York.
"Going back decades, people like Ken Iverson (of Nucor
Corp., Charlotte, N.C.) were always very up-front in saying
that higher scrap prices meant higher earnings. Yet the premise
of the (ASC) approach is to get the price down," he said. In
any event, he noted, by September market pressures were
bringing the price down without political intervention.
The tricky part for mini-mills is that the 2008 price
trajectory of prime scrap eliminated and then reversed the
price advantage of electric furnaces over integrated mills in
making flat-rolled steel, assuming prime scrap to be 50 percent
of the mini-mills' metallics intake, Bradford said. However,
the subsequent price fall in scrap could restore the previous
state of affairs-and integrated steelmakers might even face
higher costs from the next President's agenda on penalizing
"The price of scrap is determined by the demand for steel.
When demand for steel is good, mills buy more scrap, the price
of steel goes up, and margins expand," Bradford said. "There's
lots of historical evidence going back a long time."
The U.S. availability of prime ferrous scrap grades-No. 1
bundles and No. 1 busheling-might be impaired if the dollar
continues to strengthen and U.S. manufacturing plants become
less competitive and have to throttle back, he said. "There is
a problem of prime scrap supply."
But scrap substitutes may be able to take up the slack. A
prime example is Steel Dynamics Inc.'s Hoyt Lakes, Minn.,
project, which is keyed toproduce iron nuggets from low-grade
ore. "If SDI can make a product better than prime scrap at a
cost below where prime scrap is currently selling, the way they
say they can, the profitability of this stuff is going to be
phenomenal," Bradford said. PAUL SCHAFFER