Watching the mid-October stock market collapse, rise, then
collapse again was not a pleasant experience. Television news
showed the anguish of traders on the floor of the New York
Stock Exchange as even blue-chip stocks like PepsiCo Inc. fell
to new lows.
They had it easy; they could go home when the market closed
at 400 p.m. The shock and awe they suffered was mild compared
with the migraines that many of the nation's ferrous scrap
Ferrous scrap prices didn't simply plunge in mid-October.
They fell into an abyss.
With steel product sales sagging, inventories piling up and
mill operating rates falling, none of the mills was buying even
a pound more than they needed to meet their production
requirements. Many steel mills didn't want scrap-some didn't
even want the scrap they already had ordered-while those who
were buying took far less than the usual tonnage purchased for
each month's melt program.
One respected industry analyst estimated that mills were
producing at only about 77 percent of their capacity in early
October, although capacity utilization rates calculated by the
American Iron and Steel Institute were still showing domestic
mills' operating rates in the 80s.
Scrap is a purchased commodity. Some steel mills avoid
buying it when they have their own blast furnaces and home
scrap to remelt to make finished steel products. Others need to
buy each month, but when the market is in a swoon-as was the
case in mid-October-they don't buy scrap like they were doing
earlier this year, when they lined up as much tonnage in the
first week of each month to make certain enough would be
delivered to the mill throughout the following weeks.
When the ferrous market and its prices fall, they still
buy-but they buy down and continue to buy down, an accepted
purchasing practice. They keep buying a single truckload or
two, making the next price lower than the previous purchase and
making sure each dealer knows they bought that truckload of
busheling or bundles at a lower price than he or she was
Despite well-publicized acquisitions and mergers by some of
the steel and scrap industry's largest players, the average
scrap company is still a small, proprietor-operated business.
The yards take in scrap from local industrial plants or from
the hordes of small peddlers that clamber to get on the scale,
get paid and out on the road again. When their market
collapses, as it did in October, they can't call Charles Schwab
or Merrill Lynch and tell them to sell 10,000 tons of No. 1
bundles. There are a limited number of outlets for that
material, and when they don't want it, it sits in the dealers'
At the same time, though, the dealer still has a payroll to
make. Wages must be paid to the workers who have sorted, baled
or shredded that metal.
If they are handling several industrial accounts from nearby
manufacturing plants, they will be watching the mail for the
check that pays for the scrap. Not too many years ago,
manufacturers were glad that somebody hauled it away and did
something useful with much of it. Today, ferrous scrap almost
has the status of a product line at some manufacturing plants,
even though at the end of October much of the metal was still
sitting on the ground at the dealers' yards. I doubt that many
of their industrial accounts cared.
For scrap dealers and processors, there is no offloading of
their risk to some offshore bank or trading house, and no hedge
funds are plying company owners with millions of dollars. There
is no roadmap showing them the nearest London Metal Exchange or
Comex warehouse. In simple terms, there are several piles of
metals-some to be sorted, some not-that need a home at a local
steel mill or an iron foundry.
Those piles could be sheet steel punchings from a stamping
plant, girders and beams from an old bridge or a mountain of
junk cars and appliances waiting for their last ride up the
conveyor to the shredder's hammers. They are not cash. They are
the rejected pieces of our advanced manufacturing
economy-worthless until they are transformed into something
that can be remade into, say, steel sheet, rebar or an
On Wall Street, if a broker wants to sell 100,000 shares of
PepsiCo and it is trading at $54 a share, he may be forced to
wait until the price falls to $53.95 a share before he finds a
There are more than a few scrap dealers who wish they had it
that easy. That mills would offer prices is not unusual-that's
the normal give-and-take each day in the scrap trade. What
troubled many was the absence of much demand.
Most mill buyers will say that price is important, but not
their top concern. Supply is. How can you make 100,000 tons of
cold-rolled sheet if you only have 50,000 tons of scrap? You
can't, and at the same time you have a lot of workers standing
around waiting for something to do.
A veteran scrap buyer at a major mill once said, "They (his
bosses) will never shoot me for paying more for scrap, but they
will shoot me if we ever run out."
That issue is more critical today than it was years ago,
when mills operated with a month's supply of scrap on the
ground. Today, it is often five to seven days of melt material
and a promise from suppliers that the rest will be delivered on
an ongoing basis throughout the month.