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The pendulum swings millward with a vengeance

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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 dealers endured.

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 seeking.

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' yards.

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 I-beam.

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 buyer.

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.
MICHAEL MARLEY


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