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METALLICS In a resource-short world, commodities are uncontested king

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We live in a world with a finite amount of resources, the supply of which is growing shorter day by day. Combine that with explosive economic and manufacturing growth in various countries around the globe, and what do we get? Apparently, just the right mix.

Ferrous scrap is only one of the commodities that is in tight supply in a resource-short world, one prominent U.S. scrap industry executive says. "I don't care if you are talking about oil, or agricultural commodities, or metallics," said Daniel W. Dienst, chairman, president and chief executive officer of Metal Management Inc., Chicago. "The consensus is we are in a resource-short world. With the explosive growth outside of the United States and still fairly mild growth characteristics inside the United States, it really sets up what we believe is a favorable long-term demand-supply situation for all commodities and, in particular, metallics."

The U.S. manufacturing economy is in a sloppy, strange period at the moment, Dienst said. However, many of his company's industrial accounts are still running pretty strong. "The steel mill and scrap guys are finding their way through this market. (There is) no shame in $300 bundles and busheling and $250 to $270 shred," he said, but added that if steel demand recovers and economic growth accelerates in the United States in the second half and into next year it could be a time to "look out."

Drawing a focus on scrap, Dienst said quality industrial steel scrap grades like No. 1 busheling and bundles remain "tightly calibrated" commodities. With the diminished manufacturing capabilities in this country during the past 20 years, those iron units will continue to be in demand—not just in the second half of 2007 but for the foreseeable future. That, in turn, leaves little room for purchasing errors, he said.

Shredded scrap, on the other hand, appears to be in plentiful supply currently, Dienst said, although supplies of cut grades like No. 1 heavy melt will dwindle as more of the metal that was once sheared and sold as prepared scrap now goes to the big, new megashredders. "More of this (cut scrap) will go to shredders over time, particularly as people upgrade their facilities," Dienst said. His own company will be starting up a new megashredder at its export yard in Newark, N.J., in a matter of weeks, he added.

Another scrap industry executive in the Midwest said he doesn't believe that any specific grades will be in tight supply for the rest of this year. Instead, scrap supplies will ebb and flow throughout the second half.

"Right now, shredded is in plentiful supply and prime scrap is tight. But at the same time, some mills are using less scrap now," he said. "The market is dynamic. It is almost like a merry-go-round on what will be the next scrap commodity to go up in demand. Shredded is plentiful this month; it could be tight next month and cut scrap could be tight as well."

Despite the pessimism that prevails in some segments of the scrap and steel industries, he said he remains bullish that the rest of 2007 will be better for both industries. "A lot of our guys are more conservative in their outlook, (but) I felt like we had to work a lot harder in the past 30 days to buy the scrap we needed for our customers, harder than we initially anticipated."

Long products have been carrying the market, but flat-rolled will be stronger in the second half, he predicted. Pricing will be supported based on the weakness of the U.S. dollar. The U.S. steel market could make a strong finish at the end of this year. The service centers and others haven't bought all the steel they need, and the international scrap market is still hot. The weak dollar is the main driver for scrap leaving U.S. shores and, at the same time, will reduce the amount of finished steel imports coming into the country, he said.

But one scrap export executive said he believes the ferrous market will be more of a domestic story than an export story in the second half, in part because of new U.S. steelmaking capacity, citing the SeverCorr LLC mill in Columbus, Miss., and the additional melt capacity at Steel Dynamics Inc.'s mill in Columbia City, Ind., as two examples.

"We will see a very mild uptick (in August) and September and then it will top off in October, but we will be at a better level," he said. This also will drive up scrap export prices—first, because exporters will have to pay more to draw scrap away from the domestic market; and second, because ocean freight rates are up. "We've turned here and I think the key will be the U.S. domestic economy (and) the steel business, both of which should better," he added.

Prices for busheling, factory bundles and other grades of prompt industrial scrap are likely to go up more dramatically because of the new demand. Even though SeverCorr will import a lot of pig iron and other iron units, it also will be a big buyer of prime scrap, he said. At the same time, the low volume of industrial scrap generated by automakers and other manufacturers this summer will put pressure of those scrap supplies.

Shredded is in good supply and, in fact, is in too good supply, he said. "That's why export is weaker," he said. "We try to convince the steelmakers to use more shredded, but it is very hard to convince the guys to change their practices, especially when the tech support that made their furnaces sees scrap prices as they were five years ago."


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