Several insightful comments came from the panelists at AMM's Scrap Conference in November. One in particular sparked my interest. It was the suggestion that scrap processors and others are driven to consolidate because major manufacturing companies—industrial scrap generators—want to deal with a single processor who will handle all the scrap metal from their production plants.
Scrap processors have the distinct experience of serving two customers—the steel mills and smelters that buy and melt scrap, and the manufacturers that generate scrap as by-products. The auto industry's factory bundles are perhaps the best example of scrap generators—some stamping plants produce as much as 15,000 tons of baled steel scrap a month. At $300-plus per ton, those bundles are not waste—it's another product line for auto companies. It may not be as profitable as a Cadillac Escalade or even a Toyota Camry, but selling it wisely can offset some of the costs of production.
All of the nation's auto manufacturers aren't the size of General Motors Corp. Many are smaller, but they still generate enough scrap to make it worthwhile to recover. Scrapyards often were founded by individuals who had enough entrepreneurial spirit to believe they could make a buck or two from the material. They were—and many still remain—local businesses. Expansion often was achieved by opening a feeder yard in the next town, collecting scrap there and hauling it to the main yard to be baled or sheared. Scrap dealers and processors often refer to these small manufacturers and scrap peddlers as their customers, and they have been chided by steelmakers and some in their own ranks for not seeing steel mills and nonferrous metal smelters—companies that buy prepared scrap—as their customers.
That's not the way the game has been played, though, according to many seasoned scrap traders. Money is made on the buying side, not the selling side. Whether it's a bid for auto bundles or a contract based on a published price, the margins often are set at the buying point in the cycle. That's why some dealers are willing to hold scrap—laying it down in their yards—instead of selling it in a declining market and losing money.
That rule, and that game, are changing. Even before steel scrap prices reached the record levels seen in 2004, manufacturing companies, utilities and others with substantial capital assets were looking to maximize the return on their investments, even when they were discarding them. It is no longer just an annoying, additional task for someone in the purchasing department to handle. Some companies employ managers whose sole task is to make sure they get the best prices for production scrap or a plant that is to be demolished. GM, for example, aptly named it workers in this unit "the Scrap Team."
At the same time, the pool of much-needed industrial scrap has been steadily dwindling. Many manufacturers that supply components and parts to GM or Whirlpool Corp. have relocated to other shores where labor and other costs are lower. But they don't ship the scrap back here with the parts.
At the same time, the steel industry is changing. Thin-slab casting technology has opened the gates of the flat-rolled sheet market to mini-mills. Twenty years ago, many integrated steelmakers were content to cede lower-margin products like reinforcing bar to the mini-mills. They still had the sheet market, and nobody could take that away. Right? The late Kenneth Iverson and his team of can-do managers at Nucor Corp. helped shatter that self-assurance.
The largest scrap players have accepted the change ushered-in by the rise of the flat-rolled mini-mill and are doing more than just "dealing with it." For instance, they can collect all the steel scrap from one large steel service center's plants to offer to steel mills and foundries. At the same time, the service center has a benchmark to gauge the value recovered for its scrap regardless of its location.
To be sure, there are many other factors driving the scrap industry's consolidation trend. Scrap processors' desires to attain a financial footing that matched the nation's steelmakers is another. Others may be selling out because they need an exit strategy—an aging owner, for example, with no one in the family interested in taking over the business.
Regardless, control of what is steadily becoming a scarce commodity could be the main reason why in five years—or maybe in just two—we'll see fewer but larger players in the scrap game.
Finally, on a more personal note, a doctor's order prohibited me from traveling to AMM's Scrap Conference in Scottsdale, Ariz. Fortunately, my co-workers brought home full reports, keeping me well informed of all the insights offered by our conference speakers.
Before I sign off, I want to take a minute to correct two mis-statements in our December edition. In last month's column, the reason cited for TJN Enterprises' withdrawal of its plans to expand operations in Sioux Falls, S.D., was incorrect. TJN shelved the plans because its option to buy 32 acres of land near the municipal airport had expired, not because of any inaction by city officials. It seems my arithmetic didn't add up, either. OmniSource Corp. processes 800 million pounds of nonferrous scrap metal a year, not the figure cited in November's Month In Metals section.