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Does the U.S. have an infinite supply of obsolete scrap?

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In a previous column, I questioned whether all the easy-to-obtain obsolete scrap like No. 1 heavy melt and plate and structural scrap—the low-hanging fruit—had been picked, processed and sold to steel mills and foundries.

As often happens, a mysterious force called reality stepped in, slapped me in the face and said, "I'm gonna make you look foolish again."

Simply put, ferrous scrap seemed to flood into the market in May, driving down the prices paid by domestic mills. Some mill buyers and brokers like to argue that when spring weather arrives, old iron and steel scrap "comes out of the woodwork" or just materializes in farmers' fields. Perhaps it had been under the ground all winter and now has grown, ripened and is ready to be picked, much like corn or soybeans. Perhaps not.

What is true is that warmer weather stirs smaller dealers and their suppliers, often called peddlers, to get out on the highways and byways looking for scrap. And perhaps some manufacturing companies take a second look at old equipment that has been lying around for a few years and decide it's not worth bringing back on-line.

Scrap prices have been climbing throughout the past winter, so maybe it was time to tear down an old corrugated building too small to serve as a production facility or even a warehouse, while old lathes and milling machines—workhorses in days past—can't produce even half the parts that new computer numerical controlled machines can whip out.

That's one way to see this latest bumper crop of ferrous scrap. There is another.

Much of the scrap that some U.S. mills obtained in May was brought in earlier from scrap exporters in the United Kingdom and western Europe. It arrived at the port of New Orleans and other destinations in time to add some bulk to mills' inventories and strengthened their ability to bargain with some of their local scrap suppliers.

Using that foreign material—higher-quality industrial steel scrap like new steel clips and busheling—along with a cargo or two of Brazilian pig iron helped some melters to shift the mix they put into electric-arc furnaces and use less heavy melt and shredded scrap.

At the same time, some integrated mills brought idled furnaces back on-line in recent months. Normally when that happens, the big mills stock up on scrap like No. 1 bundles, plate and structural scrap and shredded. They bought a bit, but not as much as some had anticipated.

The domestic ferrous market quickly shifted from being a supply-driven market, as it had been since late last year, to a demand-driven market. Mill buyers and their brokers could tell their scrap suppliers, "Well, yes, we bought 50,000 tons last month, but we doubt that we will need even 10,000 tons this month."

When scrap sellers hear the same song from another mill or two, the waves of fear begin knocking over one after another. Within a few days—if not hours—it's panic selling time. The mills won't pay even the same price they paid last month. All right, says the boss, offer them the scrap at $10 a ton less. Still no takers? Try down $20 a ton, or $25.

It's not unusual to see such behavior. The yards piled up scrap when the price was higher and the flow was strong. The mills are running better and were expected to be strong buyers again. That's true, but not right away. Maybe not even in June.

In the meantime, some yards are sitting on thousands of tons of scrap bought when prices were at their most recent highs and now they see their profit margins sinking and in some instances vanishing altogether. Who wouldn't panic in such a situation?

The problem isn't just one or two scrap sellers panicking. Buyers are not averse to playing one supplier against another, telling dealer Smith that dealer Jones offered 10,000 tons at $5 a ton less. Dealer Smith reacts by offering to sell for $10 a ton less to get the order.

So does that mean the low-hanging fruit is once again ripening on the lowest branches? I don't think so. Some believe there will always be scrap at a price, but that's not necessarily the case.

There is a finite supply of obsolete scrap. No state or county highway department is going to tear down a bridge built five years ago at a cost of several hundred million dollars just to sell a few thousand tons of plate and beams for a fraction of that cost.

And let's not forget that the U.S. has become the largest scrap shopping mall for many of the world's scrap-poor nations. Ferrous scrap exports now average 20 million tonnes a year, not 7 million or 8 million tonnes as was the case 10 years ago. The excess tonnage shipped abroad in recent years was a significant part of that low-hanging fruit.

Obsolete scrap has not become obsolete, so to speak. It still has many fans overseas—in Turkey, China and throughout the Far East. China and Turkey have not been as active as they had been, but they will be back on the U.S. docks not just in another month or two but for the next few decades—until they manage to generate enough indigenous scrap. Then, perhaps, they may start shredding junked vehicles and appliances and tearing down old factories and bridges and even selling it to U.S. mills.

MICHAEL MARLEY


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