Discounting is a fact of life. A damaged product will almost always be cheaper than an undamaged one. But don't expect a sliding scale based on the level of damage, because market conditions play the most significant role in determining the eventual price.
We see it all the time in appliances, with "scratch-and-dent" sales by stores looking to move damaged merchandise. Washers and dryers, refrigerators and air conditioners often suffer a minor scratch or dent between the manufacturing plant and the showroom floor. Shoppers who are content to hide such an imperfection, sometimes as easily as covering it with a refrigerator magnet, or who can live with the blemish can find themselves receiving significant financial benefit as the damaged goods are priced lower strictly as a means of getting them off the showroom floor.
It's much the same with the market for secondary steel. Steel coils can be—and are—damaged in any number of ways, but that doesn't mean those coils immediately are turned into scrap. Far from it. Most find a home, usually in an unexposed application where the fact that they contain pits, skid marks, scratches, slashes or dents means nothing.
"It's probably unique in some respects that there is such a market for secondary or damaged steel," said Jim Barnett, president of Grand Steel Products Inc., Wixom, Mich., a flat-rolled steel service center that buys and sells secondary steel products. "But that steel has to be sold. It has to find a home."
Barnett also is president of the Association of Steel Distributors (ASD). Many of the group's members buy and sell both primary and secondary steel products, and some specialize in the processing of secondary steel for distribution to a wide customer base. They source the steel from any number of locations—steel mills who have had product rejected by customers, steel traders who bring in material damaged in transport, or their own internal rejects.
The imperfections in the steel are sometimes minor. Automakers, for example, have zero tolerance for imperfections based on their need to use sheet for exposed auto parts, such as fenders and hoods. While consumers might not mind a scratch on a dryer that no one will see in their basement, few will accept one on the hood of their new car.
"Clearly the highest-quality requirements and most restrictive tolerances in terms of flat-rolled are from the automobile manufacturers," Barnett said. "The highest rejection rates are for automotive-grade steels."
Most estimates put the U.S. market for steel products at close to 100 million tons per year, although steel consumption was down in 2009 due to the global recession and likely will remain below that level this year. Many sources estimate that in a 100-million-ton market, secondary steel—the damaged product—accounts for about 5 million tons per year.
"There are any number of ways you can sell it—a lot of customers are looking for secondary," Steve Gottlieb, vice president of Ratner Steel Supply Co. Inc., Roseville, Minn., said. "There are underground applications and things like that where the steel is not going to be seen. People will powder coat the steel and that might cover up a problem. The benefit to them, of course, is that they are able to buy it at a discounted rate.
"It's something that the mills don't want to have happen, but when it does they have to find a place for that steel," Gottlieb said. "It's a market that usually tracks the primary market pretty closely in terms of demand. But there are times when you'll see a shift, like we did (in 2008) when demand was really strong. At that time, there were people who needed steel and they were paying prices for secondary that were pretty close to the same as (what was being paid) for prime."
Ratner Steel works in both the primary and secondary markets, with secondary or excess steel products accounting for about 10 percent of its sales.
David Fischer, vice president of IM Steel Inc., Bourbonnais, Ill., said his service center deals mostly in secondary plate products. Imperfections in plate might be as simple as a mill needing to roll 72-inch wide product and ending up with product measuring only 71 inches wide. At other times, thicknesses or yield strengths aren't exactly what the original customer sought so the product is rejected—but another customer might easily be able to use the material in a different application.
"When you look at it, a lot of times you would not know the difference (between secondary and prime)," he said. "One might have a mill edge instead of a cut. It's hardly noticeable, but sometimes it makes a difference to the buyer."
On the plate side, demand characteristics for prime and secondary materials often run hand in hand, Fischer said. "No one wants to buy high and sell low," he said. "We did that last year. What we find is that for our (secondary) product, we end up selling to a lot of other service centers. We don't sell much to end-users."
Barnett, Gottlieb and Fischer, looking at the secondary market from the viewpoint of sellers, said there is no real discount formula in place for secondary steel. A buyer can't necessarily approach them for a deal with the idea that if prime product costs X dollars, secondary can be bought for X minus Y.
"There is a price you base your numbers on and sometimes the gap between the two is wider than it is at other times," Fischer said. "Price really depends on supply and demand. That's one thing that doesn't really change." SCOTT ROBERTSON