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Year 1 AB (After Bundles) and the scrap keeps flowing

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And so it came to pass that the last of the Big Three (though they were no longer as big and were now more than three) proclaimed that factory bundles would no longer be sold openly.

And was there great wailing and moaning throughout the land? Nope.

There were a few dealers and scrap buyers who wondered aloud, "How will we know what to sell or buy scrap for?" Then they went back to their usual monthly go-rounds of haggling and bargaining-the same way that the buying and selling of scrap metal has been done for decades. Sure, the auto bundles did provide a starting point for some, but it was never carved in stone that grades like No. 1 dealer bundles and No. 1 busheling would rise or fall by the same dollar amount.

There has always been some measure of give and take in ferrous scrap transactions, sometimes not on the most polite terms, with irate buyers or sellers sometimes trading a few choice words. Maybe this wasn't as tactful as Miss Manners would recommend, but deals got done and the same buyers and sellers would be back on the phone again the following month exchanging pleasantries.

Twenty years ago General Motors Corp., Ford Motor Co. and Chrysler Corp. all sold their upcoming month's output of baled sheet steel scrap-usually totaling around 150,000 long tons-within a day of each other. Normally this occurred about five working days before the end of the month; in that five-day span, buyers and sellers were able to haggle.

Detroit-based GM halted its auctions in the mid-1980s and set up buybacks, or contract sales, with steelmakers. Ford slowly cut back the number of plants from which it sold bundles until only a few thousand tons were sold each month from its big Chicago plant, and the Dearborn, Mich.-based automaker hasn't sold a single bundle on the open market from that facility in almost two years.

The last to abandon the auction block was Auburn Hills, Mich.-based Chrysler, which announced a few months ago that it would no longer auction its bundles each month. Instead, the automaker said it would sell them on a formula tied to a published price. Whether that will still be the company's practice is uncertain at this time. What is clear, as one of its managers said at an AMM/World Steel Dynamics Inc. Steel Success Strategies conference earlier this decade, was that auctioning the bundles wasn't part of the company's plans.

But steelmaking hasn't come to a screeching halt because scrap sellers and buyers no longer have a factory bundle price, which was a comfortable-but outdated and often unrepresentative-price of industrial steel scrap, and junk vehicles aren't piling up on city streets.

Market participants will always find or devise new mechanisms. For example, scrap buyers and sellers complained when the auto bundle sales were shifted to the last day of the month or into the next month, but industry veterans had already done some polling and had a fair idea of what they would pay for, say, shredded scrap.

But the most critical issue was never pricing. It is supply.

Today, unlike several decades ago, few steel mills carry much inventory at the mill. Some might have only a few days worth and others a week or more, but none carries the traditional month or more of supply. That practice prevailed in the 1960s and 1970s, but better inventory management practices and freight scheduling has allowed many to operate without huge piles of scrap outside their melt shops.

That also has put more stress on the cardinal rule for the scrap buyer at a steel mill never run out of scrap. You can pay more for material, but don't run out. They'll fire you for that, and for good reason No executive wants several hundred workers standing around waiting for a rail car or a single truck full of scrap to arrive.

So many buyers at steel mills and their most trusted scrap suppliers have come to what lawyers like to call a "meeting of the minds." They hashed out a mechanism to use when ferrous scrap prices are gyrating wildly and no one is sure what the final price will be. It's called the "price-to-be-determined" purchase order.

While few might be pleased with the process, since they would prefer to know the price for 10,000 tons of busheling ahead of time, the mechanism-and not the price of factory bundles-has kept scrap flowing to the melt shops.

MICHAEL MARLEY


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