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Expanding frag operations shred past market results

Keywords: Tags  Auto Shredder, Frag, ISRI, Wendt Corp,

Over the past decade, the number of shredders operating in scrapyards across North America has skyrocketed—projected to reach 302 by the end of this year, a 56-percent increase from an estimated 193 in 2000—as supply and demand of shredded material have been locked in a mutual growth cycle.

As demand and prices rose significantly in recent years, adding a shredder—or starting up a new yard featuring one—became a relatively common business decision. Profit margins on material produced through shredders were strong, as mini-mills in particular—because of the needs of their electric-arc furnace operations—snapped up as much shredded material as they could find.

"This has become an extremely popular grade, especially with certain mill operators," a leading Midwest broker said. "The mills that use frag are very comfortable and flexible in their mixes and will ride the market from cycle to cycle. What they have found is that frag more often than not is what suits all of their considerations best."

Shredded scrap is defined by the Institute of Scrap Recycling Industries as homogeneous iron and steel scrap, magnetically separated, originating from automobiles, unprepared No. 1 and No. 2 steel, miscellaneous baling and sheet scrap, with an average density of 50 pounds per cubic foot. Most of that mix is usually fist-sized, homogenous pieces of old automobile hulks.

The number of shredders has increased in lockstep with shredded scrap demand, which has jumped about 50 percent during the past decade to more than 18 million tons annually from around 12 million tons. The price has risen about 420 percent during that period, settling at an average of $455 per ton delivered to consumers so far in 2011. (The largest monthly price average was nearly $600 per ton in July 2008.)

"With prices riding the wave they have during the past five or six years, I don’t see anyone who’s going to want to get out of the shredded business," a New York-based scrap dealer said. "That being said, the marketplace can hold only so many businesses, and so at some point the growth in shredders being installed is going to have to slow down."

It should come as no surprise that OmniSource Corp. (owned by Steel Dynamics Inc.) and David J. Joseph Co. (owned by Nucor Corp.) would be among the leaders in North American shredder operations.

But it’s not only the big dogs that are barking right now. Smaller shredder equipment "also allows smaller scrapyards to enter the shredding side of processing because the smaller shredders do not have the high feedstock/material demands of the larger shredders," said a spokesman for Tonawanda, N.Y.-based shredder equipment manufacturer Wendt Corp. "This means they can produce a return on investment with smaller amounts of material and still take advantage of the premium for shredded product."

Shredders have become increasingly popular over the past decade because they usually provide an opportunity for better margins—they allow yards to upgrade material to fetch a higher sales price. While they are a major investment, usually involving hundreds of thousands or even millions of dollars, shredders bring quick returns. Projects are in the works all across the country this year, despite the continuing economic uncertainty.

But not everyone has a rosy outlook. As one Pittsburgh-area dealer said, "When you look at the overall playing field, you’d better be sure you can do two things before you add a shredder: secure enough scrap to run through it, and have a big enough market to sell into. I’m not sure either of those look good right now."

Yet it is undeniable that the growth trend in shredders was a major factor in fueling the unprecedented run that ferrous scrap has been on in the past decade, and especially since 2004. Much of the obsolete scrap that put wind in the sails of this run was processed through the numerous shredding machines operating in so many yards.

In fact, one problem that has emerged in recent years is finding the scrap to keep those shredders operating for as many hours as their owners would like.

Feedstock issues are on the minds of all shredder operators today. Those who can’t control their own feedstock often find themselves paying higher prices for peddler scrap just to secure enough tonnage. That, of course, can cut into profit margins. Auto dismantlers often have taken to holding back their stripped vehicles until the market prices are favorable for them, creating artificial shortages in some months. In response, some shredder operators have been aggressively expanding their acquisitions of smaller yards to maintain their own feedstock stream. Just this year, several such purchases have taken place.

Cleveland-based PSC Metals Inc. purchased Warmington Road Recycling in Massillon, Ohio., which will serve as a feeder yard for PSC Metals’ shredders in Canton and Wooster, Ohio. The company described the acquisition as an important step in PSC’s growth as an industry leader.

Sims Metal Management Ltd., New York, is building its network of feeder yards. The large scrap processor, which has export yards in Port Newark, N.J., and Fairless Hills, Pa., disclosed in a recent conference call with analysts that it had bought two small yards: East Coast Metal Recovery in Deptford, N.J.—the backyard of rival EMR Ltd.’s big Camden, N.J., export yard—and Johnston Enterprises Inc.’s Port 33 in Tulsa, Okla.

Schnitzer Steel Industries Inc., based in Portland, Ore., operates a large scrap metal export yard in Boston and has feeder yards throughout the New England area. Earlier this year it bought State Line Scrap, an Attleboro, Mass., yard that also operates as a bulk cargo exporter of ferrous scrap.

Britain-based EMR, which owns the former Camden Iron & Metals Co.—the Philadelphia area’s largest scrap export yard—recently signed a joint-venture agreement with Washington-based Joseph Smith Co. Like Schnitzer, Smith has a wide-ranging network of feeder yards mainly in the mid-Atlantic states and along the eastern seaboard. EMR also recently opened an export yard in Newark, N.J., near Sims’ main export facility in northern New Jersey.

And Commercial Metals Co. (CMC) is gearing up for two shredder installations: one at an existing operation in Oklahoma and another at a greenfield site in Corpus Christi, Texas.

"The decision to install a shredder at our Tulsa scrap processing yard was based on already-captured feedstock from our existing recycling facilities in Oklahoma, Kansas, Missouri and Arkansas," Joe Alvarado, CMC’s president and chief operating officer, said of the 4,000-horsepower Metso Recycling-Texas Shredder machine the company is adding at its 27-acre CMC Recycling facility in Tulsa.

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