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Full of Scrap: Ferrous scrap exports still a good long-term bet

Keywords: Tags  Full of Scrap, US ferrous scrap exports, ferrous scrap

So far this year it has essentially been a tale of two coasts as European and Asian buyers present different challenges.

After a relatively stagnant January, East Coast exporters reported a February bonanza and March and April provided enough demand to keep yards relatively busy. But on the West Coast, a drop in demand from China had exporters scrambling to find other homes for their inventories.

Beyond the issue of demand, exporters—as well as domestic yards that have come to rely on selling to the coasts or shipping out their own containers—face a host of issues, from transportation costs and international currency fluctuations to government regulations and in-house business planning. 

But first some background:

• The United States currently exports about 30 percent of all the ferrous scrap it generates, leading the world in ferrous  (and stainless steel) scrap exports.

• Despite the fall-off in the national economy and the scrap microeconomy, 2011 was a record year for scrap exports by weight, according to the Institute of Scrap Recycling Industries. After exporting a then-record 21.5 million tonnes in the scrap boom year of 2008, sellers followed that up with 22.4 million tonnes in 2009, 20.5 million tonnes in 2010 and a record 24.3 million tonnes last year, U.S. Commerce Department data show.

• However, the value of the scrap shipped overseas dropped between 2008 and 2009, and while prices are up this year they are running behind the 2008 average, in large part because of a strengthening of the U.S. dollar, which suppressed international prices for scrap. In 2008, exported scrap was worth about $10 billion; in 2011, it was worth around $11.4 billion, ISRI numbers show.

• In order, Turkey, China, Taiwan, South Korea and India were the top five importers of U.S. scrap last year, and continue to offer the only potential for serious growth in the current climate.

• The historical changes also are breathtaking. Just 20 years ago, less than 10 million tonnes were moving out of U.S. export yards annually. Ten years ago, that number had fallen to just over 6 million tonnes. Estimates so far for 2012 are that exports will top 22 million to 23 million tonnes.

• Scrap exports are shipped from more than two dozen ports in the United States along the East, Gulf and West coasts. The ports handling the most material last year were Los Angeles, New York, San Francisco, Oregon, Boston, New Orleans, Seattle, Houston and Philadelphia.

• Looking at all U.S. exports of any type of finished or raw material, seven of the top 100 exporters are shipping scrap metal. Sims Metal Management Ltd. alone is the 13th-largest exporter of goods in the country, according to U.S. Census data.

What all this adds up to is that the current climate makes entering the export game a risk that numerous yards and brokers find worth taking. In fact, in today’s market any yard—no matter how small—can become an exporter. Booming demand, the availability of containers, affordable shipping costs and changes in technology have allowed many yards to sell directly to foreign buyers. This has created new opportunities to sell scrap outside of a domestic environment becoming dominated by consolidation and a vertical integration of the scrap supply chain into corporate mill business.

A business that plays it right can benefit from the current environment as well as the healthier one that might emerge as 2012 moves into the second half. 

For many yards, the investment in dollars and training that becoming a direct exporter requires is small enough to make it an attractive alternative to selling only to the mill down the block.

Because of this new reality, mills are forced to compete in the world of export pricing, as happened during the record-setting year of 2011, so even those dealers who sell to bulk export shippers or exclusively to mills see some benefit. But those also willing and able to fill containers and send them to export yards are in even better shape.

Container shipments have broken the stranglehold that bulk shippers maintained on the export market. By using containers, scrap dealers and smaller brokers are able to bypass bigger companies on the coasts and make their deals directly with foreign buyers. Long-term outlooks are nearly unanimous: Exports will continue to increase in the coming years, and any scrap business gearing at least part of its operations with this in mind is likely to do well. However, the short-term viewpoints are a little less certain. While China’s economy is still growing and Turkey and India are not far behind, U.S. ferrous scrap exporters face competition from producers of alternative iron units, as well as European exporters. 

Much of this is dependent on the fluctuations in foreign currency, the value of the U.S. dollar and transportation availability and cost. The short answer? If you’re thinking longer term, most experts bet on exports. Worried more about next quarter? Do some close-to-the-bone business planning before committing.

Even more than domestic mill demand, foreign demand has set the pace for pricing in recent years. This has led to a situation in which prices can rebound even when local mills aren’t dramatically increasing their buying programs. It doesn’t take a lot of increased foreign demand to drive prices back up, especially when scrap itself is in somewhat short supply. 

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