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Ferrous scrap flows a big concern for 2013

Keywords: Tags  ferrous scrap, scrap flows, 2013 outlook, Sean Davidson

Many of the ferrous scrap industry’s concerns for 2013 align with those any business owner, employee, retiree, student or unemployed person might have about the economy.

The outcome of debates over foreign and domestic policies, regulations and controls, and taxes and benefits affect everyone, no matter the economy. These are much-discussed universal uncertainties that the ferrous scrap market cannot avoid. But only time will reveal how they will impact the industry, so market participants asked to take a peek into 2013 chose to focus their attention on the issues that directly affect them.

Obsolete scrap flows into shredders as well as nonshredding yards emerged as a prevailing concern--not so much on volume, but quite heavily on margins. Supply flows are directly affected by economic activity, but given a status quo 2012, suppliers say processing margins will come under increased pressure.

From a supply perspective, most participants surveyed by AMM predicted flows will equal those recorded in 2012, or possibly trek a bit higher. Only a few suggested flows could tighten this year.

The supply of used appliances this year is expected to trend at 2012 levels because, according to one source, “generally replacement of an appliance isn’t an elective decision.”

“We are now seeing the bottom of a cycle of scrap turnover of durable goods that is a direct result of the limited production of goods during and after the great recession of 2008,” a second source said. “There were far fewer goods produced in 2008, 2009 and 2010 which are now turning over as scrap. In addition, the Cash for Clunkers program took almost 1 million autos out of the loop. As production ramped up in the past several years to near-pre-recession levels, the durable goods produced in 2010, 2011 and 2012 will start to slowly increase scrap levels in future years.”

Those predicting a year of similar scrap flows said there was little reason to believe flows would improve. Others who predicted better scrap flows in 2013 cited such reasons as possible increases in construction and manufacturing activity. In the Mid-Atlantic region, the general expectation is that first- and second-quarter flows will rise due to collections stemming from Hurricane Sandy’s wreckage.

“I am concerned that scrap flows will be less in 2013,” said one of the few who told AMM that flows will be challenged. “It seems that obsolete grades have gotten more scarce in (the Midwest) region.”

Some seemed unfazed, saying that obsolete scrap flows would continue to respond directly to scrap prices. “The better the price, the better the flow” was the underlying sentiment.

Margins, however, are where 2013 could prove to be a maker or a breaker, according to several sources.

“Too many mouths at the table and a smaller pie to share,” a fourth source said. “Although demand is improving modestly, the availability of scrap is also only modestly improving. It will be a challenge, especially for shredders, to compete for the limited supplies of scrap.”

“The real challenge is for scrap processors to realize profits while chasing raw materials with higher buying prices,” a fifth source said. “Sooner than later, processors have to pay the right price for feedstock.”

Margins will remain under pressure until shredder capacity finds balance, sources generally agreed. One said that part of the solution lies in consolidation, not only among shredders but also among dealers, of which there are “too many.”

At least one other source agreed, adding that 2013 could bring some reprieve. “I see more consolidation in the scrap industry. Some want out due to regulation and some want to grow and own all the tons possible,” he said.

Outside shredder feedstock and the overall health of the shredding industry, however, there is another issue of concern.

“I see too much demolition going on in the short term, which will dry up the supply for later years and drive prices higher,” a seventh source said. “The reality is that demolition is one of the largest single sources of scrap--almost as great right now as peddler and auto salvage combined. While all the talk (is) about shredders and peddlers, the demolition business has been booming and the end of the boom is within sight. When this happens, I estimate 20 percent of the current flow will be gone.

“The only continued boom will be two to three years of scrapping infrastructure from the coal industry, which the (Obama) administration has literally demolished,” he said. “Small and mid-sized demo guys will start starving on the scrap by the end of 2013, while large firms will be OK for two to three years on these coal plants, unless real estate dramatically picks up.”

With 35 to 40 percent of the scrap supply originating from demolition jobs, he added, the industry needs to take notice.

Most respondents felt that issues relating to supply and margins in 2013 would mirror those of last year. The same applied to speculation on pricing trends for 2013, with many saying that ferrous scrap tags would be similar to those in 2012.

“It should be a narrow price range again, with a swing of less than $75 per gross ton for the entire year,” one source said. Another predicted similar seasonal price movements, “but hopefully with an upward sustained price range due to higher capacity utilization at mills domestically.”

A buyer at a Mid-Atlantic mill divided his outlook into quarters. “Up in the first quarter due to weather and renewed inventory builds at steelmakers. Leveled off in the second quarter. Down in the third. And leveled off in the fourth quarter,” he said, with one caveat. “UnlessÑlike (in 2012)Ñthere is an early bounce.”

Of the many industry players AMM contacted, a few chose not to speculate on 2013. “It’s hard enough predicting the next month” was a common response.

“It’s a real crapshoot right now in terms of being able to forecast accurately,” one source said. “Right now, my long-term thoughts and forecast wouldn’t be worth the paper they’re e-mailed on.”

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