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Rethinking scrap handling

Mar 31, 2017 | 08:00 PM | Gregory DL Morris

Traditionally, scrapyard intake operations have not put much of a premium on speed. Today, technology in the form of scanners at the yards and sensors in the furnace are poised to monitor the supply chain and eventually melt in real time

Logistics along the scrap metal supply chain are at an inflection point, one that encompasses and reflects the position of the North American scrap industry as a whole.

Big picture, commercial enterprise-wide systems are capable of including scrap among the inputs of various raw materials feeding into a melt shop. Even so, software vendors say most steel mills tend to keep and track scrap flows on spreadsheets.

Factors behind that preference vary. For starters, many scrap operators are simply not large enough to need sophisticated enterprise systems. At the same time, even the larger ones, especially those that grew by acquisition, have integrated the legacy logistics systems inherited when they purchased other yards.

And although upgrades, overhauls, even root-and-branch replacements are available, such fixes are expensive. Add to that the fact that even the smoothest of installations is typically accompanied by some degree of disruption to operations.

Feedback from Wall Street indicates that industry analysts also view the entire scrap sector as facing a pivotal crossroads. After a few of the largest operators were acquired by fast-growing steel companies, the scrap sector underwent a major consolidation. At the same time, the use of intermodal box containers opened the export market to even small, inland yards. That trend too seems to have run its course.

In recent years, scrap operators have, for their part, invested heavily in new and more sophisticated handling and sorting equipment
and technology. In most cases, those outlays have enabled operators to improve margins by selling higher-quality streams of material to new clients. But those investments do not seem to have delivered the breakout profitability or differentiation that some expected.

It has been suggested that the next big thing for scrap operators could be more sophisticated logistics and supply-chain management tools. Such advances would enable operators to better manage what comes in over the scale, and therefore
make the most of their new sorting equipment and further tighten their relationship with mill customers.

“Scrap operators are certainly looking to bond more closely with their customers, and mills are looking to fill in gaps,” observes Vince
Pappalardo, managing director at investment banking firm Brown Gibbons & Lang Co. (BGL), Cleveland. “Some mills are still interested in moving into the scrap market, but no one has made any moves on the scale of what SDI (Steel Dynamics Inc.) and Nucor did.”

Why not? “Frankly, there is not much out there in terms of scale and depth,” Pappalardo says. “In scrap, there is a volume premium from the mills, not a volume discount. It’s all about scale, especially the economies of scale for the mills.

“We’ve handled a few acquisitions, and there are a few others out there,” he adds. “But at this point, mergers may be the best way for the regional guys to get scale.”

As local and regional operators close ranks, either in collaborations, joint ventures, or formal combinations, logistics become even more key. “Mills are looking for scrap operators that hit the logistics benefits, especially if they can ship in many different directions,” Pappalardo says.

“Logistics and quality control are just blocking and tackling, just good business practice,” the investment banker notes. “The big change in scrap over the past few years is that there is more business risk. Things like logistics and supply-chain management, as well as quality control are not just nice to have, they are need to have.”

Trade Flows Turn for Home

On a global basis, scrap flows have changed significantly in recent years, according to data provided by Metal Strategies, a West Chester, Pa.-based steel and metals consultancy. Most notably, exports of scrap have plunged by half since 2010, from 22.6 million short tons to 13.9 million tons. At the same time, imports have increased by 3 percent from 4.16 million tons to 4.27 million tons. Together those trends confirm increased domestic consumption of scrap.

In aggregate, that pattern shift is positive for both the U.S. balance of trade and for industry activity up and down the supply chain. But it
also means a revision of customary logistics to accommodate changing volumes and directions. There is also the perennial concern of “mining out the scrap mountain.”

With some expectation of new infrastructure spending on the horizon, it remains to be seen if--and to what degree--demolition activity will take place. If not major, scrap markets will have to rely on a range of variables, including the number of Taurus sedans Ford sold in 2007, or imports for feed. In either case, quality control and the ability to draw on scrap sources from farther afield figure large in any operator’s considerations.

In addition to the shifting tide in scrap export and import flows, there has also been a shift in the sources and ports of entry. From 2015 to 2016, Metal Strategies data show that although imports from Canada and Mexico were essentially flat, imports from Europe soared 54 percent from 592,000 tons to 914,000 tons. At the same time, imports from Asia and other regions fell by half, from 34,000 tons to just 17,000 tons.

While export origins and import destinations are not reconciled exactly, the data show that a major beneficiary of that influx from Europe was the Port of New Orleans. Scrap imports into the Big Easy soared 94 percent from 241,000 tons in 2015 to 459,000 tons in 2016. Imports were also slightly higher at Charleston, S.C., and Detroit. Not surprisingly, imports into Seattle declined.

All that reshuffling poses a challenge to logistics professionals. Clearly, scrap inputs are making their way to the country’s melt shops. Indeed, the new kid on the block, Big River Steel, the greenfield “fleximill” in Osceola, Ark., had no trouble parachuting into the market and securing sufficient scrap volumes. Making that scrap supply chain efficient, however, remains elusive.

“Scrap logistics are not as transparent as iron ore, or pig, or even DRI (direct-reduced iron),” says Chris Plummer, president and chief executive officer, Metal Strategies. “We have done a lot of studies for mills lately. They have those other inputs all mapped out,” he notes.

Plummer adds, however, that although the mills have their aggregate scrap numbers, there is less clarity back up the scrap supply chain, at least from the steelmaker’s perspective.

“Most people are comfortable with the scrap balance, which regions and what sectors have a surplus and which have a deficit,” he observes.“There have also been advances in transportation, notably the intermodal box container.

“Twenty tons of scrap can fit into one of those shipping containers,” Plummer says. “That idea was originally intended to put inland scrap into the export market,” he points out. “But it works well moving scrap by rail and truck around the country.”

Starting to Ask the Questions

Moving scrap, by rail, truck and/or barge from a yard to a mill site is, of course, anything but new among scrap and steelmaking circles. “Scrap yards and their mill customers have been handling scrap as long as they have been making steel,” says Perry Zalevsky, industry principal for mining and metals at OSIsoft, San Leandro, Calif.

“Inputs management is not new,” he adds. “What is new is how mills and yards are looking at opportunities in all their raw materials.”

The challenge facing scrap is that today’s sophisticated inventory management techniques are mostly designed for industries with parts and fabrication, Zalevsky points out. “So far, rather than trying to adapt those systems and practices for scrap, mills have mostly found it easier, and safer just to keep more scrap on hand,” he notes. “They are still very much looking for operational improvements, so they are just getting to the point in terms of the technology where they are asking these questions.”

Zalevsky suggests that the driver for enhanced logistics management in scrap might come from quality control, rather than a more traditional strategy targeting cost reduction or efficiency improvement. “It may be worth more, from a process-control technology perspective, to monitor scrap inputs for quality to protect the melt,” he shares the rationale behind that suggestion.

“Mills are starting to get the idea that they can do this,” he notes. “They have made improvements just about everywhere else in their process. And the technology now exists in terms of scanners at the yards and sensors in the furnace to monitor the supply chain and melt in real time.”

In a very real sense, “real time” means different things at different stages of the process. In a furnace, real time is second-by-second. But at the scrapyards gate, scanners and sensors can take a few minutes to aggregate a few dozen sample readings before calculating a price that the yard should pay for a load. “Give the driver time to have a cup of coffee and call his wife,” one source quips.

For scrap yard intake, speed is of secondary importance. The priority is the mill operator paying a premium for more desirable loads, and less for lower-quality materials. That is nothing new, but the ability to connect those sensor inputs with the yard’s own financial and operational systems is nascent. Just as nascent or new is the idea of connecting that data–not in real time necessarily but perhaps daily–with the mills that the yard supplies. Ultimately that information gets connected to the mill’s ERP, and on to both
purchasing and sales.

“Yes, that kind of technology is available today,” Zalevsky says. “From the guns and sensors at the yard to monitors on the melt, sensor technology is becoming cheaper, smaller, and easier to use.

“Data processing is also becoming cheaper and easier,” he points out. “The full-execution systems don’t exist yet, but we will start to see them in the next few years.”

One recent example of a large operator moving to upgrade what comes in through the front gate is Upstate Shredding where within the last several months the company started using a two-tiered price for cars with and without motors. “The inspection is very strict,” says Adam Weitsman, owner of Upstate and Weitsman Recycling. “The different rates have helped us on margin, but it also slows the processing.” Upstate-Weitsman claims primacy as the largest privately owned scrap operator on the East Coast, and is a former AMM Scrap Operator of the Year.

In a further effort to manage inflows, Weitsman tells AMM that his firm is expanding its captive trucking operations. “We want to
be able to go pick it up. That is becoming a big part of the business. It is expensive, but we are gaining on the [industry]. The bigger companies can afford to buy as many trucks as they like, but we have to be methodical about our capital expenditures.”