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Foreign scrap buyers see opportunity in US mill end-of-year purchasing patterns


The domestic steel industry's scrap buying practices have become as predictable as a rainstorm on an overcast day. Take, for example, the steel industry's decision to buy little or no scrap in December.

Mill buyers complain that company accountants call the plays in December. Even if they could score a touchdown by buying scrap at a bargain price, the bean counters whistle the play dead before it even gets started. The rationale is simple: Finance managers don't want to spend cash or to carry excess inventory on the company's books at year-end.

This has been the case for decades, not just a few years, so ferrous scrap processors are well aware of the practice and have learned to live with it. Some cut their purchases of peddler and obsolete scrap before December arrives. Others simply hold onto what comes through the gates, knowing that they are unlikely to sell much of it to mills in December and are prepared to wait until January or February. A few may even pray for a heavy snowfall, which seems to prod mills into buying scrap regardless of the price or inventory on hand.

But steelmakers and ferrous scrap dealers are not the only people aware of the end-of-year buying practices. Foreign steel mills also know U.S. mills don't buy much scrap at year-end, which may be why we see them on scrap buying binges late in the year when prices in the domestic market tend to decline.

China, for instance, bought 16 bulk cargoes, or about 500,000 tonnes, of ferrous scrap, much of it shredded supplied by the big export yards on the West Coast. Those purchases have little impact on the ferrous scrap supply for the domestic steel industry, much of which is east of the Mississippi River, making it too expensive to transport east from California.

But those were not the sole purchases by the Chinese and other scrap-hungry nations in the Far East at year-end. They also were scooping up container after container of shredded and No. 1 heavy melt wherever it could be found—U.S. coastal scrapyards and those in inland towns and cities not too far from U.S. ports.

Turkey, the main scrap buyer across the Atlantic, became active in mid-November as well. Turkish mills first raised their rebar prices; assured they had enough money, they gave in to exporters' demands for higher prices and bought several cargoes of scrap—some supplied by export yards in western and northern Europe, but more came from the United States, where the appeal of the weak dollar is difficult to resist.

In the past, export yards were regarded as the buyers of last resort for many domestic scrap processors. That has changed. The expansion of electric-furnace steelmaking both in the United States and abroad has made iron and steel scrap a desirable commodity. That was not the case when the industry consisted mainly of basic oxygen furnaces and open hearths, and scrap was something bought and melted when the prices made it appealing.

Today, demand for ferrous scrap is so strong that domestic steelmakers often find they are in competition for raw materials not just with each other but with steelmakers overseas. Exports of ferrous scrap have leaped to more than 20 million tons in each of the past two years from between 5 million and 10 million tons just a few years ago. Some domestic electric furnace mills, such as Nucor Corp., Charlotte, N.C., and Steel Dynamics Inc., Fort Wayne, Ind., have countered this with the acquisition of large scrap processors so they can be certain of supply regardless of the price.

But other changes have joined the export equation. First is the steady loss of metal manufacturing capacity. When a manufacturer moves a plant overseas, its industrial scrap often finds a new home as well. When industrial scrap is not available or the price is too high, some mills substitute shredded scrap. But melters still worry about the use of shredded because it may contain enough copper or lead to contaminate a heat of steel. Shredders have added equipment that removes copper and aluminum and other unwanted nonferrous metals, but shredded scrap can still be a source of other problems.

Second, shredded scrap is the most exported grade of ferrous scrap. The United States shipped 8.4 million tonnes of shredded scrap to foreign steel mills and foundries in 2008 and will likely match or surpass that in 2009 when December's exports are tallied, surpassing its nearest rivals—No. 1 and No. 2 heavy melt—by about 3 million tonnes a year.

Third, few scrap processors have much control over the feedstock. The most shredded item is an old car, but those rarely come right off the highway to a shredder. They first go to an auto recycler or wrecker—what used to be called a junkyard—whose main interest is selling parts. Only when a junker is stripped will it be sold to a shredder, and auto recyclers have learned that those old heaps contain an increasingly scarce commodity—ferrous scrap—and many will hold onto vehicles until they get the prices they want from shredders. They have adopted a new version of the scrap industry's adage about "laying it down on the ground" until the buying price rises.

So it isn't just the offshore demand that is slowing the scrap flow; the supply can be stalled here as well. That doesn't make it any easier on those who must buy scrap for steel mills, and the most opportune time may also be the month when company accountants are least interested in approving purchase orders.

Michael Marley

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