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FULL OF SCRAP Please don’t shoot the piano player—it’s not his fault


In times like these, when ferrous scrap prices have leaped as high as they did in January, I feel like a piano player in a saloon in the wild and woolly American West. The cowboys have come to town and sold their steers. Their next stop is usually the saloon, where they drink to their success, tell the piano player to play some happy music and dance with the bar girls. It's time to celebrate.

Some of the patrons might not like those tunes. But a piano is too expensive to replace, so shoot the piano player. He's unarmed. Sure, I'm the guy making the noise by reporting the steep increases in the price of bundles and shredded scrap, but I only play what I hear from the scrap market. I don't compose it. The mill buyers, their brokers and the dealers are the composers. I simply wait until they've finished each month's piece, then I play it back for them and others in the metals industry and its markets.

January saw prices climb by as much as $90 a long ton in some regions. Such obsolete grades as No. 1 heavy melt and shredded scrap soared to record highs. No. 1 heavy melting steel rose to $345 a ton while shredded scrap prices averaged $395 a ton and even topped $400 a ton in so-called quiet deals, or purchases of material from more-distant suppliers. Strong export demand and low inventories at mills were seen as the culprits. Some mills were short scrap and had little choice but to buy at the prices that dealers were asking.

One problem with January's tune was that steelmakers have been singing the same old December song year after year. Let's call it "We Don't Want No Scrap." Often, as the end of the year approaches the accountants are making the decisions. "Don't buy much this month," they tell the mill's purchasing department. "We don't want to carry much inventory at year's end." It's a shortsighted decision and has consequences that are more expensive than the value of a few thousand tons of scrap lying on the ground come Dec. 31.

This buying practice has become uniform in the past few decades. For most steel companies, it's not only the end of the calendar year but the end of the fiscal year as well. Scrap dealers and brokers are well aware of this minimal-inventory rule at year's end. They've been schooled in it year after year. So when a few of the mills broke ranks and offered to buy scrap in December, it sent a message to suppliers. Many saw it as a selling opportunity and choose to sit it out. They decided to wait for January's song, which many believed would sound a lot like that the old 1960s Spencer Davis Group song, "Gimme Some (Scrap) Lovin'," but with a bit more desperation in the lyrics.

At the same time, the steady decline in the value of the U.S. dollar made the clanking and banging of cheaper U.S. ferrous scrap unloaded from a cargo ship or a container sound like a symphony to scrap buyers in Turkey and the Pacific Rim. The Turkish mills reportedly paid as much as $460 a tonne for their preferred 80-20 mix of No. 1 and No. 2 heavy melt and as much as $475 a tonne for shredded scrap to suppliers on the East Coast. That was cheap compared with the $522 a tonne that a Taiwanese mill paid for bonus grade (5-foot plate and structural scrap) and its $512-a-tonne check for shredded. Major export yards were quoting prices that rivaled those paid by domestic mills, and those on the East Coast once again reached into western Pennsylvania and eastern Ohio to obtain scrap.

Could the tunes played in January have been any different? Perhaps.

There were a few mills and foundries that managed to avoid the market melee in January. Some mills, including Steel Dynamics Inc. and Commercial Metals Corp., have scrap-processing yards as part of their corporate structure. They are like the integrated steel mills of the past in the sense that they have their own raw materials supply to tap when inventories are low. They pay the higher prices just like other mills, but they are assured the scrap will be there. That's not to say that all mills should buy up local scrapyards to lock up supplies and have more say over pricing.

Others have come up with some variations on this theme. For instance, one foundry in Pennsylvania has a retired scrap broker on its board of directors. He travels from Florida, visits family members and sits in on board meetings. For much of the past year, he persuaded the foundry's managers to pile up some inventory—not in November and December, but earlier. They did not need to buy a huge tonnage each month. That would have sent the market a message that they needed scrap. Instead, they bought just a bit more than they would normally buy. According to some of the foundry's scrap suppliers, it worked. While others were out in the cold beating the drums for any tonnage they could find, its melters were comfortable and enjoying the warmth and the rhythm of their melt shop.

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