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Relax, the US is blessed with a bottomless well of scrap


Just how deep is the U.S. ferrous scrap reservoir? Truth is, no one knows with any certainty how deep.

A study by consultancy Robert R. Nathan Associates Inc. in the late 1970s said, in brief, that there were millions and millions of tons of iron and steel scrap out there. Not to worry.

The study was done a year or so after the now-deceased Father William T. Hogan, an economics professor and steel industry analyst, had issued his own report predicting a severe ferrous scrap shortage in the 1980s. Too bad Hogan didn't live long enough to see the current ferrous scrap market—it might have reassured him of his earlier prediction. But at the same time, it might have undermined it.

In the first half of the past century, purchased ferrous scrap was a commodity that steelmakers used at will. If the price was cheap enough, they tossed it into their open-hearth furnaces with their home scrap and iron. Electric and cupola furnaces, which use mainly scrap, were the realm of specialty steelmakers and foundries. When basic oxygen furnaces (BOFs) became the operating standard for carbon steelmaking in the 1950s and 1960s, obsolete ferrous scrap got short shrift. The BOF shops wanted the auto bundles and heavier demolition scrap like plate and structural beams.

Our obsolete scrap reservoir grew and helped pave the way for a new and innovative segment in the steel industry the electric-arc furnace mini-mills. The scrap was here, it was readily available from local suppliers and it was cheap enough .?.?. and, after all, the nonferrous industries had been recovering and reusing their metals for decades, if not centuries.

At first it was just reinforcing bar and other construction products. Later, as the mini-mills moved into the sheet steel markets in the 1980s, chemistries and specifications got tougher and required more of the best-quality steel scrap. The auto industry's factory bundles and similar prompt industrial steel scrap, once sold mainly to integrated steel mills, became a highly desirable commodity. Both BOF shops and the flat-rolled mini-mills want them. The name itself—prompt industrial scrap—indicates that there are few, if any, reservoirs of that scrap. It comes to market almost as soon as it is generated.

A glance at the $300-a-ton differential in the price paid for No. 1 busheling and shredded and heavy melt indicates where the pricing battle has been the most fierce. In the past there was rarely more than a $10- to $20-a-ton premium in the price paid for No. 1 bundles and No. 1 busheling over shredded scrap. Consuming steel mills and foundries have compensated by adopting scrap surcharges to offset higher costs. Those have been in place for several years now, the consequence—not the cause—of the spike in steel scrap prices.

Obsolete scrap like No. 1 heavy melt drawn from demolition work and shredded autos still have some attraction to rebar makers and foundries, but it also has been a staple of the export market for decades.

The dollar might be weak now and drawing more scrap offshore, but the dollar has had its ups and downs before. When it drops, as it has in the past few years, new opportunities are created for U.S. manufacturers to take advantage of the comparative trade advantage that the cheap dollar affords. Scrap metal is one of those manufactured products that is among the first to reap the benefits of a weak dollar.

Some might argue that scrap isn't a true manufactured product. They probably haven't seen a shredder or a baler in action—nor have they seen the bills, permits and other preparations required to set up such machinery. Also, the weak dollar doesn't make scrap cheaper per se. It still costs a scrapyard money to acquire the junk vehicles and old refrigerators that are fed into the shredders, and junkyards and other scrap peddlers that supply that feedstock expect to be paid more if the scrap processor is getting a higher price from mills.

But the cheap dollar has made U.S. obsolete scrap more attractive to overseas steelmakers and foundries when compared with the price of scrap from other regions and alternative raw materials. More than 2.4 million tons of ferrous scrap left U.S. ports in May and nearly as much in June.

But how long will this buying binge last? By July, the dollar was on something of a rebound, Turkey's steel producers weren't selling as much rebar to construction companies in the Middle East and Taiwanese scrap buyers told suppliers that production would be cut back in order to reduce electric power consumption during the summer.

As sudden as the price spike of the first half was, the price decline at the start of the second half was far worse. In July, prices at the coastal terminals started to drop like a lead-weighted anchor—down by $100 a ton in a matter of weeks and still sliding as this was being written.

Such steep declines would normally shut off the scrap flow to the docks. That wasn't the case, however. If anything, the opposite reaction occurred, at least for the first few weeks. Dealers who had been selling to export yards didn't suddenly cut them off. Instead they shipped more scrap, hoping that it would cross the scales before the next price drop. Outside some yards, trucks loaded with scrap were lined up bumper to bumper and waited for an hour or more to unload.

The simple fact is that we are a scrap-rich nation. On its surface, that might not seem like an attribute to brag about, but it is—it says a lot about the wealth, the comfort and the many products we enjoy. You don't see central air-conditioning units outside tin shacks in Third World nations.

So how deep is our ferrous scrap reservoir? I don't know, but I doubt that anyone has yet seen the bottom.

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