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After years of seesawing between mills and yards, dealmaking leverage now appears to weigh in favor of large scrap processors . . .and they know it


One of the odd parallels of the scrap market is that the flow of obsolete ferrous scrap can be a lot like the life cycle of a vehicle's lead-acid battery.

The dead-battery/dead-scrap-market analogy was apparent in late June and early July, when much of the nation was sweltering through 90-degree-plus temperatures and humidity percentages that matched the mercury's numbers. The analogy has an ironic twist since most scrapyards no longer handle dead car batteries after being stuck with millions of dollars in cleanup costs.

Anyone who has owned an older vehicle for several years probably has learned the lesson about batteries. A car's battery has a typical life-span of five to seven years, but it can die young in the heat of summer just as easily as it will on a cold winter's morning.

Most scrap peddlers and small dealers are not mad dogs or Englishmen. In other words, they know how unwise it can be to be out in the noonday sun in such heat and humidity. By the same token, they also know it is foolish to go out in mid-February when there is a foot of snow on the ground to scout around for old pipe and other junk.

Larger scrap dealers and processing yards that have their own fleets of cranes and front-end loaders are well aware of how productivity can sink in the extreme temperatures of summer and winter. Move a crane or front-end loader around on a cold morning and something is sure to break, and because of the cold it'll often take twice as long to repair.

Similarly, on hot summer afternoons burners—the guys who cut apart thicker pieces of steel with a torch—aren't likely to be at their most productive. Smart yard managers realize that. One shifts the workday, bringing his burners in at 6 a.m. and sending them home at noon; it might also be that he doesn't have enough scrap to cut—remember, the small peddlers and dealers stay indoors with the air conditioners cranked up.

Do people who buy scrap have the same wisdom? It did not appear to be the case in late June and early July. The market's rumor mill was at work—it works all the time, regardless of the weather—churning out predictions that prices would be down in July. Some prices had leveled off a bit in June and some had even declined, and exports were weaker. The market would be down $50 a ton or more in July, was the oft-repeated prediction.

As a result, those scrap dealers who had not shipped what they sold earlier in the month got the usual end-of-month fax or e-mail telling them that all the scrap not shipped by June 30 was unwanted. That's no surprise—industry veterans have been getting those price-weakening, month-end cancellations from some mills since the dawn of the scrap business.

These days, though, there seems to be a lot more dealers saying the cancellations are meaningless, that they are not troubled by them. Most had no scrap to ship and little feedstock coming into their yards because of the heat wave.

In other words, the ferrous scrap market's battery had a couple of dead cells, and a car battery with even a single dead cell won't turn over the engine. For some scrapyards, it wasn't just that one cell had died—the entire battery was drained. Peddlers were not delivering scrap, demolition work had slowed and auto wreckers were holding onto junked vehicles because they didn't like the low prices that shredders were offering.

When such slowdowns occur and brokers or mill buyers are sure they can push through price cuts, their actions are likely to produce the opposite result. Like a pair of jumper cables, they can bring the dead battery to life.

Dealers don't have much to sell, but at the same time they note that mills want the same quantities—and sometimes even more—than it wanted the previous month. If there is less than 1,000 or 2,000 tons on the ground, they reason, why sell it at $40 or $50 a ton lower than what the mill would have paid the previous month? Sit on it and see what next week or perhaps even next month will bring, they tell themselves.

Their fathers and grandfathers had to do that in the past when the mills had no appetite for scrap. Today, however, it is a different world. Demand for ferrous scrap is enjoying strong demand, not just in the United States but throughout the world.

And there is no cheap alternative to ferrous scrap these days. Three big companies (Vale, BHP Billiton and Rio Tinto) control much of the world's output of iron ore and hence the production of pig iron by the smaller blast furnace operators. And the largest non-captive producers of hot-briquetted iron are in Venezuela, a country whose socialist leader isn't too fond of the United States. Add to that the steep climb in offshore demand for scrap.

If ferrous scrap and other steelmaking materials are not readily available, what else can a mini-mill use to make rebar or plate? Air?

The power now lies in the hands of many large scrap processors. And many know it. One veteran scrap trader in the South has an irrepressible sense of humor about this. "If they don't like the price this month," he laughs, "just think how much they'll love it next month."

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