Squeezed at the scale

Winter has often provided challenges for demo contractors and scrap processors alike, especially in the parts of the country where snow and ice interrupt travel and discourage outdoor work.

The winter months of the first quarter of 2015 proved no exception to the pattern, and in many ways surpassed prior winters on the misery index by including sharp drops in ferrous scrap pricing from which the market is only now recovering.

As scrap yard operators and ferrous scrap traders move into the summer months, they are eager to put the first half of the year behind them and ideally find both weather and market conditions that warm up considerably.

Recyclers contacted in the spring, if not necessarily optimistic, cited several reasons why the remainder of 2015 may play out differently from the first several months.
 

Starting from a low point

The first quarter of 2015 was an unpleasant one for ferrous scrap processors measured not only by reduced flows of scrap but also by the plummeting per ton prices paid by domestic steel mills and export brokers alike.

Don Zulanch of scrap processing firm Cohen, Middletown, Ohio, estimated in the spring that “flows of all retail material are off 20 percent, at least” in his company’s Ohio Valley operating region. Even with reduced buying interest from mills, “It is very hard to hold inventories,” says Zulanch.

On the East Coast, David Caffee of Atlantic Recycling Group, Rockville, Maryland, witnessed a similar first quarter of 2015. “Flows were devastated by weather and by price in February,” says Caffee. “In March it picked back up, but flows were still down 20 percent from last year’s average—which must be a function of price.” After scale prices drop so steeply, says Caffee, “There is not as much incentive to be a collector.”

Rich Brady, executive vice president of OmniSource Corp., Fort Wayne, Indiana, comments, “Obsolete scrap flows were dramatically lower in the first quarter due to weather and the downward pressure on scrap pricing, which was driven primarily by a lack of demand from domestic steelmakers and the strength of the dollar (limiting exports [and] increasing available supply).”

Prices that plunged dramatically in February—$85 to $99 per ton, as measured by the Raw Material Data Aggregation Service (RMDAS) of Management Science Associates (MSA) Inc.—caused some ferrous scrap to go into hiding before it could reach a consumer or even hit shredder yards.

“Scrap flows are certainly reduced, with many individual customers (non-dealers, even) holding onto material when they find out how relatively little they are getting for their scrap—both ferrous and nonferrous, too,” says Keith Highiet of Modesto Junk Co. in Modesto, California.

A recycler in Florida, who preferred to remain anonymous, say the phenomenon was widespread in his part of the country. “Some dealers were caught with high-cost inventory, not expecting the downturn to be so severe,” he comments. For other companies in the processing chain, “The challenge is to replace tons at pricing that is not attracting a high level of peddler activity.”

As low pricing continued into the spring, the Florida recycler says, “This is leading many dealers and auto parts yards to hold inventory in anticipation of a price correction,” although he says their ability to do so is “limited by space and capitalization.”

Brady says he does not expect any hoarding of scrap to last for very long. “There was likely some speculating on automobile hulks, but by and large most scrap processors continued to turn inventories given uncertainty in the domestic steel and scrap markets,” he comments. “Notably, the ‘correction’ in the ferrous scrap price has left many players acknowledging a new price range will prevail in 2015, more in line with global steel and scrap prices.”

By early June, however, some new life was appearing in the ferrous scrap market, with American Metal Market (AMM) June prices rising $15 to $25 per ton, depending on the grade. That followed a lull from March to May when the same grades only rose in price by a few dollars per ton during the three-month span.
 

Building up expectations

Regarding potential kick-starts for an improved ferrous scrap market, the construction and demolition sectors provide a foremost possibility, especially if Congress can agree to a federal highway funding formula.

In terms of reduced generation in the first quarter of 2015, the prompt grades generated by durable goods manufacturers were not a primary culprit. “Industrial generations of prime grades remained relatively steady during the period, however, pricing on these grades contracted as well in response to the demand-supply dynamics,” says Brady.

When both steelmakers and scrap processors complain about weather-related effects, one of the reasons is reduced construction and demolition activity. Regarding OmniSource operations in the Midwest, Brady says, “Demolition activity was minimal in the first quarter due primarily to seasonality and weaker prices.”

In central California, Highiet didn’t blame the weather for a lack of activity but rather a lackluster regional economy. “Demolition scrap is not too [prominent] in the northern San Joaquin Valley area of California; construction has not been robust here since 2008,” he remarks.

The recycler based in Florida is more optimistic about demolition activity not only in the Sunshine State but throughout the South. “Demo projects in this region appear to be picking up, with the General Motors plant outside of Atlanta being a significant project,” he comments. “A rebound in commercial construction has been helped by historically low interest rates and pent-up demand coming off the real estate decline approximately five years ago,” he adds.

In Ohio, Zulanch does not point to a booming construction sector, but does point to a strategic advantage he says Cohen enjoys. “Not much has changed for the better on the overall generation of demo scrap, but we are certainly getting our share.”

Construction contractors ramped up for a busier spring as measured by construction employment figures distributed by the Associated General Contractors (AGC), Arlington, Virginia.

AGC says construction sector employers in 30 states added jobs in April, with Pennsylvania, Minnesota, Virginia and Nevada among the biggest gainers. Bucking the trend and shedding construction jobs were Texas, West Virginia and Hawaii.
 

Outbound is down

No matter how much ferrous scrap flows into yards in the summer of 2015, pricing may hit a ceiling if export demand continues to dwindle as it has for the past three years.

After peaking in 2011, demand for U.S. ferrous scrap from overseas buyers has declined steadily, and 2015 is thus far pointing to a continuation of that trend. Recyclers cite several reasons for the phenomenon as well as several ways it has affected ferrous scrap flows within North America.

Brady says the strength of the U.S. dollar is likely to continue limiting exports until it weakens against the euro, the Japanese yen and other currencies, and the Florida recycler concurs. “The strength of the dollar and the U.S. economy compared to Europe and other regions will continue to make exporting a challenge,” he comments.

Recyclers saw only modest improvements in demand from overseas in the second quarter. “In spot cases we have seen inquiries from overseas buyers to suppliers who face high transportation costs to get to domestic homes, and who have access to export shipping outlets,” says the Florida recycler.

Farther north on the Atlantic Coast, Caffee reports some signs of optimism. “We are hearing there are more bulk cargoes from U.S. East Coast to Turkey, and the [ferrous] container business is strong and competitive,” he remarks.

On the Pacific Coast, export shipping remains critical (with few nearby domestic options available), but has been challenging both because of reduced demand and, earlier, the port workers’ slowdown that lingered for several months in late 2014 and early 2015.

In the midst of volatile prices and changing flow patterns, Zulanch and the other veteran recyclers contacted say maintaining a profit margin is difficult, but challenging business climates are as old as the scrap industry itself.

“The key to profitability and sustainability at lower pricing, and most likely reduced volume, is being a low-cost operator and sizing the business accordingly,” says the Florida recycler.

Caffee even sees a positive side to the lower per-ton prices, commenting, “In theory, the price is fine if we can hold a margin and keep up volume. We like operating with lower prices—it’s easier on the letter of credit interest and on cash consumption.”

Demo contractors, however, face the burden of estimating how much iron and steel scrap will be worth when it reaches the scale, a task made more difficult in a volatile pricing climate. “Projecting scrap prices is always a challenge for project estimators and everyone in our industry,” says Max Hounshell of Cherry Cos., Houston.

“With constantly fluctuating prices, any estimates on projects are always a risk you have to take whether the current prices are high or low,” he continues. “Usually, our models are formed on future projections based on the term of the project, but you have to rely on a certain balance between watching trends and day-to-day changes in the market.”

The author is an editor with the Recycling Today Media Group and can be contacted at btaylor@gie.net.