Why ferrous scrap is worth the effort for demo contractors

As the United States and many other parts of the world have rebounded from the severe COVID-19-related restrictions imposed in the spring of 2020, prices of both steel and ferrous scrap have rebounded and held onto those gains.

For construction contractors, the soaring cost (and occasionally spotty availability) of steel has at times been a burden. For demolition contractors, on the other hand, higher scale prices for ferrous scrap have yielded additional bidding opportunities and additional revenue.

History has shown that lofty scrap prices eventually decline, or even plummet, but the first eight months of 2021 have been good news for both generators and sellers of ferrous scrap.

A spike with staying power

In early August, steel mills in the Midwest were buying ferrous No. 1 heavy melting scrap (HMS) for $455 per ton, according to surveyed pricing gathered by Fastmarkets AMM. Data collected by that publication and by the Pittsburgh-based Raw Material Data Aggregation Service (RMDAS) of Management Science Associates demonstrates the ongoing strength of the 2021 ferrous scrap market.

Last August, as the U.S. economy tried to bounce back from pandemic-related restrictions, RMDAS pegged the No. 1 HMS price at $226 per ton. HMS is usually the closest in price to the plate and structural (P&S) grade paid by recyclers for the scrap iron and steel loads leaving demolition sites.

Prices for HMS and P&S have risen several times since then and have seldom backtracked. According to RMDAS, mills were paying an average of $270 per ton last November, $429 per ton this January and $477 per ton this June.

While scale prices track lower than that to allow processors to make a margin, the positive trend has made a difference in demolition bidding and job scheduling.

This March, a local media report from Youngstown, Ohio, indicated that the city would pay less than expected to demolish a bridge thanks to the steel content of the aging structure combined with the high-value ferrous scrap market.

An online report from Youngstown's The Vindicator newspaper indicated the three bids Youngstown received to demolish a 78-foot steel girder bridge over an abandoned railroad right of way were “significantly less than the city’s estimate” for the project.

A deputy director of public works was quoted by the newspaper as saying, “There’s so much steel on the bridge, which was a factor in the estimate being high. We’re conservative with the salvage value of steel.”

While the city estimated it would receive bids in the $950,000 range, instead the three bids received checked in between $580,000 and $650,000.

The potential for increased activity is half of the good news for demo contractors in a scrap iron bull market, the other is the increased revenue flowing in per ton of scrap brought across the truck scale at a processing facility.

Commodity analysts and economists in general can always find sources of concern, with inflation and the COVID-19 Delta variant topping the list as of mid-August.

Fundamentals for U.S. and global steelmaking as of that same time, however, appear strong. In the supply-and-demand-centric ferrous scrap market, that is a critical part of the equation.

Statistics gathered by the Washington-based American Iron and Steel Institute (AISI) showed as of the week ending July 24, year-to-date steel output in the U.S. had surpassed 52.6 million tons, an 18.4 percent increase from the 44.5 million tons made at furnaces and melt shops during the first six-and-a-half months of 2020.

AISI said the late July capability utilization (capacity) rate at mills in the U.S. had reached 84.6 percent. The July 2021 weekly figure represents a 38.4 percent increase compared with production of just 1.35 million tons during the same week in 2020, when furnaces were running at 60.3 percent of capacity in the midst of a COVID-19-impacted economy.

Globally, through the month of June, crude steel production for the 64 countries reporting to the Brussels-based Worldsteel Association had amassed more than 1 million metric tons. That represents a 14.4 percent increase over the amount of steel produced in the first half of 2020.

Global output in the month of June rose 11.6 percent compared with June 2020. Steel production in Europe, the Americas and Africa in June 2021 rose from 35 to 51 percent compared with June 2020, when restrictions in many nations were just starting to lift.

Year-to-date, steelmakers in Turkey have produced 19.7 percent more steel than they did in the first half of 2020, while steelmakers in India have churned out 31.3 percent more product. The two nations provide steady export markets for American ferrous scrap processors.

Despite the bullish summer market, scrap price volatility is a matter of “when,” not “if.” That causes advocates of metals price hedging to urge companies who generate, sell and buy ferrous scrap to consider hedging options that have long been used in the copper and aluminum markets.

Hedging one’s bets

Several contracts in place from the U.S.-based Comex and United Kingdom-based London Metal Exchange (LME) allow sellers and buyers of ferrous scrap to hedge, or place a price floor and ceiling, on the scrap they handle.

Adam Jackson of Texas-based Aegis Hedging has been working to help that firm convince potential clients—including contractors involved in large-scale industrial demolition projects—to consider the merits of managing their risk by hedging a percentage of the ferrous scrap they handle.

Jackson’s message to such demo contractors: “Scrap prices are still historically high, and you can lock in those profit margins right now.” He adds, “Even if metals prices drop from these historic levels, you can sleep better at night knowing your hedges are working.”

Aegis is among the companies “eager to help scrap participants learn the intricacies of metals hedging,” says Jackson. He acknowledges hedging can seem mysterious to the uninitiated, but adds, “Hedging using financial instruments doesn’t change the physical transaction at all. Your hedges work as a complement to the transaction you executed in the physical market. There’s also no change in the invoicing and collection process.”

There is an additional process in arranging a hedge, which Jackson says firms like Aegis are equipped to handle. “We also run into a few misconceptions about financial hedging,” he continues. “Hedging, by definition, is the opposite of speculation and not as complicated as it may first seem.”

Avoiding risk is the central goal of hedging and can yield enormous benefits when a commodity market turns, says Jackson. “If you are bidding on a project based on the current scrap market, the scrap revenues become ‘at risk’ as soon as the contract is signed,” he comments.

Continues Jackson, “Ideally, you need to have your hedging program in place as a project goes from planning to completion. The administrative items and hedge program structure need to be defined and implemented to ensure you can act quickly in fast-moving markets.”

The additional office work can be well worth it, he adds. “Implementing a proper hedging portfolio is not as daunting as it seems. There are different contracts on multiple exchanges that can be considered for hedging. The key is understanding the benefits and limitations of each product and designing a hedge program that meets the unique risk tolerance of your company.”

On the benefits side, “Hedging makes the revenue or cost of metal predictable, rather than random,” states Jackson. “Hedging, at its core, strives to eliminate or lessen the risk that market prices perform negatively to your physical commodity contracts. Financial hedging adds tools to a company’s toolbox that can’t always be achieved in the physical markets. Hedging and proper price risk management allow an organization to quantify potential risks and lower the likelihood of negative outcomes.”

This article originally appeared in the Sept./Oct. issue of Construction & Demolition Recycling magazine. The author is a senior editor with the Recycling Today Media Group and can be contacted at btaylor@gie.net.