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Apr 2010

Scrap Metal Recycling: Salvaging Value in a Recession


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There are many types of recyclable metals, including aluminum, brass, carbide, cobalt, copper, hastelloy, incoloy, molybdenum, monel, nickel alloys, stainless steel, titanium and tungsten. For about 200 years, the U.S. has been wholesaling and recycling scrap metal for the steel industry. Today, steel is the most recycled material, being extracted from old appliances, automobiles, packaging products and obsolete infrastructure components. Scrap metal recycling is a cyclical industry that generally reflects the current economic condition, and both domestic and international demand and supply influences.

SUPPLY

Scrap inventories fluctuating with steel production

About two thirds of the steel made in the U.S. is manufactured using ferrous scrap. This scrap is collected through 2,500 scrap processors and more than 12,500 auto dismantlers in the U.S. From 2004 to mid-2008, the average price for scrap steel and iron doubled due to strong global demand for steel products. But, in late 2008, the bottom fell out as we fell into a global recession. Prices hit rock bottom in the fourth quarter of 2008 as end-user demand (particularly in the automotive and construction industries) dropped. From Q4 2008 to Q1 2009, steel production declined 39% and inventories at scrap yards started piling up. Over the last 12 months, prices have begun to recover and high inventory levels have leveled off.

Scrap, Ferrous, No. 1 Heavy Melt

Distressed companies creating great buying opportunities

Recently, scrap yards have been reporting opportunities to purchase inventory at high discounts below American Metals Market (AMM) pricing from distressed companies. Thus, reported scrap prices may not actually be reflective of some of the variance in the marketplace, especially where scrap yards are negotiating bargain pricing.

Scrap metal extraction capabilities improved

There has also been significant investment in the equipment and processes for the collecting and recycling of metals. Maximizing the amount of metal extracted from waste has positively impacted the availability of scrap. While automobiles continue to be recycled at a high rate, containers and appliances extraction rates have increased approximately 20% over the past ten years.

Overall Steel Recycling Rate

Scrap metal recycling of consumer appliances increasing

Prior to the current economic crisis, inventories of scrap iron and steel were nearing lows not seen since the 1990’s. Over the course of the twentieth century, the introduction of curbside collection of electrical appliances and other materials containing steel helped to increase the level of metal recycling, resulting in more scrap availability to meet growing demand. Currently, more than 34 million appliances are recycled annually, providing approximately 10% of the steel processed by recycling facilities. Recyclable appliances include refrigerators, washers, dryers, dishwashers and ranges.

Vehicle Recycling Cycle

Scrap metal recycled from automobiles will decrease in the long-term

Automobiles are the most recycled consumer “product”. The ratio of recycled steel and iron within the individual components of an automobile varies, but in general, the average passenger car is made up of approximately 65% of steel and iron; 25% of which comes from recycling. With rising levels of plastic and non-ferrous metals used in the production of automobiles, the amount of steel utilized will continue to decline. This has produced a situation whereby the amount of steel “recovered” through recycling is exceeding the amount “used” in new cars, resulting in an aggregate scrap recycling rate per automobile of over 100%, as illustrated in the chart below. At some point in the future, as these “new” cars start being recycled on a more consistent basis (due to age as opposed to damage), the recovery rates will begin declining to less than 100% and less scrap will be available.

Automotive Recycling Rates

DEMAND

International demand strong; exports increasing

Demand for iron and steel scrap is growing from China, Egypt, India, Taiwan and Turkey. These countries often purchase lower-grade steel scrap in high volumes. Despite the global financial crisis, the U.S. International Trade Commission reports significant growth in scrap exports, which have doubled since 2003. Worldwide demand for scrap will remain high as industrial expansion continues in developing nations. Much of the scrap exported is processed in mills located in these countries and is used to build new infrastructure.

Automotive Recycling Rates

In the short-term, steel mills have adjusted capacity down, lowering scrap demand

Domestic demand has remained tight. The collapse in the transportation and construction industries and the subsequent credit crisis resulted in a significant drop in demand for finished products manufactured in steel. In response, many mills started to remove capacity throughout 2009 especially in the first half, by “hot idling” furnace and production lines. In January 2010, key steel mills announced they were going to increase capacity by bringing some idled furnaces back online; however, significant capacity has not been brought back online as there are continued concerns that prices for finished goods will decline. Based on discussions with industry contacts, steel mills are running at approximately 65%-75% capacity. As an alternative, lead times for finished goods are being extended in an effort to keep supply low so that prices continue to increase. This decision to “hot idle” has resulted in a financial crisis for a few mills due to decreased sales coupled with continuous operating costs to maintain their equipment.

Environmentally friendly electric arc furnaces increasing demand for scrap

The majority of processed scrap steel is used in electric arc furnaces (EAF), which produce lower levels of greenhouse gas emissions than alternative traditional blast furnaces. Also, the metallic mix in EAF steel production is about 80-85% scrap, versus the traditional blast furnace that uses only 20% scrap. It has been reported that using recycled material instead of virgin ore can save up to 95% of the energy in aluminum production and 74% in iron and steel production. Furthermore, for each ton of steel that is recycled, 2,500 pounds of iron ore, 1,400 pounds of coal and 120 pounds of limestone are conserved. Historically, iron ore was priced on an annual basis; now the market is determining the price which has driven iron ore costs higher than scrap.

Cash for Clunkers took older cars off the road, lowering demand for the parts to keep them running

In 2009, a government incentive was introduced to jumpstart new car buying in the United States. Cash for Clunkers, as it was infamously named, got hundreds of thousands of used cars off the streets. In turn, demand for the auto parts needed to keep those jalopies running vanished, which meant that demand from auto parts makers to the secondary market decreased, driving down domestic demand for scrap.

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