WSJ: Scrap-metal sector is latest victim of commodities bust

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From: Scrap-metal sector is latest victim of commodities bust
By: John W. Miller

PITTSBURGH—Cars are piling up at junkyards across the U.S., as the commodities bust that has already bruised mining and metals companies from Ohio to Australia ripples through another sector: scrap.

As prices for steel, iron ore and other commodities have dropped because of a demand slowdown and oversupply in China, prices for scrap metal have also collapsed.

That is leading junkyard operators to stockpile cars instead of shredding them, stalling the auto-recycling industry and the chain of largely small businesses that make up the U.S. scrap sector, which is a linchpin of the U.S. industrial economy and an $105 billion-a-year business.

Already this year, over 50 metal scrapyards have stopped operations in North America, according to the Institute for Scrap Recycling Industries. U.S. scrap steel exports fell to $4.1 billion last year, down 34% from $6.2 billion in 2014, according to customs figures. The index price for scrap steel in the U.S. has fallen 29% to $203 a ton, from $261 a ton a year ago.

Scrap companies are facing “extreme challenges unseen since the early 1980s,” saidGaldino Claro, CEO of Sydney-based Sims Metal Management, Inc., one of the few scrap firms with a global presence.

The metal-recycling crisis mirrors the travails of big mining and big steel. ArcelorMittal, the world’s biggest steelmaker, lost almost $8 billion last year, and U.S. Steel Corp lost $1.5 billion as steel prices in the U.S. fell 33%.

In the U.S., scrap has come to underpin almost every sector of heavy industry, because the U.S. began churning out massive numbers of cars, refrigerators and other steel goods decades before any other country.

Scrap—largely the product of recycled consumer goods—is a rare commodity segment where the U.S. is still the world’s dominant player and biggest exporter.

More than 60% of steel in the U.S. is made from scrap, compared with only 7% in China. The U.S.’s biggest steelmaker, Charlotte-based Nucor Corp., and many of its rivals, use scrap as their main raw material.

Steel production in the U.S. was down 11% last year to 78.9 million tons, meaning steel mills bought that much less scrap. That slowdown is dampening demand for junked cars, the biggest reliable source of scrap metal.

A year ago, Joe Staab, who manages Hosek Auto Wreckers near Pittsburgh, could easily find buyers for the carcasses of cars he picked clean of tires, radios, cradles and other useful parts.

“We’d sell’em quick,” he says. “Now, sometimes, when I try to call a buyer, it’s hard to get somebody to pick up the phone.”

In a lot that was once almost empty, he has stockpiled 300 cars as he waits for scrap metal prices to recover. Mr. Staab says he can get only $50 to $100 for each car, down from $400 a year ago.

Americans scrap 10 to 12 million vehicles a year, fueling a $20 billion-plus industry in reprocessing automotive steel, copper, plastic, glass and rubber. The sector is made up of mostly small and medium-size businesses, since the importance of personal relationships with peddlers, mechanics and other suppliers has helped make it resistant to consolidation.

Junkyards strip cars of valuable parts, then ship them to shredders, giant machines that chew up cars, crush the metals into chunks that mills and smelters can melt into new metal.

Detroit-based Ferrous Processing & Trading Co.—one of the biggest scrap-metal companies in the country, with origins in early 20th century horse-and-buggy scrap and rag collecting—operates a set of giant green grinders fed with a conveyor belt that pours in crushed cars.

Manager John Savino says he is seeing around 500 cars a day coming in, compared with 1,000 a couple of years ago.

Ferrous uses magnets at the shredding complex to pull steel out of the confetti-like piles generated by the grinding, crushing and cutting. What is left is sent to a third facility that uses a sophisticated system of conveyor belts, magnetic fields, metal detectors and air blasts to remove copper, aluminum, zinc and other so-called nonferrous materials. The remains are called “fluff” and used by landfill companies to plug the top of their dumps.

In addition to slowing demand from steel mills, shredder operators are hurting because like other parts of the metals industry, they added too much capacity. Around the turn of this decade, car recyclers made the mistake of betting on what seemed like never-ending growth at the top of the business cycle.

Since 2010, the number of shredders, which cost $4 million apiece, has gone to 450 from 300. Now, these shredders are operating at only 50% of capacity on average, according toRandy Brace, president of San Antonio-based Riverside Engineering, which sells, maintains and repairs shredders. Most years, Riverside sells two or three shredders. Last year, it sold none.

Tony Murrell, the manager of Parts Galore, a junkyard that supplies Ferrous’s Detroit shredder and is also owned by Ferrous, says that what differentiates this downturn is that prices for all the metals he produces—steel, aluminum and precious metals like palladium and platinum—have fallen.

He blames the strong dollar and imports. “The China market affects everybody.” Still, he’s confident in the future. “As long as there are cars on the road, people will need metal and this will be a viable business model,” he says.

Mr. Staab, the junkyard manager near Pittsburgh, has been in the recycling business since 1973, and says he has learned to recognize business cycles. For example, “when the price of oil goes up, people bring in SUVs and trucks,” he said.

Lately, he has been seeing a lot of economy cars, which he also believes indicates a sluggish economy. “We’re going to see a couple years of these prices,” he says. “We’ll just need to hang on.”

Mr. Staab isn’t sure what he is going to do with his rusting collection. “I’m trying to ride out the bad times, and not sell for scrap for now,” he says. “But scrap prices are going down and the bills are not.”

S.A. StevensonWSJ: Scrap-metal sector is latest victim of commodities bust

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