October 2, 2008

Merchants Must Steel Themselves for Tough Times ; METALS Steel Scrap Merchants Are Having a Torrid Time Due to the Plunge in the Price for All Types of Ferrous Residues. Russell Luckock, Chairman of Birmingham-Based Pressworks Company AE Harris, Looks at

By Russell Luckock

Until recently, prices had rocketed upwards to the tune of some pounds 250 per tonne. Money was being made, and their customers, the steel mills, were asking for more. Then suddenly the tap was turned off, and the price being offered now is pounds 100-pounds 125 per tonne, a swift and substantial fall, which has caught many merchants with overstocked yards brought in at much higher prices.

Now the steel business, in terms of scrap, has always been somewhat cyclical, with no fixed pattern over the years. The commodity is essential in the production of raw steel in all its forms, and demand is a direct reflection of the needs of the rolling mills. They tend to live on a hand-to-mouth basis, and the price paid is related to their degree of need.

For instance, at times the value has been as low as pounds 6 per tonne; the early part of 2000 being a case in point. Recently, the record prices being achieved was in the main entirely due to the huge demands being made from China, and in particular, India. The Tata Corporation - owner of Corus - led the way, and prices escalated world wide.

Suddenly, demand has dramatically reduced, leading to the price plunge. John Sansome of city centre scrap merchantsAF Sansome, told me that an additional factor, was that many Chinese companies are declining to pay by irrevocable letter of credit. They are imposing new terms, whereby payment will only be made after the material is received and subject to it passing their quality control requirements. This could well mean long delays in the settlement of accounts.

I asked Mr Sansome if there was any way in which he could forecast when the prices would start to stiffen. He had no comfort to offer here, only 40 years of experience which had taught him that the market was as predictable as guessing the lottery numbers.

Alan Dunn, of Dunn Brothers in Smethwick confirmed that the lack of Eastern demand, was forcing prices down. In addition, the huge cut back in demand from the building industry not only in this country, but in Italy, France and Spain was having an impact.

The demand for beams and structural steel is well down, and until the housing market starts to move again, demand in that sector will remain very sluggish.

Jennifer Williams, a director of Birmingham processors Haywood & Cook, which has been in the business since 1914, feels that the price will continue to drop due to the Oriental factor, plus the fact continuing declines being seen in the manufacturing industry.

Traditionally, the market firms up a little in August, as supplies are low due to factory holidays. The reverse has happened this year, illustrated by the rapid plunge of some pounds 125 to pounds 150 per tonne.

For the component manufacturer struggling to cope with cheap imports, the return that can be achieved for scrap produced, is discounted from the ultimate price quoted to the customer, hopefully providing an attractive package. However, the rapidly increasing cost of raw material, coupled with the scrap crash, is causing a few sleepless nights. For instance, a manufacturer of pressings, using strip or sheet steel, will lose some 30 per cent of any given tonne in scrap. This means that the return on cuttings is very important when endeavouring to achieve a profit.

Stuart Roberts, of steel merchants F H Warden, has no comfort for manufacturers.

His company is having to contend with the fact that from yesterday Corus, has increased the price for heavy beams by seven per cent.

This will be another headache. Fortunately, the non-ferrous scrap market which covers such materials as brass, copper and similar alloys, while dropping by some six per cent, has not experienced the same degree of falls as ferrous. The base prices have eased on the London Metal Market, but it is very difficult to predict which way future movement will occur.

However, it has to be remembered that today's prices are very similar to those in force in the spring of this year. A lot of money was made in a very short space of time, and such blips do occur over the years. Nevertheless, with the rapidly expanding demand in both China and India, my guess is that demand for product will continue to be healthy.

There is however, a lot of scrap about in the world. Many countries, especially those in the Third World, have hundreds of thousands of tonnes of scrap lying about in the form of scrap vehicles, old steel buildings, not to mention rotting hulks of ships. By way of illustration, on the holiday island of Barbados, it is estimated that there is at least 200,000 tonnes of rusting steel just abandoned in the countryside. There has recently been a fact finding mission to this country from several Caribbean islands, with a brief to identify means of turning this material into hard cash, and at the same time, fulfilling the green pledges of their incumbent governments.

The same is true of continental Africa, where the hardware of local wars, lies awaiting collection. The current relatively high prices are causing entrepreneurs to examine ways and means of cost effectively reclaiming this available material. This, if they are successful may affect the world market, but not in the immediate future.

The chaotic state of the market price is unhelpful to the manufacturer, but at least there is still a demand. I can remember when it was impossible to persuade merchants to collect your residues, for they had no room in their yards, and every square inch of spare factory space was full of steel scrap, awaiting a marked change. In 2001, the price achieved was just pounds 12 per tonne, so today's returns are really very good!

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