June 30, 2005

Scrap Metal Prices Fall 65% in 6 Months; Automakers’ Reductions in Production, Glut of Supply Factors in the Drop

Prices of scrap metal and new steel are coming down fast, bringing relief for some and pain for others.

"It's strictly the blues out there right now," for people who turn junk into cash, said Marty Forman, president of Forman Metal Co., a Milwaukee metal recycler.

Scrap metal is a key ingredient in the manufacturing of new steel. In 2004, some finished steel prices doubled for a plethora of reasons, including high costs of scrap metal and energy. Strong global demand for steel and a weak U.S. dollar also fueled price increases.

Now, the price of prime scrap steel has dropped from a high of $430 a ton last November to $150 in June, including a $120 drop in the last two months, according to Forman.

"We are talking about a 65 percent drop in the value of scrap steel in just over six months, if you can sell it," Forman said. "All of the price run-up, virtually every cent of it, has come crashing down in really big chunks."

The price of No. 1 heavy-melt scrap, a common type of steel, has fallen 52% from about $252 a ton last November to $120 this month.

"What goes up in this industry comes down fast," said Chuck Carr, communications manager for the Institute of Scrap Recycling Industries, in Washington, D.C.

One reason for the decline is the scrap-metal pipeline has been filled with material, partly as the result of metal collectors cashing in when prices were high. Also, the Big Three automakers have cut production of cars and trucks meaning they have bought less steel, further reducing the need for scrap metal and some other raw ingredients used to make steel.

"That's a lot less steel," said Robert Stevens, president of the Emergency Scrap Steel Coalition, a trade group that's advocated for government intervention into scrap metal shortages.

Stevens, the CEO of an Indiana metal forging company, said the drop in scrap prices is long overdue.

"It's helping drive steel prices down," he said.

U.S. steel prices have fallen for nine straight months, dropping 7.5% from May to a current price of about $495 a ton for steel sheet, a material used in manufacturing, according to Purchasing Magazine, a commodities pricing publication.

The June price of steel sheet is off 35% from a record $756 a ton in September, according to the magazine. The price of wide-flanged beams used in commercial buildings fell 3% to $516 a ton.

Strengthened dollar

Steelmakers Nucor Corp., U.S. Steel Corp. and Steel Dynamics have cut shipment or profit forecasts in the current fiscal quarter as demand for their products has fallen.

"Steel prices are coming down throughout the world now," said Donald Norman, economist for the Manufacturers Alliance/MAPI, a public policy and business research group in Arlington, Va.

A strengthened U.S. dollar has resulted in a surge of steel imports, which has helped lower prices here, Norman said. In the first three months of this year, China became the world's second- largest steel exporter, producing almost as much steel as Japan.

Steel prices have not fallen as far, or as fast, as scrap prices.

"But over time, steel prices will continue to come down," Norman said, as the world's steelmaking capacity catches up with the demand for steel products.

Building contractors have seen some decline in steel prices, although it's been more of a leveling off than a sharp drop, said Ken Simonson, chief economist for the Associated General Contractors of America, an Alexandria, Va., trade group.

Steel prices haven't dropped very much in the Milwaukee area, said Ron Kaas, owner of Sourcemaster Co., a Milwaukee firm that sells metal forgings and other products to manufacturers.

The overall demand for steel is still fairly high, which keeps prices from falling, Kaas said.

"In certain sectors, such as construction and mining equipment, the demand is tremendous," he said.

Soaring prices for alloys used in making steel, such as vanadium, also have kept steel prices high, according to Kaas.

Price swings

Manufacturers that buy new steel and sell the scrap from their factories are caught in the middle of the current price swings.

"I have customers now who are still paying high prices for steel, and their scrap isn't worth very much," Forman said. "At least a while ago they were getting big bucks for their scrap."

The price of scrap metal will probably increase this fall and winter, if only because the pendulum has swung too far toward low prices, according to Forman.

"We are likely to have to hold our noses through the summer, but surely by December we will be seeing a really substantial rise in scrap iron and steel pricing," he said.

The current scrap-metal price doldrums have made it less desirable for people to steal things such as street manhole covers and metal placed in scrap bins.

"We had customers who had to build fences around their scrap- metal boxes last winter," to keep thieves out, Forman said.

But it isn't a good summer for scrap-metal collectors who scour the alleys looking for junk they can turn into cash.

"The guys who ran around in old pickup trucks, hoping to raise enough cash for a steak dinner, are now dining at McDonalds," Forman said.

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