Flexing its strength: restructuring has helped stabilize the steel industry, so will steel mills start flexing their purchasing muscles?

Recycling Today, Jan, 2005 by Dan Sandoval

The purchase of International Steel Group (ISG), Cleveland, by the Mittal Steel Co. is only the most recent acquisition to sweep the world steel industry. Steel mills have been charging into the merger and acquisition mentality in the last two years. Giving rise to such transactions was one of the U.S. government's primary intentions when it put Section 201 tariffs in place for steel products.

The sweep of mergers has helped the steel industry restructure into a much healthier business. This, scrap metal recyclers and steel mills say, is a positive step. In fact, several scrap recyclers say they prefer working with a handful of large, healthy steel companies, rather than with many financially ailing companies.

However, the trend toward fewer steel companies does pose some potential concerns about scrap purchasing. With fewer buyers in the market, some question whether there is a tipping point where healthier steel companies will attempt to strong-arm suppliers for the most favorable rates.

Despite the number of worldwide mergers among mini-mills and integrated steel makers, a fair number of steel companies remain.

While scrap industry watchers differ as to whether a potential scrap shortage in the near future, with higher ferrous scrap prices, more EAF and integrated steel mills are renewing their interest in using scrap substitutes.

This step could lessen the reliance of steel mills on the more volatile scrap market.

SCRAP ALTERNATIVES. Charles Bradford, a consultant to the steel industry, says that a number of steel companies in North America are looking at augmenting their raw material sources by purchasing or developing hot briquetted iron or direct-reduced iron (DRI).

While DRI fell out of favor among steelmakers several years ago because of high natural gas costs, prices for natural gas have since eased. This may make DRI a more marketable product for the time being. In addition to DRI, other scrap substitutes also could become sought-after commodities.

A significant rise in ferrous scrap prices may, on the surface, cause concern for scrap purchasing officials. However, Bradford is quick to point out that higher ferrous scrap prices typically benefit the steel industry. "They always complain about rising scrap prices," he says. "However, when scrap prices go up, the steel industry does better."

As scrap prices have escalated, steel companies have been able to push through higher finished steel prices, helping to improve the financial health of the domestic steel industry.

Although higher scrap prices do not necessarily harm the steel industry, Bradford does point out that steel companies are always searching for ways to blend in greater amounts of scrap substitutes. This strategy relates in part to the challenge of continuing to obtain high-grade scrap to make higher grades of finished steel.

While switching between scrap and scrap substitutes is a way to keep scrap prices in check to a degree, some steel consumers are also looking to soften the spikes in ferrous prices by negotiating away from spot markets and focusing on establishing a barter system using the scrap generated at their plants.

THE BARTER SYSTEM. Greg Maindonald, vice president of operations services for IPSCO Steel, a Lisle, Ill.-based steel company, says that some steel consumers are looking to get away from industrial scrap auctions, instead opting to trade their industrial scrap for more favorable prices on finished steel. IPSCO also operates a number of scrap processing facilities that are used to feed the company's mini-mills.

Maindonald says that auto manufacturers such as Ford Motor Co. have taken steps to offer their industrial scrap back to steel mills. In return, the steel mills will keep prices more stable.

However, he stresses that these steps are limited. Part of the reason is that while a move to barter scrap shipments for more favorable finished steel prices is helpful in the short term, logistical issues take time and effort to sort out in the longer term.

"This is a very regional and fractional business; very relationship based," Maindonald adds.

While some of the larger steel companies are finding it an opportune time to flex their purchasing muscles, many of the largest integrated steel companies that have been merging are not the largest consumers of scrap metal, as their manufacturing processes consume 25 percent scrap on average. This has led to some uncertainty on their part. Maindonald says these integrated steel mills have to be very careful about what they are doing so as not to create larger problems.

Chip Hering, executive vice president of Ferrous Processing & Trading, a scrap recycler headquartered in Detroit, says that at the present time there really isn't much of a change in the purchasing dynamic for the steel industry. "Scrap is so tight right now, I just don't see it."

He adds that while ferrous scrap prices have strengthened, steel pricing also has gone through the roof.

With the market the way it is right now, Hering says it is really too difficult to determine whether steel mills are shifting their approaches to purchasing. "There are too many variables in the market right now," he says.