I think you would all agree that scrap metal is an asset, or at least it starts out as an asset. And from an Investment Recovery standpoint, it is clear that the scrap processor is not your first choice for disposition—which is to reuse the asset. The scrap processor is not even your second choice— which is to sell the asset as usable. However, the scrap processing community is happy to be there when you have exhausted all of your options and it is time to scrap the asset. And when that time comes, the first thing you need to know is—what is the value of that asset as scrap metal?
 
 The purchase price of scrap is a function of the actual sale price to the steel mills and foundries. However, for those who do not have the visibility into the actual mill sales, the published indexes, such as American Metal Market (AMM) or the Scrap Price Bulletin, can provide the next best alternative for developing an order of magnitude price valuation. Because the publications do not actually buy or sell scrap, they gather their information through conversations and other correspondence with consumers, generators, brokers, dealers and processors, and attempt to determine how the scrap market has transacted in any given month. As a result, over time, a degree of cumulative error can be incorporated in the magnitude of the published scrap value. For example, in the May 14 Scrap Price Bulletin, #1 Heavy Melting in Detroit shows a Broker Buying Price of $293 GT and the Cleveland region shows a #1 Heavy Melting Broker Buying Price of $360 GT. The $67 differential in price far exceeds the freight differential to displace material from Detroit to Cleveland and is a good example of the cumulative error in the magnitude of the prices represented by the indexes. However, from an order of magnitude pricing perspective, the Chicago region consistently publishes pricing levels that are on par with the actual scrap market. It is important to note that the Scrap Price Bulletin index pricing for the Chicago, Pittsburgh and Philadelphia regions is based on the price of scrap delivered to the consumer, which is different than the Broker Buying Price that is used for St. Louis, Detroit, Cleveland and other regions. The Broker Buying Price is not the price delivered to the mill, but instead it represents the purchase price FOB a processor’s or dealer’s yard. The Broker Buying Price is derived using the sale price delivered to the mill, less the freight to the mill and any commissions that may be involved. Furthermore, because the ferrous scrap market operates on monthly cycles, the steel mills and foundries typically negotiate their scrap purchases during the first week of each month for delivery throughout the month, and as a result, the date the index is published also plays a role in its accuracy. American Metal Market publishes their indexes on a daily basis, and due to the time it takes to gather the actual sales information for the month, AMM typically does not capture the actual change in the current month’s market until the seventh or tenth issue of the month. However, the Scrap Price Bulletin, publishes their indexes on a weekly basis, and depending on how the month falls, the change in the current month’s market is not typically recognized until the publication that is issued on the second Monday of the month. Additionally, prices in both indices are based on prepared grades of scrap, which is an important distinction when establishing the value of secondary scrap. Unprepared secondary scrap such as machinery and equipment, maintenance scrap and demolition scrap must be processed in order to achieve the size, density and chemistry requirements of the consuming mills, and the cost of logistics and processing the scrap must be incorporated into the pricing model. Although each of these unprepared grades of scrap is different, from the scrap processors perspective, the value of the material FOB a stamping plant, warehouse or demolition site is developed based on evaluating the actual sale price delivered to the mill for the actual prepared grade of scrap the mill is consuming. The valuation begins by using the actual sale price or a representative index value. From that value, deductions are made for the freight to move the material to a processing facility and any rigging and material handling costs if necessary, the cost to process the material, the cost to transport the finished product to the consuming mill, as well as the associated administrative cost and profit. The result is the relative value of the scrap, FOB the warehouse, stamping plant or wherever the scrap is located. Furthermore, due to the long duration of approval process and the time it takes to actually execute a disposal project, it is also important to understand how the price of scrap may move up or down going forward in the coming months. In the past, the direction of the scrap market could be determined by the volume of scrap that was accumulated in the local scrap yards and the nature of your conversations with the purchasing agents at the various freight logical mills. Today, scrap metal has truly become a global commodity, and the forces that drive its value have expanded considerably. Each month as the scrap industry evaluates the scrap market on both a short-term and long-term basis, we look at the factors that affect both supply and demand, as well as the tension within the supply chain. Some of the data we use to analyze the market is as  follows: mill operating rates, global and domestic steel production, automotive production and sales, the Architecture Billings Index, lead times for steel delivery, scrap inventories at both the mills and scrap processing facilities, automotive inventory levels, steel service center inventory levels, the value of the dollar, and scrap export and import rates. Each of these data points provides a small piece of the puzzle and helps us get closer to the answer to the operative question, which is “how are all of these forces impacting the balance of supply and demand for scrap metal and how will that impact the price?” A review of the price of prime scrap for the past 12 years clearly shows that in 2004 the dynamics of the scrap market changed significantly. The price of scrap moved into a substantially higher trading range, resulting from a shift in the market dynamics of both supply and demand, with the demand curve shifting to the right and the supply curve shifting to the left. Supply and Demand Model The shift in the demand for scrap manifested itself over a period of time as a greater percentage of the steel generated in the United States was made by mini mills using electric arc furnace (EAF) technology, versus the traditional integrated steel mills that use basic oxygen furnaces (BOF). The substantive difference between a BOF and an electric arc furnace is that a BOF uses iron ore or hot metal as its primary source of raw material, versus an EAF mill, which uses approximately 90% scrap metal as its raw material for steel making. Therefore, as steelmaking capacity began migrating toward EAF melting technology, the demand for scrap metal began to increase, although, the overall supply of scrap metal proved to be quite elastic and was able to keep pace with the increased demand. Interestingly, the elasticity of scrap supply was not supported by all grades of scrap metal, as the majority of the additional scrap supply came from obsolete scrap grades, which resulted from increased activity levels in demolition, asset disposals and retail scrap collection. However, from a global perspective, as world steel production began to accelerate in 2003, the domestic supply of prompt industrial and obsolete scrap in developing countries such as China, Turkey and India, proved to be inelastic and could not keep pace with their expanding demand. As the demand for scrap metal in these developing countries continued to increase, the weak US dollar made the value of US scrap very attractive from an export perspective and as a result, the volume of scrap exported from the United States began to increase sharply in the 2003 and 2004 timeframe. Therefore, with larger volumes of domestic scrap beginning to flow off the coasts, the domestic supply curve began to shift to the left. As a result, with the increased demand for scrap due to the proliferation of EAF technology and the reduction in domestic scrap supply due to the increase in the volume of scrap exported from the United States, the trading range for scrap metal moved to a new level and has remained well above the trading range we saw in the 1990s and the early part of this century. However, as the stress on the global economy continues to increase, we are seeing the domestic supply and demand curves moving back toward the center and correspondingly, the price of scrap is decreasing. Although global steel production continues to remain strong, the recent increase in the strength of the dollar has made domestic scrap metal less attractive to China, Turkey, India and other foreign markets, which has decreased the volume of exported scrap and increased the volume of scrap available for domestic consumption. Additionally, with mill operating rates holding in the high 70s to 80% range, and the banking of some domestic production capacity, we are seeing a reduction in domestic demand, further contributing to the reduction in the price of scrap in the United States. How far each of the supply and demand curves will shift is uncertain, however, with the heightened uncertainty in the global economy and the acute problems that we are seeing in Greece and the rest of the Euro Zone. The one thing that is certain is that the supply and demand curves will continue to shift inward and the price of scrap metal will continue to fall until we reach a point of equilibrium between supply and demand. However, with global steel production remaining relatively strong, any global economic changes that negatively impact the strength of the dollar or any material increase in the domestic mill operating rate could quickly shift the supply and demand curves an put upward pressure on the price of scrap metal.