Scrap Steel - A National Crisis

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). As if the pressure from their OEM customers weren't enough to drive automotive suppliers out of business, now there's another more imminent danger - the skyrocketing price and an ominous shortage of scrap steel, a resource vital to the steel-making process. More than half of the steel produced in the United States is derived from scrap.

What exactly is scrap steel? Scrap steel is any steel that has been used and reprocessed, then subsequently reused in another application. There are two types of scrap steel: new scrap, which includes off-cuts, stampings, turnings, etc., and old scrap, which is derived from end-of-life products. Old scrap is divided into two types: heavy scrap (from construction or railway equipment) and light scrap (from vehicles, packaging, and white goods).

Virtually all manufactured steel is to a lesser or greater degree made with scrap steel. There are two types of steel manufacturing, basic oxygen furnace (BOF) manufacturing, which uses approximately 25% scrap steel, and electric arc furnace (EAF) manufacturing, which uses almost 100% scrap steel in the steel-making process.

At the present time, there is a precarious shortage of scrap steel available to steelmakers, and what there is, is shockingly expensive. Steel mills are charging "scrap surcharges" and price increases to their customers, which seem to climb weekly. This has become such a problem among automotive suppliers, that it could cause wholesale failure of suppliers, large and small. The price of hot-rolled steel has risen from $14 per hundred pounds last August to $29 per hundred pounds at this time. Smaller suppliers, who don’t have the contract negotiating power that OEMs and larger suppliers have, are particularly vulnerable, especially since their OEM suppliers are resisting absorbing the higher costs of steel, which would eventually be passed along to the ultimate consumer. This recalcitrant attitude will eventually backfire on the OEMs (most particularly the Big 3, who are unwilling to accommodate their suppliers by accepting the pass-along surcharges), and they will find themselves in danger of an interrupted, and eventually non-existent, supply line. One smaller supplier finds itself burdened with scrap surcharges of $10,000 a day, which will rise to $20,000 a day by April.

Steel scrap shortages are due to several factors, the primary one being the massive growth in scrap export to China, South Korea, Turkey, and Indonesia. Other countries, such as South Korea, Russia, the Ukraine, Venezuela, are restricting their own scrap exports, while at the same time buying as much of the U.S. supply as they can get their hands on. By restricting their own scrap supply export and depleting the U.S.', they are driving up scrap prices in the U.S. and globally. Exports from America have doubled, from 6.3 millions tons in 2000 to 12 million tons in 2003. South Korea alone took 2.5 million tons of U.S. scrap in 2003.

Another factor is a domestically created one. The U.S. government has not, and seemingly will not, address several issues at play internationally, in order to protect the U.S. manufacturing sector. The Bush Administration has not addressed a very unbalanced, unfair international currency issue. The Chinese have pegged their yuan to the dollar, in spite of its true value, further unbalancing the trade deficit in general, in favor of the Chinese, and to our detriment.

Secondly, the Administration has refused to address the subsidy issue. The Chinese government has conducted unprincipled credit extensions, in which credit has been extended to credit-unworthy, inept operations, simply to support capacity and to create jobs in China. When they go bottoms up, the Chinese government simply underwrites them, because it knows that ultimately the capacity is still there. The Chinese government already admits to $500 billion of bad debts with defaulting Chinese companies. Private estimates are that the true number is $1 trillion of bad debt and growing.

The U.S. government (and we won't even address the World Trade Organization problem here) has tolerated and even ignored the massive problems for the U.S. manufacturing sector created by China's refusal to play by the WTO rules it agreed to abide by when it was granted membership several years ago. The Chinese have severely restricted their own scrap export, while devouring the U.S. supply, paying for it with the unfairly pegged yuan.

Nor do the Chinese play by the rules of any other of their international agreements. The U.S. government has not only tolerated it, but it doesn’t seem to know (or want to know) about it. However, before it's too late, the present Administration must stand up for American manufacturing by recognizing and dealing with that unlevel playing field, and by making policies that reflect the real world, rather than the intellectual idealism, in which it is so deeply mired.

There is already existing U.S. legislation from 1973-74 that would allow the Department of Commerce to restrict the export of U.S. scrap steel in the event that both its scrap exports and the price of steel products increase, or if the export of steel scrap causes a shortage in the U.S. industry. Steel users have already been severely handicapped by the steel embargo levied by the present Administration to shore up major steel producers. If the government doesn't act quickly to stem the tide of adversity, this could be the coup-de-grace for U.S. supplier manufacturing, already diminished by the rush to China, Mexico, and Eastern Europe.

In short, U.S. manufacturers are being required by their own government to play global games on an uneven playing field, against opponents who will stop at nothing to turn all advantage to themselves. To try to remedy this blindness and lack of support on the part of the U.S. government, steel consumers and manufacturers have formed the Emergency Scrap Steel Coalition, which aims to make the government act to save this strategic natural resource. Information about the Coalition can be found at www.scrapemergency.com. The Coalition is in the process at the present time of drafting a petition, which should be available for presentation in the next few weeks. Companies concerned about their competitiveness, indeed, their very existence, should investigate and join the Coalition, which is involved in solving their problems.

The industry that will be most impacted by the steel shortage is the construction industry. Architects and contractors are very nervous about the situation, and well they should be. Architects are upset about being asked to revise or redesign projects to include alternative building materials and options, such as concrete block construction instead of steel.

Contractors themselves are in an even less enviable position than architects, as they try to renegotiate contracts with their steel suppliers, when the chances of that happening are almost nil. Suppliers are in no mood to share the bounty of rising prices they have set up for themselves. Indeed, the whole situation is at least partially the direct result of steel suppliers cutting the supply output to cause a shortage, thus raising their asking prices.

If redesigning the project and renegotiating labor contracts (sometimes set for two or three years into the future) doesn't prove feasible or adequate, the only option left for contractors will be to go out of business.

Most contractors, with the exception of a handful of national/international contractors, are small businesses with limited cash reserves. Many must sign labor contracts several years into the future, and have not anticipated the huge and unexpected increases in steel prices. The steel surcharges, combined with the steel suppliers' demands for immediate payment, tie up what little capital contractors had on hand to pay wages with or buy other materials. This situation is bound to cause either mergers among smaller contractors or outright closings in the contracting business, because it looks less and less likely that there will be a remedy in the near future. Government measures are usually too few, too late, and too poorly thought out as to their wider consequences (cf. steel tariff fiasco).

Private office construction and commercial building for January were both down from December estimates, while highway and bridge construction was up slightly over December estimates. Estimates for February will be available April 1, and for March, May 1. It is expected that commercial construction will be harder hit than residential construction, because residential does not require the amount of steel that commercial construction does. The only exception to that is for fixtures (faucets, sinks, piping) and appliances, which are bound to go up as steel prices do.

The House of Representatives has slashed $100 billion off their proposal for long-term highway and transit spending. Federal highway construction programs are funded through April at last year's rates, but who can say what the rest of the year will bring?

In at least one instance in the automotive industry, the general contractor on a new construction project has apparently walked off the job until an acceptable agreement can be reached with the OEM about steel surcharges. If there are many cases like this, the resulting delays in construction are sure to drive up labor and other costs. Other projects not so far advanced in schedule will more than likely be postponed or completely cancelled until the market stabilizes, and until contractors, their clients, and their suppliers can come to some agreement on how these escalating surcharges will be handled. Project postponement or cancellation will have a further negative impact on the unemployment problem the U.S. is already experiencing.

The consensus of opinion seems to be that China's voracious appetite for steel for its booming manufacturing economy and its stepped-up effort to build infrastructure for the 2008 Summer Olympic Games is to blame for the resultant steel shortage. China is buying globally, wherever it can get steel. Although steel production is up worldwide, the demand for crude steel has outstripped production. As China consumes more of our scrap steel, there is less available for domestic use, and therefore the increasing prices - more than 60 percent in the last 90 days, and the end is not in sight. March marks the sixth consecutive month the Fed has reported increases in input prices.

On the domestic front, we can expect to see continuing price rises in anything that contains steel - VCR's, dishwashers, washers and dryers, computers, tubing and piping, and cars. The average car contains about $600-$800 worth of steel. If the price of steel doubles this year, as is predicted, there's no question in anybody's mind who will pay for it.