Miller on scrap: The plight of dealer resistance

Over the past three decades, the scrap recycling business has experienced a considerable amount of mergers and acquisitions.

In the 1990s, a group of Wall Street acquisition firms formed or advised companies like Metal Management and Philip Services Corp. in their mission to roll-up a large portion of the US family-owned scrap businesses. These two scrap companies, among several others, gained control of numerous scrap facilities across the nation. They operated separately, but the prospect of centralization alarmed steelmakers.

In the 2000s, Steel Dynamics Inc. (SDI) acquired OmniSource, a scrap organization from Fort Wayne, Ind. OmniSource had been acquiring numerous scrap businesses in Ohio, Indiana, Michigan, and in South Carolina and Georgia. They were one of the largest producers in the US.

About a year later, Nucor Corp. acquired David J. Joseph, the largest scrap brokerage in the US, with scores of processing yards and trading offices.

Needless to say, this gave these two steelmakers a great deal of leverage over scrap pricing and scrap movement.

In the years prior to these acquisitions, there were scrap tycoons who held significant influence on scrap prices due to the location of their processing facilities and their brokerage operations.

This apparently did not sit well with the mills who did not want their suppliers dictating prices to them.

In the late 1960s, a mill operating in the Cleveland area was concerned their scrap buying program was being bullied by several large scrap companies. To alleviate this dealer resistance, they deployed a smallish independent broker from Pittsburgh to open a trading office in Cleveland.

His job was to supply the Cleveland mills with scrap from the multitude of scrap dealers in Ohio, thereby making the mill less reliant on the larger local scrap companies. The mill awarded him 50% of their monthly purchases and the stranglehold was broken. This is an example of negative dealer resistance being rectified.

However, after the mergers in the 1990s and 2000s, the steelmakers developed more control over monthly scrap pricing. The old tycoons were gone or had sold out and the scrap business became more corporatized.

Dealer resistance had become less prevalent as these new executives did not want their steel mill counterparts to associate them with this type of “anti-corporate” activity.

This brings us where we are today. The steelmakers and their in-house scrap brokers have a great deal of control over affecting the market price for scrap. In recent years, there has been no one company large enough to stir up any real resistance to deficient pricing.

However, this seems to be changing with recent mergers and acquisitions in the industry. Also, other steelmakers have bought large scrap concerns that sell to other mills. They take a dim view of pricing that makes little sense for their product.

Great Lakes region purchasing exec

SMU received the below comments from a purchasing executive in the Great lakes region

“I think dealer resistance is still very prevalent in the industry, but in a much different magnitude,” he said.

He noted that, historically, dealers would dig in and not sell scrap until they felt the market hit the right level for them to “move material.”

While this is still the case for some grades, the industry is now dominated by large corporations. Because of this, more and more deals are being “tied to indices as a unit of measure,” the purchasing executive added.

Conclusion

The dealers in the Southeast seem to be the capable of mounting resistance to scrap pricing that does not make sense to them given market conditions, as they did this month. Perhaps, the reason is that steel production has increased in the South and scrap demand has gone up with it. Dealers in the North don’t seem to have this capacity, at least not yet.