SCRAP SOLUTIONS

A METAL RECYCLER’S PERSPECTIVE ON UNLOCKING VALUE

By Trey Lipsitz, Marketing Manager, Market Street Recycling

Scrap metal recycling within the oil and gas industry has never been a popular subject.

Companies have their horror stories and managers often cringe at the mere mention of scrap. As a metal recycler, I get it: scrap metal is not your main business; it’s a by-product and a headache to manage. Regardless, scrap metal is a valuable line item and, in challenging markets – like the present one – becomes even more so. From my experience, many businesses find themselves a bit in the dark on scrap values and lack the time to invest in overseeing the recycling process to its full potential. While often overlooked, a well-run scrap program can serve as a beneficial and profitable complement to your oil and gas business. It’s important to be in-the-know regarding the scrap market today, both globally and domestically. As with any other commodities, understanding past trends, current market impacts, and future predictions helps manage expectations and set the stage for proper planning and decision making.

In 2019, the metal commodity market suffered the perfect storm of events. Trade war issues and China’s Green Fence Plan were largely responsible for the downturn, but there is hope for a potential rebound in 2020. With the passage of the United States-Mexico-Canada Agreement (USMCA) and China’s reclassification of scrap grades, the metal market may very well get the shot in the arm it so desperately needs. Although it is difficult to accurately predict what lies ahead, investor sentiment is high, based on gains on the Dow Jones, record low unemployment and multiple rate reductions from the Federal Reserve.

Still, expectations are tempered as economists fear more trade wars, softer manufacturing readings, rising geopolitical factors, and now, the coronavirus, will slow economic development. According to the National Association of Business Economics, two-thirds of economists predict a recession won’t occur until 2021. Nevertheless, scrap dealer surveys reveal slower export orders, expanding inventories and rising input costs, all of which are indicative of a more ominous outlook. The picture for 2020 is further complicated by the surplus of scrap metal left over from 2019 and trade barriers. If we are to see market growth in 2020, we will need an easing of those trade barriers, consumption of the metal surplus and a resolution to the pandemic.

With respect to specific metal classes impacting the oil and gas industry, the 2020 outlook was originally predicted as follows. Admittedly, current events have impacted the reliability of these predictions, but they are nevertheless helpful to provide a big-picture perspective and highlight problem areas:

IRON AND STEEL: Pre-COVID-19, the World Steel Association (Brussels) estimated that the Chinese demand for iron and steel would increase by 1% and worldwide by 2.5%. The resulting global demand in 2020 was predicted to be 1.7%, which was down from 3.9% in 2019. But, with the finalization of the USMCA and improvement in U.S.-China relations, additional growth was previously expected. Also, with better ferrous scrap trade flow, and the domestic capacity expansion plans announced by Nucor and U.S. Steel, there was the potential for growth similar to that experienced in 2019.

ALUMINUM: As in 2019, aluminum prices struggle to maintain value with the primary metals. The Chinese Government’s new standards have directly impacted aluminum export sales and created a domestic supply glut. Other complicating market factors include the low valuation of automobile scrap, competition from imported aluminum, weaker aluminum demand, and the potential of primary aluminum flooding the market. Without a sharp rebound in demand, forecasters are concerned that the expansion of aluminum capacity will be limited.

NICKEL AND STAINLESS STEEL: The prices for nickel and stainless steel were extremely volatile in 2019 with a low of $10,530 per ton to a high of $18,850 per ton. Despite this volatility, nickel outperformed the other base metals by 32%. Given the roller coaster of in 2019, there was and continues to be lingering uncertainty for 2020. However, FastMarkets Metal Bulletin reported early on in 2020 that "London Metal Exchange nickel’s fundamentals have improved and can support the higher side of pricing seen in 2019." The International Nickel Study Group (Lisbon) is forecasting another global supply deficit, which may elevate pricing. Also promising, Macquarie is projecting recovery in stainless and healthy growth in nickel demand from the electric vehicle battery market. As a result, Macquarie anticipates that nickel prices will reach $19,500 per ton by 2024.

Keeping the basic overview of the market in mind, we can now turn to developing a scrap program customized to your particular oil and gas business:

KNOW YOUR SCRAP: Conduct a walk-thru with your employees and your scrap metal recycler to document all grades of scrap produced, volumes and the equipment needed to handle your scrap.

MAXIMIZE VALUE: Work with your metal recycler and ask questions. Knowing the grades of your scrap is important, but understanding the sorting and labor cost associated with your scrap is key. Decide if it makes sense for you to sort on the front end or let your recycler handle it. The less a recycler has to handle your scrap, the more they should be able to pay you in return.

ACCOUNTING AND INVENTORY: Knowing your scrap history and trends allows you to monitor your scrap for inconsistencies. Also, require accurate accounting from your recycler on all grades, weights, and pricing. Discuss payment terms best suited for your company, so that paperwork is seamless with your accounting department.

PRICING: Do your homework. There are many published resources available that keep track of scrap metal pricing. Your recycler can suggest the correct reference for your scrap metal class.

COMPREHENSIVE SERVICE PLAN: Pricing is important, but customer service will make your life easier. Have your recycler create a formal plan in writing that incorporates all business needs including your equipment needs, logistics, turnaround time and payment terms. There are always opportunities to lower overhead and reduce redundancy.

Implementing these steps will help your business achieve a successful scrap metal recycling program and ultimately add to your bottom line.

Trey Lipsitz is the 4th generation in his family’s Texas-based business, M. Lipsitz & Co., which was established in 1895. He currently works at their Market Street Recycling location in Houston, TX.