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USA - Steel Mills and Foundries will fare differently due to stamping supply reductions

Currently the lack of scrap generation from industrial sources, including the auto manufacturers, has not had much of an impact on the scrap market.  This is primarily because the low output has been matched by even lower demand.  But that will change.

The grades of scrap generated by stamping facilities are of the highest quality due to the chemistry of the steel used and the fact that the scrap itself can be segregated from other less desirable grades.  This means they command a price premium over other grades of scrap whose chemistry and physical properties are not as good.

In August of 2008 we saw the spread between prime scraps grades and shredded (obsolete material) reach a record high of $300 per ton.  As demand for high quality steel castings and steel sheet products around the world outpaced the supply, a bidding war for these grades took place.  Fast forward to today where two of the Detroit Big 3 are bankrupt and general manufacturing is suffering as a result of the current economic recession.  Demand for all products is down and steel mills are operating at less than 50% of total capacity.  Demand is very weak.  Today that same pricing spread is about $30 per ton.

However the impact on consumers of scrap generated by auto stamping plants can be quite different.  Specifically ductile iron casting facilities face a severe shortage of quality feedstock.  Unlike the steel sheet producers that also favor the stamping quality scrap, foundries can only use a very specific type of material.  They are constrained by physical size, usually 2 feet and under and by very strict chemistry requirements. 

Due to the nature of their manufacturing processes there are few other scrap alternatives.  Over the past few years we have seen the supply of foundry grade scrap diminish.  This has been a result of both manufacturing moving abroad and as steel mills work to provide micro alloy steels that work well for auto/critical manufacturing applications, but the left over scrap is not acceptable to foundries.  Additions of Boron, Titanium, Manganese and other elements that can produce high strength steel, often make them unusable to foundries.  Typically these have little, if any impact on EAF steel mills.  Steel mills are much more adapt at using different types of scrap in sizes ranging as large as 5ft or baled in bundles.  They are also more tolerant of chemistry related issues that plague induction casting methods used by foundries.

As we move toward a brighter day in our economy, demand for autos and other steel intensive consumer goods will return.  What may not be there however is the historical supply of prime, low alloy, 2ft and under foundry scrap.  The main substitute for them being a special grade of pig iron that must be imported.  This material is an excellent replacement from a chemical and operational perspective, however it comes at a cost.  Foundry pig iron is expensive and because it must be imported, supply chain/logistics problems are common.

I see a situation where companies such as Intermet and Citation are squeezed by both demand and raw material supply side factors.  Even casting companies that are able to move away from auto/transportation related goods to a more robust business such as energy, cannot escape the pressure on the lack of quality raw materials.  There must be more innovation in manufacturing processes to allow for a broader range of raw material usage or they will continue to see their input costs rise relative to market prices.

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