When economies are expanding, there is great demand for steel and other metal products. In point of fact, steel is used in the construction of buildings, in bridges, in cars and trucks, in trains, and even some in planes. Steel is also used in building ships, a lot of steel. We see many things that require steel. We also see things like wire, which generally use a lot of copper. Aluminum and various alloys are used a lot in jet planes and for things where weight might be a concern. It is easy enough to understand that many things we use daily require metals to create them. That is on the demand side.
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On the supply side, metals become available to use in manufacture of finished goods in a couple of different ways. First, they are mined and processed into raw metals or alloys. There are a large number of different alloys and grades of metal produced in all sorts of shapes and sizes. Another way to come up with finished metal supplies is to recycle scrap metal into metal stock.
Let’s explore the mining to finished raw metal products process. To do mining requires long permitting and development process to bring a mining operation on line. Power must be brought to the processing site, roads must be constructed to the site, workers found locally or brought in, etc. Large vehicles are required to remove and move earth. Those vehicles require large amounts of fuel, along with tracks or very large and expensive tires. Suffice it to say that bringing a mine through approval to production after a site has been proven to be viable is generally a lengthy process taking years to decades. The mines have inventories of ore and metals that have been processed into raw metal.
Where mines are able to produce sufficient ore into metal, the steel, copper, aluminum, and other producers create sheet, plate, rod, bar, and other forms of stock metal to sell to manufacturers to create finished goods from. These producers of metal products create distribution networks that stock inventories of finished product they receive from the mills. The distributors supply the manufacturers of products that use the metal as part of their manufacturing process. This creates scrap metal, which is then sold to and collected by recyclers.
Recyclers collect scrap metal from the manufacturers to have that metal processed back into usable stock metal product that may again be offered to manufacturers for use to create finished goods. They have an inventory of scrap metal they have collected that they haven’t actually taken to the scrap metal processors. There is actually a network of collectors who sell the scrap metal in bulk to large scale processing plants who turn the scrap into usable metal products. These scrap metal processors have their own inventories of scrap as well as finished goods they have processed.
Not all of the scrap is processed locally. Some may be sent in bulk to another location, often overseas. Where scrap is processed depends on supply and demand locally versus other locations. Demand for scrap varies, based on the availability of stock metal and the prices for that metal.
With all that as background, let’s examine where things are today in the metals world.
- The price of metals has dropped precipitously with other commodities.
- Mines are continuing to produce ore and processed metals increasing supply of ore and raw metals.
- Steel makers, and other finished goods metal processors have seen prices collapse, but so have some of their costs in terms of the energy costs required to produce finished metal products. Still, any raw metal that they recently purchased is likely to contribute to losses as they reduce production and grow inventories.
- The drop in the price of steel and other metals has affected the prices of metal scrap.
- The metal scrap processors can only get a price near the price of newly produced metal. With new metal flooding the market and the price dropping, metal scrap processors are closing their doors to receiving new inventories as they work off inventory that they paid a high price for before demand for their finished goods caused prices to crater, sometimes to prices below the price they paid for the scrap that they will use to turn into finished goods.
- Processors scrap inventory will decline for a period of months as they work on turning the collected scrap into metal products.
- Processors finished goods inventories may rise as they try to achieve top dollar for their finished products.
- Collectors inventories will grow, subject to operating cash and space to store it.
- The collectors of the scrap metal have no demand for scrap metal they have collected and must carry the scrap inventory. Meanwhile, they must continue to incur costs to collect and store scrap inventory from manufacturers or risk losing those customers to other scrap collectors.
- Scrap collectors that don’t have working capital will have to rely on banks to finance them (buy commercial paper from them) to continue operating while they can not sell their inventories. Without financing, financially weak collectors would be forced to close their doors or be acquired by stronger competitors. Once the processors begin to take on new inventories, their cash flow can once again commence.
- Manufacturers will enjoy lower costs on finished metal stock but lower prices for scrap material they produce. Overall, this is a benefit to the manufacturers. Their costs of materials to produce finished goods will fall.
We will circle back to the metals supply chain, but before we cover that, we will introduce one more dimension, global trade.