Tuesday, December 09, 2003

The High Price of Scrap Steel

My colleague Ken Kellams alerted me yesterday to recent data showing a very rapid rise in the price of scrap steel to all-time record levels over the past four months. This is gaining attention since scrap is a key input to new steel manufacture.

Which got me thinking; Does a high price for scrap steel serve as a disincentive to eliminating waste? Does this make the effort to get rid of scrap less attractive? So I ran some numbers.

Consider a hypothetical steel processor who purchases steel for $500/ton and by processing it further adds 20% to its value, selling it for $600/ton. Further, assume the processor has an 8% scrap rate.

In this scenario, the processor requires 1.08 tons of steel to produce one ton of salable product. The input steel will thus cost $540. Assuming all scrap is recoverable and is sold at the current record-high price of $190/ton, the 0.08 tons of scrap will generate $15.20 of additional revenue. Put together, one ton of product will generate $44.80 in net profit.

What happens then if the processor can cut the scrap rate to 4% from 8%??

The customer doesn't care, still paying only $600 for the finished product. However, it now only takes 1.04 tons of input to produce that output, costing $520. The now-smaller scrap of 0.04 tons yields $7.60 of additional revenue. The result? $72.40 of net profit for the ton of output.

An increase of 61% in operating profit. By simply focusing on waste elimination as a strategy.

Now, if that processor can handle, say, 500 tons of product per week, it would be left with an improvement on operating profit of $13,800 per week. With this data, the processor could assess if additional labor costs and/or capital improvements are justified for $13,800 per week.

Further calculations indicate that the price for scrap steel would have to triple in this scenario to make waste elimination not pay off.

Test these figures with your own...but the logic is the same. Inevitably, waste elimination wins out because one saves the high priced inputs, which will always cost more than scrap.

I hope this is helpful...and that you don't get distracted by the appeal of selling scrap to the exclusion of not needing to sell it in the first place.

Feel free to forward to a friend. Email me

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