Miller on scrap: The diminished role of the scrap broker

Written by Stephen Miller

Over the last two decades, the role of the scrap broker has been diminished in favor of steel mills purchasing their scrap requirements directly from scrap dealers. The theory is they save the commission the broker would potentially earn. Is there really any advantage to this or are scrap buyers ignoring the several advantages of dealing with a scrap broker?

In the 1970s, the allowable broker commission deducted from the mill buying price was $2.00 per gross ton. It rose to $3.00 in the 1980s. Today, it’s roughly $5.00, but the price of scrap has tripled over this span. So, on $400 scrap, this amounts to about 1%. Nobody is getting rich here!

There are advantages to dealing with brokers. For one thing, they deal with the potential suppliers and find new ones for their mill customers. This saves the steelmaker the expense of staffing their purchasing department to do this in-house. Brokers can offer mills new sources and opportunities due to their expansive coverage of the overall scrap community. In dealing with individual scrapyards, this aspect may be limited.

It wasn’t too long ago when most dealers would not sell directly to mills due to the rash of bankruptcies in the 1980s and late 1990s. Today, with the improvement and reorganization of steelmakers’ finances, the buy-direct movement has taken hold. But if bad times return to the steel business, suppliers will be looking for a secure broker.

However, the greatest advantage of a scrap broker is being able to negotiate the monthly price of scrap with certainty and brevity. Example:  A mill buys 60,000 tons per month (TPM) of scrap. They give 20,000 tons to three brokers and agree on the price. At that point, the price is fixed and each broker has to fill the order at that price and within the contract period. So, the broker is committed to fill the order whether or not they win, lose or draw on it.

To apply this, we only have to review what happened earlier this month. Steel mills in the Great Lakes regions, initially issued prices on #1 busheling at up $50 per gross ton (GT). At first this price seemed reasonable. But as the mill tried to cover their needs, it soon became apparent this price wasn’t strong enough to procure enough material. So, they had to raise the price to up $90/GT and pay it from their own pocket.

Contrast this with the above example of giving this order of #1 busheling at up $50/GT to the three brokers. At that point, the mill’s needs were the responsibility the brokers and there was no need to change this contract price no matter where actual prices were trending. The mill would have saved $40 per ton on several thousand tons. Not a bad return on investment (ROI) for a 1% commission! The broker(s) may have been able to advise the mill buyer of what the right price the market would accept prior to entering the market.

There may be some disadvantages in dealing with scrap brokers. There has been significant consolidation within the scrap industry. Mills are concerned about scrap quality and conduct audits of their suppliers. However, this can be accomplished while using a broker. Some dealers want to sell directly to achieve the highest price possible for their scrap.

Scrap brokerage is not dead, but has been diminished. But the advantages of their services should not be cast aside for perceived short-term objectives. There should be a balanced approach with a mix of brokerage and dealer direct.

To borrow a quote from a great American, Gen. Douglas MacArthur:

‘’Old brokers never die, they just fade away.”

The post Miller on scrap: The diminished role of the scrap broker appeared first on Steel Market Update.

Latest in Market