Master a recipe for a cake and you're not apt to alter the ingredients too much for fear of messing up your sumptuous treat. Not so when you're an electric arc furnace (EAF) mini-mill cooking up a viable formula to transform common scrap materials into steel. These manufacturers rely on a varied diet of old appliances, obsolete equipment and shredded automobile parts (in others words, common scrap) to concoct steel products that meet the varied demands of their customers. Modifying the makeup to reduce costs or produce a higher-quality product is an exercise that comes with the territory.
"We know what the cake is going to look like, but we're always tinkering with the ingredients," says Rich Brady, manager of ferrous resources and logistics for Steel Dynamics Inc. (Ft. Wayne, IN), a $2.1 billion mini-mill steel producer. "We are always trying to determine what the scrap mix will be, trying to find one that will constitute the least amount of cost, but yet keep us within the parameters of the grade that our customers require."
Until recently, most EAF mills went about the business of comparing and purchasing scrap without a whole lot of solid pricing data or market intelligence to back up their choices. With over 3,000 dealers in the country -- from multimillion dollar public companies to mom and pop shops -- hawking scrap materials, all at different grades and with varying consistencies, keeping a handle on pricing has been no easy feat. Given that scrap purchases typically account for about 60% of an EAF maker's cost of finished goods, and still a relatively sizeable 20% to 25% chunk of an integrated steel maker's investment, the lack of a reliable pricing index has created a significant void.
FILLING THE VOID
Management Science Associates Inc. (Pittsburgh) is aiming to fill the gap with Raw Material Data Aggregation Service (RMDAS), a pricing service it claims will arm scrap metals industry participants with much-needed information. Through contracts with leading steel companies, RMDAS collects and aggregates pricing and volume information on ferrous scrap materials, giving those same member companies a more accurate and timely picture with which to track pricing and, at the same time, allowing them to measure and analyze their own buying performance.
Pre-RMDAS, steel manufacturers could get their hands on such comparative pricing information only anecdotally or through less scientific survey data compiled by a handful of industry trade magazines doing monthly polling. Not having accurate and up-to-date information has been a real disadvantage to EAF mills, particularly those looking to alter their recipes on an on-going basis to maintain a competitive edge.
"Scrap buying is a vital piece of the puzzle -- anything that represents 60% to 65% of the cost of the end product has to be considered a key element," says Brady. "The more accurate information we have about price, the more informed we are, the better decisions we're able to make, and the more clarity comes to the process."
MSA is selling decision-making tools to the mini-mill steel community, an idea that's beginning to resonate. Since RMDAS' debut early last year, MSA has signed up 14 steel companies, operating 53 production locations throughout North America and representing over 55% of the total scrap bought and consumed in the United States each month (estimated at more than 2.8 million tons), according to company officials.
The participants furnish their actual purchase order data for scrap materials. In return, MSA employs its own data repository technology to cleanse and aggregate the data, and then whip it into a variety of analytical reports that can help companies improve the way they buy scrap. For example, using RMDAS scrap, buyers can spot pricing trends, recognize cost-favorable sourcing opportunities in other regions, and leverage the collective intelligence to negotiate better pricing with scrap suppliers, along with many other opportunities that allow them to make the most of their scrap sourcing.
"We're trying to help them answer questions, such as are they buying scrap at fair market prices, did they pay more for scrap because of true demand or did they not do a good enough job of finding market intelligence to help negotiate pricing?" explains Pat Gallagher, vice president of metals and advanced manufacturing development for MSA. "We're trying to help them benchmark themselves in terms of an extremely important raw materials cost -- one that goes right to the bottom line."
Having better information can certainly be a plus for scrap metals buyers, but some steel industry experts don't expect better data to correlate with better pricing. "I happen to be a believer in the more information, the better," says Charles Bradford, metals analyst at Bradford Research Inc. (New York), an independent research firm that markets its research through Soleil Securities. "But just because companies get better information doesn't mean they're going to get better pricing."
The whole pricing issue is a bit of a conundrum in the scrap metals market, Bradford says. Despite the fact that mini mills -- which take scrap materials and melt them down in a process that creates different grades of steel -- are constantly on the hunt for lower scrap prices, Bradford maintains that history has shown a correlation between higher scrap costs and those very same companies earning a better profit. "It's counterintuitive, but the math is very compelling," he contends. "Scrap prices go up when the economy is good, and when the economy is good, steel companies can raise steel prices and make more money."
Even so, steel players such as Steel Dynamics are more than willing to give RMDAS a shot because of the potential to use information as the competitive edge. The question is how is MSA, a 40-plus-year-old company, qualified to produce a scrap pricing index when a lot of other industry efforts have failed? Gallagher says the firm has experience on a number of fronts. Its strong market-research background landed it similar work in other industries such as consumer packaged goods and tobacco, where it undertook efforts to aggregate sensitive information as a neutral third party. MSA also has a background in the steel industry providing automation services to steel mills, and it acquired some e-commerce auction technology, which allowed manufacturers to purchase non-ferrous products and scrap materials on the Web.
It was while promoting those early B2B auction sites that Gallagher says MSA saw opportunity for RMDAS. "It became clear to us this was an area that a lot of companies were struggling with, and it fit into the model we'd done already with tobacco, paper and confectionary," he explains. "It seemed like a natural fit for us to apply some of our core competencies of handling, cleansing and analyzing data and presenting it back to an industry where we had strong domain knowledge."
MSA began prototypes of RMDAS in late 2002, working with three major steel companies. Now, the service is done in partnership with 14 major steel companies, including Steel Dynamics, U.S. Steel and Nucor Corp., which pay a fee based on a charge of cents per ton.
Some of the client companies send several transmissions of their scrap purchase orders on a daily basis, while others pipe their data in weekly, depending on their volume. MSA collects the disparate information (individual data is kept in a confidential manner and not shared), categorizes it and massages it into a common database structure that is provided back to each member on an aggregated basis. MSA's Web-based analysis tools provide participants with written reports that allow them to view the data in a multitude of ways. That way, steel mills can be assured that they're comparing apples to apples when researching pricing information on various types of scrap materials.
MSA is currently working to sign up additional steel players. It's also looking to expand coverage beyond the United States to cover Mexico and Canada, and potentially offer a similar service in Europe, Gallagher says. And, to enable members to make the most of the pricing information, MSA offers consulting services to help companies integrate RMDAS pricing data directly into their ERP and supply chain systems. Pricing information can then be used to trigger purchase orders, further streamlining the buying process, MSA officials say.
TRY IT, YOU MAY LIKE IT
While MSA considers offering a form of the RMDAS technology to other industries -- such as recycled paper or aluminum scrap, Gallagher says -- for now, the steel community is content to take it for a spin and see if it can prove its mettle. Steel Dynamics, for one, has seen great potential since it's had RMDAS up and running for the last year. Initially, the company tapped RMDAS as an analytical tool to benchmark how its monthly scrap purchases compared to others in the market. It also used RMDAS to verify information about whether its scrap sources were reliable and whether it was focusing purchases in the right geographic area, Brady says.
Both of those steps were much more difficult prior to the RMDAS index. "With the [metals] publications' surveys, you don't know how many people they talked to each month," he explains. "I have more confidence in a transaction-based report [such as RMDAS] versus a polled report [such as the publications provide]."
Moving forward, Brady plans to expand the use of the RMDAS information, tying it directly to purchases and using it as a basis to negotiate better deals with scrap suppliers. He also sees it playing a role in helping Steel Dynamics measure the effectiveness of its business strategies -- for example, changing up the formulas to create specific steel products by incorporating less expensive, but equally viable, scrap materials, or identifying regions that present better opportunities for scrap buying. Brady says RMDAS can also serve as a barometer to decide whether to introduce new scrap commodities Steel Dynamics might otherwise not have considered.
Applying RMDAS' analytical component in this manner rather than simply using the information service as a price sheet is what will really give steel manufacturers an edge. "Information means different things for different people," Brady says. "As the service gains more participation, the possibilities really expand. The accuracy of the information will make us more competitive in the marketplace. At the end of the day, that's the real payoff." You might say it's the icing on the cake.