Argus Media : Scrap M&A ramps up on steel expansions, profits

Consolidation in the US metal recycling industry has accelerated this year in step with the expansion of electric arc furnace (EAF) steelmaking capacity, and record profitability for steelmakers is likely to drive more mergers and acquisitions in coming months.

M&A activity has ramped up as prices and profits have rebounded. US hot-rolled coil prices have nearly hit $2,000/st, up from a low of $450/st in August 2020, blowing out spreads to ferrous scrap costs and ballooning profits.

US metal recyclers and steel mills grown market share in the wake of a surge in EAF steelmaking capacity, particularly in the southern US.

Since 2016, more than 140 scrap locations and 20 automotive shredders have been bought or sold, according to data analyzed by Argus.

Large independent ferrous scrap recyclers have accounted for about 70pc of these transactions, while 30pc have been affiliated with EAF steelmakers.

Mills look to secure scrap supply

The wave of acquisitions has reflected the mill consolidation across the US.

That dynamic has driven steelmakers looking to better control volumes and costs of ferrous scrap feedstock to bolster their own recycling operations. Established EAF steelmakers Nucor, Steel Dynamics (SDI), Commercial Metals (CMC) and Gerdau all operate extensive recycling operations to support their steel operations.

Cleveland-Cliffs chief executive Laurenco Goncalves told Argus last month that he intends to get involved in the scrap business 'very soon' to support his company's existing EAFs and integrated operations acquired from ArecelorMittal USA in 2020, as well as potential future EAFs it may build.

US scrap industry sources told Argus this week that the steelmaker has inquired with multiple established, larger-scale recyclers about potential acquisitions.

A move by Cliffs could be the most significant scrap acquisition for a US steelmaker since 2007-08 when SDI acquired OmniSource for $1bn and Nucor bought David J Joseph (DJJ) for $1.4bn in quick succession amid a rapid rise in commodity prices.

US steelmakers are also flush with cash for potential acquisitions because of record high steel prices in 2021, while ferrous scrap prices have plateaued. Nucor and SDI this week both announced expectations for another round of record profits in the third quarter, while US Steel, fresh off earning more than $1bn in the second quarter, yesterday unveiled plans for a new $3bn flat-rolled EAF steel mill to begin construction in 2022.

New EAF mills often result in scrap yard acquisitions to secure supply.

SDI's new 3mn st/yr flat-rolled EAF mill in Sinton, Texas, will likely not begin melting until the end of 2021, but resulted in the steelmaker strategically buying Mexican recycler Zimmer in 2020, as well as three CMC yards in south Texas, including a Corpus Christi shredder.

Similarly, Nucor/DJJ subsidiary River Metals Recycling in 2019 acquired Louisville, Kentucky, shredder ISA and an Ashland, Kentucky, shredder from Columbus Recycling in 2020 ahead of a new plate mill in Brandenburg and an expansion in Gallatin coming online in 2021-22.

Southern hotspot

Steelmakers and non-mill affiliated recyclers have been active in acquiring locations in the southern US to capitalize on growing scrap demand in the region.

Alabama, Arkansas, Florida, Kentucky, Missouri and Texas could see more than 9.75mn t/yr of steelmaking capacity, all EAF-based, brought on line through various rebar, tubular, sheet and plate mill projects.

As a result, mills and large scrap companies have aggressively competed to shore up scrap flows, with 53pc of all the consolidation activity tracked by Argus since 2016 taking place in the south.

Large independent recyclers accounted for about 60pc of acquisition activity in the south, which includes seven shredders, while steel mills accounted for the remaining 40pc.

California-based SA Recycling has rapidly grown its footprint in the region through acquisitions of Newell Recycling Southeast, Tennessee Valley Recycling, Georgia Recyclers, two Alter Trading yards, Steel City Recycling, Southern Recycling, as well as six locations in Florida.

Schnitzer Steel nearly doubled its southern locations by acquiring eight Columbus Recycling yards throughout Mississippi, Tennessee and Kentucky in August.

Other regions have seen consolidation as well.

Activity in the Midwest and northeast has been mostly driven by independent recyclers compared to the south as the area is not poised to see as much steelmaking capacity growth. The most notable project in the region is North Star BlueScope's expansion of its Delta, Ohio, mill, which will add 850,000 st/yr in 2022.

St Louis-based Alter Trading has taken an outsized role in acquisitions throughout the region followed by Michigan-based Padnos.

Elsewhere, Canada-based American Iron and Metal (AIM) has expanded its footprint in the US southwest by acquiring shredders in Phoenix, Arizona, and Erie, Pennsylvania, from Liberty Iron and Metal, a subsidiary of Hong Kong-based Chiho Environmental Group.

The company told Argus in July that it would continue to look at expanding operations in the US.

Future targets

With multiple mills and recyclers on the hunt for additional scrap processing locations and steel and scrap prices at elevated levels, now may be an attractive time for independent yards to cash out.

At least one major recycler is known to be on the market: PSC Metals. Icahn Enterprises has been exploring the potential sale of its Ohio-based metals recycling subsidiary, which operates more than 30 scrap metal processing and trading locations in seven US states, primarily in the Midwest, Ohio valley and south. The company has nine shredders, with four in Tennessee, three in Ohio, one in Pennsylvania, and one in St Louis.

Other yards that recently sold were approached by unsolicited bids, according to sources, underscoring the financial situation for steelmakers, who have ample cash flow, as well as large-scale recyclers that have benefited from higher ferrous and nonferrous prices since the end of 2020.

By Brad MacAulay and Blake Hurtik