Move over, Optimus Prime: The optimizer is a scrappy competitor

The unique nature of the US ferrous scrap trade makes for some tense moments and critical decisions. A steel mill’s entire month of scrap requirements are generally priced and purchased in as little as a few days, if not a few hours. Buyers have precious little time to decide what grades of scrap make sense at what prices.

Enter the optimizer.

The computer program is used by a mill’s scrap buyer when he takes his grocery list of ferrous needs to the store (aka the scrap market). The buyer enters as much information as possible and the optimizer tells him the best mix of scrap grades to buy. It’s an overlooked technology in the steel industry, which is otherwise teeming with technological solutions.

“Basically it looks to meet chemistry requirements the cheapest way possible,” one scrap buyer explained. Some mills use tried-and-true formulas, other optimizers are internally developed. “Some are far more sophisticated than others.”

There are a lot of variables to consider month-to-month when it comes to buying scrap. For example, heavy melting scrap takes longer to melt than No. 1 busheling scrap. The longer it takes, the more energy is consumed. Energy rates also fluctuate. The optimizer takes all this into account.

Mill order books for finished steel also fluctuate. For example, some mills with a wide range of products make steel grades that are copper-restrictive and require higher-quality scrap.

The optimizer can take into account price differentials between grades, power consumption needed to melt those grades along with the accompanying carbon costs, all while being cognizant of the mix of products that the mill will need to produce that month.

“We look at melt times by grades,” a scrap buyer for an electric arc furnace mill source said. “Slag characteristics are factored in … yield is important … cycle time between melts … all these things factor into what we do.”

A scrap buyer at an EAF sheet mill noted that optimizers “advise” about the cheapest mix of scrap grades possible “given market and operational constraints” to meet forecast production at a particular mill site. The key word here is “operational.” In July, when prime scrap prices rebounded and shredded prices sank, some mill scrap optimizers were reportedly telling scrap buyers to purchase exactly zero tons of prime material.

That would not be operationally feasible for most steel mills but it was very telling. It showed how disproportionately formerly stagnant prime scrap prices had rebounded versus their weakening obsolete scrap counterparts.

Prime material, as defined by the Institute of Scrap Recycling Industries’ (ISRI) specifications, is clean steel scrap that could originate from sheet clippings or stampings, mostly generated by automotive and general manufacturing facilities that use sheet steel as feedstock.

Prime scrap is new scrap, obsolete scrap is old scrap. The bellwether prime grade is No. 1 busheling and the bellwether obsolete grade is shredded scrap, which mostly originates from end-of-life consumer goods like old cars and washing machines.

A natural premium is appropriate for prime scrap, but for most of 2015 and earlier this year, that advantage evaporated. Scrap grades were trading roughly on par across the country and in some regions No. 1 busheling could be had at a discount to shred.

To simplify the differences in the supply-demand economics surrounding the two grades, it’s important to remember that prime scrap is generated and obsolete scrap has to be collected.

And for a while a lot of prime scrap was being generated because strong US auto sales meant more discards from stamping, while not a lot of obsolete scrap was being collected  because low prices were not enticing peddlers to collect it. The supply differentials forced prime scrap prices below some obsolete grades, most notably shredded scrap.

“The best part about optimizers is they don’t think, feel or become emotionally entrenched/attached to notions, they just do and react,” a mill scrap buyer said.

tolomeo-us-busheling-shredded-scrap-2005-2016

So even though it went against historical norms and maybe even logic, new clean prime scrap was optimal to buy at cheaper prices than old shredded scrap earlier this year. Optimus Prime is a character from the “Transformer” toy/film franchise, but in the steelmaking world, Optimal Prime became a way of life for mills.

tolomeo-us-busheling-shredded-scrap

In April there was a mill paying $240/long ton delivered mill for No. 1 busheling and $250/lt for shredded scrap. In May the prices were even at $270/lt. By June, No. 1 busheling was $270/lt and shred was $250/lt. In July some No. 1 busheling prices reached $300/lt while shred fell to $240/lt. That is when the optimizers stepped in and said “Enough!” and mills reduced their prime buys, increased their shred buys and in August the gap had shrunk to $20/lt — $260/lt for No. 1 busheling and $240/lt for shredded scrap — for this particular mill. In other regions the gap is $30/lt or as high as $40/lt.

The optimizers are expected to be influential again during September negotiations and shrink the gap further.

According to the biography of Optimus Prime, he had a strong moral character, excellent leadership and sound decision-making skills. Nowadays the non-fictional steel mill scrap buyers are showcasing sound decision-making skills thanks to their trusty optimizers, an evolving tool in the steelmaking process.

Source: http://blogs.platts.com/

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