Zorba drop weighs on Schnitzer as volumes rise

US metals recycler Schnitzer Steel boosted ferrous and non-ferrous shipments in its most recent quarter, but a sharp drop in selling prices for zorba weighed on margins.

Stronger demand from US domestic mills helped push Schnitzer's ferrous volume up by 15pc as the Trump administration's 25pc tariff on imported steel continued to support higher domestic production.

The Portland, Oregon-based company shipped 919,000gt of ferrous scrap in its fiscal third quarter ended 30 November, up from 797,000gt in the same quarter a year earlier.

The domestic share of ferrous shipments rose by 37pc at 340,000gt (around 113,000 gt/month) from 30pc at 239,000gt (80,000 gt/month) in the prior year.

Exports accounted for 63pc of ferrous shipments on the quarter at around 579,000gt, compared with 70pc of ferrous shipments at 558,000gt in the prior year. Bangladesh, Turkey and Taiwan were the top export destinations.

Ferrous selling prices averaged $306/gt before freight on the quarter, up from $292/gt before freight in the same prior-year period in part on higher US domestic prices.

Non-ferrous shipments also increased in the quarter, rising to 153mn lbs from 129mn lbs, an 18pc increase.

But lower prices for zorba and other non-ferrous metals pushed the average non-ferrous selling price down by 19pc to 59¢/lb before freight.

Argus-assessed prices for the shredded mixed metals product zorba, which accounted for about a third of Schnitzer's non-ferrous product mix in the quarter, fell to an average of around 54¢/lb cfr China for US-origin material during the quarter from 68¢/lb on the same basis in the same period a year earlier

The 21pc drop came amid a supply glut driven by reduced demand from China and increased flows of shreddables in the US.

China, historically the largest consumer of US zorba, has substantially reduced its purchases from the US amid higher import quality restrictions implemented in early-2018 and after the country imposed a 25pc tariff on aluminum scrap imports from the US in response to the US Section 232 tariff.

Schnitzer has responded by finding homes for its material elsewhere in Asia such as Malaysia and Indonesia. China represented 27pc of the company's non-ferrous volume on the quarter, down from 38pc for the full-year fiscal 2018 and 46pc for the full-year fiscal 2017.

The company also plans to invest $40mn-50mn in non-ferrous recovery equipment over the next two fiscal years to boost the "optionality" of its non-ferrous product portfolio, but details of the investments were not disclosed.

The decline in selling prices for zorba and other non-ferrous products "outpaced the reduction in purchase prices for raw materials," compressing margins and more than offsetting the benefits of higher volume, the company said in earnings guidance in December.

The volume of cars Schnitzer purchased for its Pick-n-Pull automobile recycling subsidiary fell to 94,000 units from 108,000 units in the same period of the prior year.

The zorba-driven margin compression pushed operating profit in the auto and metals recycling segment down to $23mn from $35mn. This represents $25/gt ferrous shipped, down from $44/gt ferrous shipped.

Shipments in Schnitzer's finished steel segment fell to 119,000st from 127,000st. The 6pc drop resulted from lower production caused by a combination of a temporary disruption to a natural gas pipeline feeding the mill and downtime related to the implementation of mill equipment upgrades.

Capacity utilization at the company's Oregon rolling mill fell to 87pc from 95pc in the same year-earlier quarter.

Average selling prices for rebar and other finished steel products rose to $747/st before freight from $599/st on higher raw materials prices and as import pressure waned amid the US imposition of a 25pc tariff on imported steel.

The increase in selling prices exceeded those of scrap, boosting metal margins and pushing operating profit in the finished steel segment up by 41pc to $12mn.

Still, Schnitzer's overall profit across all segments ticked down to $17mn on revenue of $564mn from $19mn on revenue of $483mn in the prior-year period as profit from the steel segment offset reduced earnings from auto and metals recycling.