The Des Moines Register from Des Moines, Iowa on October 23, 1977 · Page 67
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October 23, 1977

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The Des Moines Register from Des Moines, Iowa · Page 67

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Sunday, October 23, 1977
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DES MOINES SUNDAY REGISTER • OCTOBER 23, 1977 f'i\ The ferrous scrap situation: Is there too little? too much? Today's garbage could be the energy of tomorrow ..© 1»77 wiuiuntfun Po«t The market for ferrous scrap is depressed right now. Scrap buyers see this as no problem, just a temporary lag in a cyclical business, while scrap sellers foresee shortages when the steel industry comes out of its slump, the worst since World War II. Ferrous is waste that contains iron or steel — discarded cars, trucks, tractors, ships, pipes, building beam, railroad tracks, boxcars, locomotives, manufacturing equipment, appliances, bicycles, the gantry that launched John Glenn, the worn-out toaster you threw away last week. Steel Institute (AISI). "When you're vertically integrated, you make sure you use all your operations as much as possible. But this isn't why the scrap market's depressed. "Scrap consumption is down now because steel production is down now. The steel industry has been in its worst recession since World War II. But for the longer term, we see ferrous scrap shortages. "Developing nations are building 'mini' mills that depend on scrap, and ! the United States appears to be the { only potential source of supply. Also, When this stuff is collected, sorted, I Japanese mills have traditionally graded, busted up and fed into steel mill cr foundry furnaces in place of iron ore, good things happen. Energy and natural resources are conserved; air, water and solid waste pollution are reduced; trade balances are improved. All these things happen with no sacrifice in the quality of the finished product. The 41 million tons of ferrous scrap that U.S. steel mills and foundries bought from scrap recyders in 1976 conserved 61 million tons of ore (22 million of which would have come from abroad), 14 million tons of coal -•aad the equivalent of 5.7 billion gallons of gasoline — enough to power one-tenth of America's cars for the entire year. What's more, according to the En. vironmental Protection Agency, when niills and foundries use ferrous scrap . in place of ore, there's an 86 per cent ..reduction in air pollution, a 76 per cent reduction in water pollution, a 40 per cent reduction in water use and a 105 per cent reduction in solid waste. . .. In theory, the toaster you throw away is retrieved from your dump by a collector who trucks his take to a scrap processing plant and sells it for . cash, by weight. The processor's machinery distills it into qualitatively - identical chunks suitable for resmelt- tng. These are shipped by rail to steel mills or foundries, c.o.d. The law of •supply and demand sets the price. . i 'Collectors and processors aren't 4?ing much these days, because steel "mills and foundries aren't buying •much. They're consuming only 40 per - 'cent of what collectors and proces- ••ors say they can supply. Meanwhile, we lose an estimated 5 million tons of ferrous scrap to rust each year, and you and I continue to throw away worn-out toasters. , Is thcrt a problem? What's the problem? No problem, say ferrous scrap buyers — mills and foundries — just a lack of demand triggered by a temporary slump in steel production. Steel always has been a cyclical business, and when it bounces back in a year or two, they say, mills and foundries will need more ferrous scrap than recyclers will be able to supply. Not true, reply ferrous scrap sellers - collectors and suppliers. The problem is chronic, and it won't be solved until Uncle Sam stops subsidizing the mining and shipment of coal and iron ore. What's more, they say, vertically integrated steel companies negleci ferrous scrap because it's in their corporate interests to extract coal and ore from their own mines and transport them on their own ships and railroads Vertical integration has little effect •ju j»crap consumption, according to jatues Collins of the steel industry*'.. group, me Aiiiencan Iron au<l been big buyers of American scrap, and they aren't buying much now. But they will, and when they do demand will soar. Governments will have to work together to develop policies to deal with ferrous scrap shortages." Herschel Cutler of the ferrous scrap recyclers' trade association, the Institute of Scrap Iron and Steel (ISIS), couldn't agree less. "There are over 600 million tons of recoverable ferrous scrap strewn around this country, and better than 8 million cars, buses and trucks will be added to the backlog this year. There's an army of peddlers, salvagers and wreckers to collect it. There are over 1,300 processors to process it. The problem isn't a future shortage of supply. It's a chronic shortage of demand, buyers, consumers. "American steel mills and foundries could get much more of the raw material they require from scrap processors. Why don't they? Because the federal government subsidizes ore with a 15 per cent depletion allowance, and the Interstate Commerce Commission permits railroads to charge three times as much for scrap as for ore. When you consider that 20 per cent of scrap's price on the average goes for transportation, the multiple become crippling. Scrap can't compete, because the government has stacked 1 the deck." Rtcyclers lighting back The recycling industry has fought long, hard and unsuccessfully to unstack it. In August 1976 the Senate defeated by two votes a provision of the Tax Reform Bill that would have given tax credits to buyers of recycled materials, including scrap. The steel industry opposed the measure. Nineteen months ago, responding to recyclers' contentions that freight rates were discriminatory, Congress ordered the ICC to re-examine railroad rates on recycled materials. Last Feb. 5 the agency upheld the current rate structures for most materials, including scrap. Annco, Inland, Republic and Youngstown Steel filed pro-railroad briefs with the ICC in advance of its ruling. Scrap recyclers maintain the steel industry opposed these changes because they would have given vertically integrated steel companies breaks they didn't want. They already ! have subsidies, they say, to extract i ore from mines they either own or develop under contract. Why should they want anything that would press | them to buy scrap from unaffiliated processor* instead'' James Collins disagrees. 'Measures that cumulate scrap consumption make little sense when the outlook u, oae of future supply shortages Thai s oue zeaion steel companies have opposed tax credits and freight rate holddowns (artificial relationships between commodities, in the case of ore and scrap). Another is that the scrap supply is price inelastic. Increases in the market price don't bring about corresponding increases in collection and processing. This was demonstrated clearly in 1973 and 1974 when large increases in scrap prices resulted in insignificant increases in supply. "Remember, too, that such increases would have quite a profound inflationary impact, which could depress steel consumption and add to unemployment. It boils down to hard economics. You don't want to force the uneconomic use of scrap, especially when the world has a 500-year supply of coal and iron ore, and when scrap consumption will rise to the point of scarcity anyway as mini mills become more prevalent worldwide." The Export Administration Act gives the Secretary of Commerce the power to limit exports if be thinks there could be domestic shortages. It happened in 1973 and 1974, and export-dependent processors fear it could happen again. This is despite the fact that ferrous scrap exports have dropped every year since 1973. Last year, they totaled 7.9 million tons, down 18 per cent from 1975. Spain replaced Japan as the biggest buyer. Japan came in second — yesterday's Ford is today's Toyota — followed by Korea, Canada, Italy, Mexico and Great Britain. ! The issue couldn't be more clearcut. Buyers say there's an approaching shortage of supply and government ought to restrict exports. Sellers say there's an abiding shortage of demand and government ought to equalize tax and freight rates. Coiflictiac studies In October 1974, when steel production was high and scrap hard to get, Secretary of Commerce Frederick Dent decided he was going to find out why, and he commissioned three studies. AISI sponsored one, an overview of the long-term ferrous scrap supply-demand picture done by Fordham University's Industrial Economics Research Institute. ISIS underwrote two, an estimate of ferrous scrap processing capacity by Battelle Memorial Institute, and an estimate of the nation's recoverable ferrous "scrap uacklog, authored by Robert R. Nathan Associates. Battelle's report came out a year ago; it calculated processing capacity at 100 million tons a year now, climbing to 130 million tons a year by 1980, and it agitated no one. Fordham's was published June 23 of this year, it predicted an 11-million too shortage worldwide by 1982, and agitated the scrap recyders. Nathan's was just recently issued. It agitated toe steel people. Its estimate of 636 million tons of recoverable ferrous scrap lying around waiting to be collected is well above Fordham's. AH three studies are about to disappear into the maw of the Commerce Department, whose ferrous materials people will spend the next half year or so attempting to make *eu*e out of the conflicting data before making a recommendation to Dent's successor, Secretary Juaruta Krepa. 1»77 CMew* tMt-Tlmn "The country may run out of oil, or {as, or even coal, but it is never going to run out of garbage. Ten yean from now the only way every major city in the country will look is toward -systems that recycle materials from garbage and convert the residue to energy." So says Lucian C. Bielicki, vice- president and general manager of Americology, the resource recycling division of American Can Co. Charles A. Ballard, with the investment banking house of Dillon, Read tt Co., says, "Potentially, the investment in garbage-recycling systems is going to reach into the billions of dollars. We estimate the number of cities or areas that need to switch from landfill to recycling ranges from a low of 50 to possibly several hundred." Ballard has devoted half a doien yean to make himself and his firm expert in the financing of recycling plants. For a decade or more recycling has been presented as something miraculous. Recycling plants would dispose of increasing floods of urban garbage without polluting land or air, and without bankrupting municipal governments. It would make possible low-cost recovery of valuable metals such as steel and aluminum. And of greater and greater importance since the 1973 Arab oil embargo, it would create a vast new source of energy with the conversion of waste wood, paper and plastics to a usable fuel. The miracle has not yet come to pass, but Bielicki and Ballard independently agree that finally recycling is beginning to prove itself a practical, if not supernatural, system. Bicycling •Id hat To American Can, recycling is as old as the company, some 70 years. "In the old days," Bielicki says, "tin cans were made by a sort of cooky- cutter process and it was natural to j pick up the waste metal for reuse." These days American Can has eightj plants in this country and three : overseas that remove the tin from tin | cans and also recover the steel. i After Earth Day, 1970, "when young people declared their deter-1 mination to stop pollution," American j Can's chairman, William F. Kay, • decided the corporation could go beyond that activity. Five years later Lou Bielicki was in Milwaukee for the signing of Ameri- REGISTIK PHOTO cology's first contract to build a complete recycling plant. And Bielicki bad acquired some gray hair. He had, among other things, gone through nine months of negotiations, hearings and threatened lawsuits as the municipal council considered the project. Originally the idea had been that the city would finance the project through a bond issue and Americolo- gy. would build and operate the system. To get the project going and prove out the firm's technology, developed with Bechtel Corp., American Can finally decided to put up its own money. Long haul for garbage "At the time," says Bielicki, "Milwaukee was hauling its garbage to landfills 20 miles outside the city and the next site was going to be 50 miles away even if local opposition could be overcome. We put $18 million of our money into the construction of the first plant located in downtown Milwaukee and we've made an additional investment of $4.5 million in a unit to enable Wisconsin Electric Power to use our material for fuel along with coal. "The plant opened officially in May this year. The city genervUes 1,000 tons of garbage a day on average and we are now handling 200 to 600 tons a day. We've given ourselves a year to debug the plant and get up to capacity, the thousand tons." As a vice-president of Dillon, Read, Charles Ballard's interest in garbage is in the underwriting of municipal bonds to finance recycling plants. So far, he says, Dillon, Reed has been instrumental in financings totaling about $125 million, in Kansas City, Akron, and Hempstead, Long Island. "We are now working on five or six other projects," Ballard says, "with a value of perhaps $200 to $250 million." Hempstead, with a $72 million bond issue, is scheduled to get into operation sometime in the first half of next year and no doubt will be a make-or-break proposition for the concept. Hempstead literally piles up 600,000 tons of garbage a year and "will have no place to go by the end of next year" unless the recycling plant takes over. Next, on Ballard's schedule is the most ambitious project to date. That's a $100-million system being considered by Dade County, Florida. Dillon, Read is acting as financial advisor to the engineering firm doing preliminary planning on the project. Who really should take the blame for the high price of gasoline? @ 1»77 CMC** Swn-Tlmn Ask almost any oil man — wildcatter to chairman of one of the giant international companies — who is to blame for the price of a gallon of gasoline and the energy crisis in general, and you'll get one answer: The U.S. government. The argument is that we'd have plenty of oil and natural gas, too, and maybe prices would be lower if the federal government hadn't messed up the workings of the free, private- enterprise market over the last few decades. That isn't necessarily true, says an economist who has spent months digging into the record since the 1930s and who looks at that record from the viewpoint of 101 per cent private-enterprise economics. Government policies over the years have been bad, he says. They have been directly responsible for our present situation and have made matters worse than they might have been. But the government was only doing what various and powerful segments of the oil industry wanted it to do. Paradoxically, the smaller U.S. companies were the chief villains rather than those giant international companies so often under attack these past three years by government agencies, congressional committees and consumer groups. So argues Jai-Hoon Yang, an 'economist on the staff of the Federal Reserve Bank of St. Louis. At the St. Louis bank, respect is accorded Adam SmiUffJn-iuuic tua& John Maynard Keynes, and the bank is generally known for a rock-ribbed adherence to unfettered, free-market economics. Oil IB Toias One place to start in Yang's lengthy and detailed analysis is with the Texas Railroad Commission. And with a fact that may come as a surprise at this late date: Back in 1948, the United States was a net exporter of oil and dominated the world markets even more so than Saudi Arabia does today. The Texas Railroad Commission was handed the job early (Texas became the No 1 oil producing state in 1928) of controlling the state's production. And prices. The oil-producing companies got the state to institute a production quota iys.teu) to keep output down uut! price* up Naturally efiuugh, the agency, ui yieidiag U> industry REGISTER PHOTO pressure, set quotas to give the smaller, high-cost producers a break. That meant even higher crude oil . prices. So the companies with the muscle ' eventually went looking for low-cost oil overseas. And found it in the Middle East. Domestic companies went to the federal government for protection against the low-cost Arabian oil, and got first a system of voluntary import quotas and finally mandatory quotas. ' A quota system was in effect from 1957 to 1978. And, says Yang, "a ' segment of the domestic oil industry was insulated from the rigors of com- ! petition in the market place." Simultaneously, the big oil companies were prevented from bringing in as much oil as they wanted. Restricted in the great U.S. growth market, the oil companies went after sales in the foreign markets. A surplus of oil reduced world prices and the oil companies cut the prices they paid to Saudi Arabia and others. The birth of OPEC The squeeze on the Arab countries was, Yang says, "The spark for the exporting countries to form an organization to safeguard their common interests.... "The point is that the (U.S.) quota system ... had a direct casual effect on the formation of the Organization of Petroleum Exporting Countries," and the suMftqucm ^a^upling of oil prices by OPEC. Since the 1973 embargo, there havebeen two major developments: First, the government set up a two-tier price system, a low price on "old" oil to keep producers from reaping windfall profits and a second, higher price on "new" oil to encourage exploration, second a complicated system was devised to give small refiners and those companies that did not own "old" or low-priced oil an equal shot The "new" oil price was stiJl und*?r the world price so the incentive to drill for new oil was not as great as u might have been. But, worse, says Yang, taking cheaper "old" o.l away from some lo give it to tho^- in the industry daiii-jring for in even creak forced the to&ers '.o inaKe up the 4u fereac? by importing oil "TV litUflleluleC! ejfevt. iiKTt-aie "L S oil." In effect, Yang argues, the program has put a tax on domestic oil and subsidized imports. bang's conclusions: "Past attempts by various segments of the energy industry to avoid the rigors of com- petitid«"fra.^ .-.uUed in public policies which have emasculated the energy market's ability to adjust to manmade (OPEC) and nature- induced (January's weather) shocks. It is ironic that those who now call for deregulation oi the energy market are the ones that had sought moat of the existing regulations." Bankers elf ct Armstrong Christy Armstrong, president of American Trust and Savings Bank, Dubuque. was elected president of the low a Bankers Association at its recent annual convention. Also elected were H Raiid Peterseu, president ^-f Shelby County SUte BanK in Hariau. vice-president, aod toward L Tubbs. president of Stale Baa* tii M<Miuufcet«, Neil Mihu-r couuuuet mt

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