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Morningstar | Lower Scrap Prices Will Pressure Schnitzer's Margins in the Coming Years

One of the largest metal recycling companies in the United States, Schnitzer Steel Industries collects, processes, and ships large volumes of ferrous and nonferrous scrap metal. Ferrous shipments account for more than 90% of the company’s scrap tonnage. However, because nonferrous scrap, which includes aluminum, copper, nickel, brass, titanium, and metal alloys, commands significantly higher selling prices, ferrous shipments typically generate only about two thirds of total recycling revenue.Although scrap metal recycling is Schnitzer’s core business, the company has vertically integrated both upstream and downstream. Schnitzer owns a large network of Pick-n-Pull auto-parts stores via its auto-parts business, in which customers can purchase individual auto parts from used cars. Once all valuable parts have been removed from a vehicle, it is shredded and the remaining ferrous and nonferrous scrap components are sold to the metals recycling operations. During the company's fiscal 2015, the metal recycling and auto-parts businesses were combined into one reporting segment.Schnitzer also operates a steel manufacturing business, housed within the Cascade Steel and Scrap segment. The steelmaking operations produce steel via one electric arc furnace with production capacity of roughly 580,000 tons per year, predominantly manufacturing rebar, coiled products, and merchant bar. Steel shipment volumes are largely driven by nonresidential construction activity on the U.S. West Coast. The furnace is in McMinnville, Oregon, but finished steel products are shipped by rail to the company’s distribution center in El Monte, California, which is closer to key customers in major civic centers.Although domestic scrap generation rates dictate scrap supply and pricing trajectories, Schnitzer’s fortunes are closely tied to scrap consumption overseas. The metal recycling business has historically exported roughly 60%-70% of its ferrous and nonferrous scrap shipments via seaborne deliveries. The company operates seven deep-water ports equipped with shredders by which it loads bulk cargo of up to 50,000 tons per vessel.