November/December 2010
Brass and bronze ingot makers are a vanishing breed in North America. To survive their many competitive challenges, they’re banking on new alloys and diversified income streams.
By Jim Fowler
As many as 60 brass and bronze ingot makers operated in North America in the mid-20th century; today there are nine. Industry participants give several reasons for this dramatic contraction, naming both external factors—globalization, material substitution, volatile markets—and the self-inflicted problem of persistent overcapacity, which creates fierce competition and narrow margins. There’s no consensus on what the future holds for the few foundries that remain. Some feel the industry will eventually die out, others express cautious optimism, still others see good times ahead. Even those who express optimism acknowledge that profitability is elusive. To achieve it, some companies see the need for change.
Pushed Aside by Plastic
The industry began to suffer, many say, when manufacturers found substitutes for brass and bronze—most notably plastic—that do the job at a lower cost. That development began 25 to 30 years ago, says Tim Strelitz of California Metal-X (Los Angeles), and plastic now dominates several markets that used to be reliable consumers of brass. He cites residential sprinklers as one example: A product that was once 100-percent brass is now probably 99-percent plastic, he says.
“Plastic has just taken over the world,” laments Thomas Avril of G.A. Avril Co. (Cincinnati). “You have to look pretty hard to find a brass sink trap or anything made of brass today. Everywhere you look you see plastic. We’ve been substituted out of business with plastic, and some ingot makers just decided to quit.” And plastic is not the only brass and bronze substitute, observes Peter Nagusky of The Federal Metal Co. (Bedford, Ohio). “Some parts that were previously cast out of brass are now cast out of aluminum or grey iron.” Bob Berny of SiPi Metals Corp. (Chicago) is not ready to give up on the plumbing market entirely—he believes that higher-end faucets will always be made of brass—but he concedes that “the functional ones, the lower-end ones, will continue to fall victim to substitution.”
To look on the bright side, at least one producer thinks all the damage has been done. “I think most of the substitution has taken place,” says Michael Mann of Colonial Metals Co. (Columbia, Pa.). “It’s leveled off.”
Globalization Hits Home
Each piece of the brass and bronze production process faces intense competition from overseas. The foundries compete with international buyers of scrap for material; the offshoring of U.S. manufacturing has gutted the domestic market for their ingots; and industrialization in other countries—most notably China and India—has increased international demand for finished products. “We’re in a global economy,” Mann says, “and what happens in China and India has a tremendous effect on every ingot maker.”
Look first at the manufacturers of brass and bronze products, which are these foundries’ customers. “The manufacturing sector in the United States just keeps dwindling every year,” says SiPi’s Berny, as factories move to countries with cheaper labor and less regulation. “Quite a bit of the high-volume plumbing brass casting [business] went offshore” in the 1990s and this past decade, Nagusky says. As these factories moved—first to Mexico and now predominantly to China and India, Berny says—they started to source their materials locally. With fewer domestic consumers for their products, “more and more of the domestic foundries have shut down.” Black & Decker was one of the first big players in brass and bronze to move, Strelitz says. “They bought Price Pfister, a huge faucet manufacturer, and in the blink of an eye moved all of that business to China, even though they were making good profits here.”
Nagusky believes the offshoring trend is past its peak, but Strelitz disagrees. The shrinking of the U.S. manufacturing base “has accelerated in the past 10 years … and I haven’t seen a slow-up yet,” he says. “As a result, it has shrunken the brass demand market, and the smelters that are left are certainly fighting for the marketplace that remains. It’s all about trying to keep a business and build a business in a diminishing marketplace. … Survival is on everybody’s mind.”
At the same time North American factories were relocating overseas, other countries were rapidly expanding their own manufacturing bases to support their infrastructure development and supply goods to the international market. The two trends meant these countries’ demand for scrap ramped up accordingly. China in particular has dominated the international scrap trade. In 2009, China was the No. 1 destination for U.S. copper, aluminum, and zinc, and it was the fourth-largest purchaser of lead scrap.
Trying to stay in business while competing with China is a major challenge, Berny says. “You have China manufacturing finished products at much lower price levels than what we would do domestically, plus we have the problem that the Chinese, at times, purchase our raw material streams,” he says. “We can experience shortages in certain grades of material when the Chinese are very active, and when there are shortages, the margins tend to get squeezed more than they traditionally are.” Shortages have not been a problem for everyone, though. “There’s plenty of scrap around,” Avril says. “We do get some competition from the Chinese, but it’s not a big deal because there is enough around for everybody. We have regular suppliers we’ve dealt with for years, and we don’t see a problem with the flow of material when the Chinese are in the market.”
Berny believes Chinese buying also affects scrap quality. “Occasionally the Chinese come in and buy more inferior or lower-grade material, and that tends to weaken the whole scrap package across the board. As a result, you have a harder time getting [a] quality package.” For example, he says, “the yellow brass package had been very desirable for ingot makers, but the Chinese have gotten lackadaisical about what they will accept. They take stuff that isn’t even yellow brass—they’ll take die-cast and stainless, and that all becomes part of the package. They’ve downgraded it, and that’s a challenge. If we’re paying, for example, 80 cents a pound, and the Chinese are going to pay 90 cents and take a worse package, then suddenly 90 cents becomes the new [price], and their quality standard becomes the new quality standard until they go out of the market.”
Several domestic consumers note the impact of international buying on prices. “There are times when the Chinese can drive raw material prices right through the ceiling,” Mann says. “I’ve seen situations where they become very active in the market, and the spread will be cut by 10 or 15 cents without a move in Comex—that drives all scrap prices higher without Comex moving up.” Scrap dealers are “extremely price-sensitive, and generally you have to match the overseas price to get the material,” says Hy Shore of Ingot Metal Co. (Weston, Ontario). “It’s truly a global market, and all of the dealers are well aware of overseas prices.”
These scrap consumers don’t blame international buyers for all of today’s market volatility. They also blame Wall Street’s use of commodities as an investment tool. The traditional factors that have moved copper prices on Comex on a day-to-day basis—supply, demand, and inventories—are no longer effective indicators in the short term, Mann says. Instead, “the market is affected short term by what financial funds decide to do. They can make the markets move for illogical reasons, and you have to live with it. You come in each day, sit down, examine where the markets are, and you adjust. Then you must be prepared to make a change midday. In fact, you may have to change your philosophy of doing business three or four times in one day. It’s incredible.”
Market volatility “is one of the biggest challenges facing us today,” Nagusky says. “How an ingot maker protects its risk is important, and difficult. A lot of raw material we buy is difficult to hedge, or not hedged very well,” he explains. “A lot of the alloys we sell are not sold on the basis of a formula or tied to a market price, so it’s much more challenging. We keep a close watch on our inventory, and that’s a big part of it—just managing the physical position. We use the markets in London and New York to protect our risks on the remainder.”
Capacity Concerns
Overcapacity was an issue when he first started in the business 41 years ago, Mann says, and—despite the industry’s dramatic contraction—overcapacity remains a problem today. At the nine remaining foundries, “each of us is operating under capacity,” Nagusky says. “That’s the biggest fundamental issue facing the industry. … There’s not enough business to go around.”
Conditions are ripe for consolidation: One or more companies could buy their competitors and idle their furnaces to reduce capacity, drive up prices, and increase profitability. “With a good consolidation, we’d have an extremely healthy industry,” Strelitz says. Nagusky is surprised it hasn’t happened. “We’ve seen it in the industry of our suppliers, and we’ve seen a little of it with our customer base.” The industry has lost some capacity due to attrition, he says, but that’s all.
What’s holding these companies back? “Every ingot maker is a family-owned and -operated company, and I think they don’t want to join with another family and try to run one business,” Avril says. “I think it could be difficult [to do so], and the people we’ve known over the years like to be independent.”
Further, there’s no guarantee the revenue will justify the cost. “Nobody wants to spend the money to close down the other guy,” Berny says. “There’s not enough profit incentive just to buy somebody to close down their capacity, at least at this point. Even if you close down one operation, people have enough capacity to start firing up furnaces they’ve idled. There is just way too much capacity in the marketplace, and by shutting one or two [furnaces] down, it will probably still leave the industry in an overcapacity situation.” Shore agrees. “I don’t think there is much to be gained from economies of scale in consolidation,” he says.
But consolidation is inevitable, Strelitz says. “It’s going to happen, whether other smelters go out of business, or they finally get smart and recognize the benefits of [it]. … I think we’re going to see something, consolidation-wise, within the next two years,” he predicts.
Environmental Issues
Ingot makers name at least two ways in which environmental concerns have affected the industry. First, these scrap consumers have had to comply with tighter environmental regulations that various government entities have imposed on them, says Colonial Metals’ Mann. The environmental targets are “harder and harder to hit, so you have to keep upgrading your pollution control systems,” Berny says. As Mann adds, “It [has been] very expensive, and that, combined with the constantly shrinking manufacturing base … led to a number of ingot producers closing.”
Also significant has been the move to eliminate lead from brass used in plumbing. In 1986, the U.S. Safe Drinking Water Act mandated the use of “lead-free” pipe in the installation and repair of plumbing that connects to a public water system and provides water for human consumption. Materials that are up to 8 percent lead meet the federal definition of “lead-free,” and the lead content of brass pipes has fallen over the years to well below that level. NSF International (Ann Arbor, Mich.) found that 89 percent of the metal parts in valves and water meters it tested recently contained less than 3.7 percent lead, and two-thirds contained less than 0.5 percent lead. Brasses commonly used in water systems are just 1.5 percent to 2.5 percent lead, according to a white paper from ASCO Valve (Florham Park, N.J.).
The U.S. Environmental Protection Agency (Washington, D.C.) has since determined that plumbing fixtures that meet federal lead-free standards can still “contribute high lead levels [to the water supply] for a considerable period of time after their installation, even in cases where these devices are in contact with relatively non-corrosive waters,” according to NSF International’s Web site. Such concerns have led California and Vermont to pass laws that change the definition of lead-free plumbing in their states. As of this year, newly installed pipes, pipe fittings, plumbing fittings, and fixtures in those states can contain no more than 0.25 percent lead in a weighted average of their “wetted surfaces” as determined by a specific formula. Maryland and Washington are considering similar legislation. Commonly used brasses are unlikely to meet the new standard unless other components of a plumbing system are entirely lead-free, according to the ASCO Valve white paper.
The move to lead-free brass has been a significant government intrusion into the industry, Strelitz says. “For the first time in the history of the copper industries, we’ve seen government policies begin to dictate what elements can be used to produce certain grades of brass that are used in specific industries … and that [has] created an entirely new alloy group. Many ingot makers have had to adjust to that.” Initially, foundries substituted bismuth and bismuth selenium for lead in brass products for the plumbing market, he says, “and today there are even newer alloys that we think will replace the bismuth alloys.”
Such mandates are irksome, but they’re also an opportunity, Strelitz notes. The plumbing markets “are stable and represent large consumption. For people coming up with alloys that work in those markets, the future could be bright.” He touts the new lead-free alloy his company has developed in conjunction with Chase Brass (Montpelier, Ohio), Ingot Metal Co., and Concast Metal Products (Mars, Pa.)—C87850, or Eco Brass—which is “heads and tails better” than bismuth-containing lead-free alloys, he says. It’s “not only much less expensive than the bismuth-containing alloys, it also uses 10 percent less energy to melt. … Considering the enormous economic pressure on state and municipal governments countrywide, this new alloy can save them millions of dollars per year.”
Shore agrees that “lead-free alloys are the trend in the industry,” but “the jury is out on which ones will be there in the end,” he says. “That will be based on many factors, including price, mechanical properties, and density.” Nagusky also believes the switch to lead-free alloys “will create some opportunities for those who can capitalize on that family of alloys,” but Avril is more pessimistic. Though there will be a market for these new alloys, “there won’t be enough demand to keep a decent-size company going,” he predicts. “It’s sad. There really is nothing out there.”
Supplier Relationships
These scrap consumers note certain trends in the scrap industry that have affected them. “Consolidation in the scrap industry has been a huge change for ingot makers,” Mann says. “Years ago we had 200 suppliers,” he recalls. “Today there are 10 companies that supply more than half of our needs.”
When depending on fewer and larger suppliers—and suppliers that have the whole world as their market—do relationships still matter? Mann says yes, but “price and prompt payments have become a major issue in the last few years.” At Ingot Metal, “we have some longstanding, beneficial relationships with scrap suppliers,” Shore says. “I think we saw [an emphasis on relationships] during the time of the financial crisis, when overseas buyers reneged on their commitments. For a time after that, relationships were very important. Many people still remember those days, and the value of those who held to their commitments, but some people have short memories.” Just two years later, “it seems to be more dollars and cents than ever before,” he says.
Strelitz also thinks relationships have taken a back seat to price, but both are important. “If your price is good, and you pay your bills, and you have a decent relationship with your supplier, you buy the metal.” From his perspective, he says, the best situation is “when we have a really good supplier who is honest with us and gives us [right of first] refusal on his metal. That is, the supplier gives you the benefit of his business if you match the best price in the market. … [That] basically affords you a supply month-in and month-out,” he explains. “You just need to meet the market.”
At SiPi Metals, which consistently uses several suppliers, “we can usually get the scrap we need and have never seen the supply totally dry up,” Berny says. “It’s a function of price. If you pay more than you want to pay, you can usually find the units.”
Hedging Their Bets
“In the good old days, brass ingot makers made brass ingot,” Strelitz says, but “several smelters through the years have recognized the value of diversity and have moved into trading.” For Colonial Metals, trading offers flexibility, Mann says. “It allows us to buy more items and also gives us the option of either trading the raw material or consuming it ourselves.” The company prepares and sells copper brass scrap packages to domestic and occasional overseas buyers.
Federal Metal started trading 20 years ago. At the time, Nagusky says, his company had access to better markets and did more sophisticated analysis and sorting than the scrap processors. “The suppliers are far more sophisticated today in terms of their market reach and technology, such as portable spectrometers [for analysis], so there isn’t that wide gap that once existed.” But Federal still adds value as a broker, he says. “A lot of foundries have switched from ingot to scrap and now melt both. Because we [also] melt and produce alloys, we understand their requirements, perhaps better than a scrap processor.” Trading is “an important part of our business that has remained stable and reliable,” he says.
California Metal-X “moved from a typical scrap operation to ingot manufacturing, but in the last two years, the trading and others things we do overshadow ingot making,” Strelitz says. With this diversification, “I’m not limited to making an ingot. I’m limited [only] by my ability to be clever and to recognize where we should be and what we should be doing, and that’s only limited by my imagination.”
Strelitz and others see opportunity in the future. “Innovation will be the fuel for growth, and that innovation relates to new product lines, particularly in the lead-free area,” Shore says. Berny’s strategy is to “keep costs in line, make a good product, and try to develop niche marketplaces where profit margins are a little higher than the high-volume business. It’s always been a tough industry,” he adds, “we just try to keep on top of it.” Others are less optimistic. “By 2020, my guess is there will only be four or five ingot makers at the most,” Avril says. “Our biggest concern is trying to make a profit, and it’s very difficult right now. We’re still hanging in [there] and hope that things turn around. If they don’t, we’ll probably go the way of those who quit. Who knows?”
Even if the North American brass and bronze industry continues to shrink, it will never go away, Mann says. “There is always going to be a place for ingot makers. We may lose one or two smaller [ones], but there will be five or six major producers in North America. … We may have to compete with the Chinese, with the Indians, some ingot maker in South America, but we must stay competitive, and I think we will.”
Jim Fowler is retired publisher and editorial director of Scrap.
Brass and bronze ingot makers are a vanishing breed in North America. To survive their many competitive challenges, they’re banking on new alloys and diversified income streams.