November/December 1992
Scrap tolling arrangements can be more complicated than their buy/sell cousins, but the payoffs can be worth it.
BY SI WAKESBERG
Si Wakesberg is New York bureau chief for Scrap Processing and Recycling. There's more to scrap deals than buying and selling. Complex arrangements referred to as tolling—while not the most common type of trading transactions—are popular in some industry circles and, in certain situations, can offer greater financial rewards to both parties than standard buy/sell arrangements.
What exactly is tolling? Trade terms are often vague and nebulous, and industry members sometimes use the phrase interchangeably with "swaps" and "exchanges," but here are some approximate definitions:
- Tolling: A company ships raw material to a refinery or a mill, where it is melted, refined, and processed. The resulting product (in the form of ingots, cathodes, sows, rods, molten metal, and so forth) is returned to the shipper for a fee. The shipper retains ownership of the metal in all forms throughout the process.
- Swaps: A company sends material to a mill or refinery and takes back something other than a resulting product. This term is used principally in the aluminum industry, where scrap is frequently swapped for billet, coil, sows, or ingots.
- Exchanges: A firm ships scrap to a mill and receives prime metal or another product in return.
A classic example of tolling can be seen in the lead-acid battery business, where spent batteries collected by retailers and wholesalers are often returned to the battery manufacturer. If the manufacturer doesn't own a secondary lead smelter, it might send the scrap batteries to an independent lead smelter for tolling. The smelter then converts the spent batteries—for a fee (often referred to as a smelting or conversion charge)—back into specification lead, which is shipped back to the manufacturer for use in new batteries.
In the copper industry, the arrangement might go like this: A large wire mill that needs rod can ship its accumulated scrap to a refinery for tolling, pay a tolling fee (industry officials estimate that it falls within a range of 6 to 8 cents per pound), and get back rod in 30 days or so.
Of course, these are simple illustrations. The process gets more complicated when third parties enter into the arrangement and have a stake in the pie.
So why go through the hassle of tolling the material instead of simply selling it and buying the rod? According to one industry executive, "Some big companies—General Electric, for example—often want to keep their own material so they can use it back where they need it." Tolling also offers market advantages, reports one refinery official: "When we buy scrap, it's against the spread on COMEX [the Commodity Exchange (New York City)] and we have to contend with variable market factors. When we toll scrap, we receive a tolling fee. It's the only money changing hands."
The Rise and Fall of No. 2 Tolls
Despite these apparent benefits, tolling isn't the best route for every situation, and it's not even an option for some materials. For example, industry sources generally agree that tolling of No. 2 copper scrap has practically vanished from the scene.
Although some refineries are said to be quietly tolling the scrap for special customers, "refiners just don't toll No. 2 anymore," notes one official. The reason, he says, is that refineries today are tolling less copper altogether, being much more inclined to buy their scrap. Other copper executives, however, contend that No. 1 copper scrap is still widely tolled and point to dwindling availability of No. 2 scrap as the explanation for its lack of popularity in tolling circles.
Still others theorize that the disappearance of refineries explains diminished No. 2 copper scrap tolling. For decades following World War II, they point out, there were numerous copper refineries in the United States , particularly the Northeast. But the industry shakeout of the 1960s and 1970s closed many doors, including the New Jerseyplants of Asarco's Federated Metals, Amax's Carteret Division, Phelps Dodge, Barth Smelting, and a number of other refiners who consumed large volumes of copper scrap.
And considering that tolling made up a substantial portion of many of these refineries' business, it seems natural that their departure would have an effect on copper tolling. Richard D. McKillop, now a buyer for Franklin Smelting & Refining Corp. (Philadelphia), but formerly with the Carteret plant of Amax Inc., recalls that Carteret used to toll about 40 percent of its incoming scrap. "Tolling offered a guaranteed feed for the refinery," he points out. "And it was also beneficial to the generator in guaranteeing a year's contract for his material."
McKillop offers an additional reason for what he calls today's "fragmented" tolling: technological changes in the processing of copper choppings. "In the past, because the material was burned, it was necessary to ship it to a refinery," he notes. "Today, however, choppings move to brass mills or foundries and not to refineries."
Aluminum Takes Its Toll
While the tolling of copper scrap may have diminished in recent years, it is apparent that the tolling—and swapping and exchanging—of aluminum scrap is booming. "Aluminum is a real volume industry," explains one executive, "and industry participants are taking advantage of every available mechanism in the trading of prime metal or scrap."
In fact, some of the large aluminum companies are reportedly availing themselves to the tolling process. In these instances, the aluminum company might enter a tolling arrangement with a mill that makes siding. The mill would melt the incoming material (prime or scrap) and return siding. In addition, aluminum companies are said to be shipping their scrap to mills, in return receiving sows. They can then swap those sows with a prime producer for stock.
Or, take the case of a merchant who is approached by a customer requiring aluminum coil. The merchant contacts a mill that sells coil, but the mill does not want to sell the product. Nevertheless, the mill representative is willing to make a deal. "Give us scrap," he says, "plus a differential and we will give you the coil." If the numbers work out, the merchant has his scrap tolled for coil and sells the coil to his customer.
Consumers that generate scrap, of course, are in the best position to enter into tolling arrangements with mills since they can offer scrap in large volumes. Do these generators approach the mills or do the mills come to the generators to initiate the toll? According to one tolling company executive, "It works both ways. Sometimes I go to them and sometimes they come to me."
As tolling of aluminum scrap has expanded, aluminum tolling specialists have emerged. The largest in the United States is IMCO Recycling Inc. (Irving, Texas), according to Senior Vice President Tom W. Rogers, who notes that "the tolling business has shown steady growth."
As evidence of this growth, Rogers points out, IMCO is building a $16-million mill in Urichsville , Ohio , which will stand next to a rolling mill owned by Barmet Aluminum Corp. ( Akron , Ohio ) and will have the exclusive right to recycle all of the Barmet facility's scrap under a 10-year tolling agreement. According to Norman Wells, Barmet's president, " IMCO will toll primarily our own scrap, but also some of our customers' scrap, and give us back hot metal. This hot metal will then be put back into our furnaces for casting."
What About Steel?
Although tolling is frequently associated with nonferrous metals, many ferrous scrap executives insist that there's a good deal of tolling—or, as some refer to it, conversion—within their industry, though the typical arrangement is a twist on nonferrous tolling.
Here's the way one industry expert explains it: "Most tolling for steel mills is accomplished on a mill's own property by a processor that brings in equipment and establishes a base there. The processor usually shears or bales the mill's home scrap, turning it into a form suitable for charging into furnaces. The mill, however, owns the scrap all along." This retention of ownership is why ferrous officials classify this process as tolling.
"Most of the integrated mills at one time or another have had such arrangements," says Joseph Curtin, senior vice president of domestic trading for Tube City Inc. (Glassport , Pa. ), which has entered into such arrangements. "It all depends upon the volume of scrap generated."
Of course, some steel tolling arrangements sound more like their nonferrous counterparts. In some instances, for example, secondary slabs have been "converted" into hot-rolled coil for a fee, said to be in the neighborhood of $60 per ton. Or, a company could purchase secondary slabs from a steel company and then have the slabs tolled by another steel mill. "Generally, the mills prefer to toll flat-rolled products," reports one industry source, indicating that he has shipped billets to a mill in return for reinforcing bars.
Pointing to the reported tolling of copper concentrates by Russian smelters (see "The Mine Toll," on page XXX), one ferrous scrap executive suggests that it might be possible to ship steel scrap to Russian steel mills, which would toll it for a fee and return the product to the shipper. "Obviously such a tolling arrangement would involve some financial risk and would have to be carefully examined," he admitted. And, so far, it's an untried arrangement.
Calculating the Comparison
For smelting and refining operations, when measuring the economics of tolling scrap against buying and selling metal, factors that might not otherwise come into play must be considered. The simplified sample cash-operating comparison in the table on page XXX, for instance, suggests that that gross margin favors the buy/sell arrangement in the sample situation. But once all costs associated with inventory maintenance (or lack thereof) and total cost per unit of output are factored in, the net profit margin may, in fact, favor the tolling arrangement.
Scrap owners must also weigh a series of influences in making tolling vs. buy/sell decisions. Industry sources point to six such factors:
- the processing costs;
- the freight charges;
- the recovery that could be obtained;
- what the raw material could have been sold for in the open market;
- the material's chemical analysis; and
- the time element. While No. 1 copper scrap is usually tolled on a 30-day basis, No. 2 usually goes on a 60-day basis and copper-bearing scrap on a l20-day basis. Aluminum scrap tolling, meanwhile, is typically a 30- to 45-day process.
In any case, as one aluminum executive puts it, "Tolling is not all milk and honey. But it certainly has many advantages and, if properly arranged, can be beneficial to both parties." Evidently, the boom in tolling in aluminum is proving that at least that industry thinks so, too.
The Mine Toll
Tolling is by no means just a scrap-related process. Mining companies—particularly those in the copper business—have been very much involved in tolling, shipping their concentrates to smelters and refiners in return for cathodes or wirebars. The mining company then markets the refined material.
There are indications, however, that the high volume of copper concentrates in the West coupled with relatively low smelting capacity has caused a smelter bottleneck, impeding the ability of mining companies to have their concentrates tolled. Nevertheless, reports indicate that the severe shortage of copper smelting capacity has been somewhat relieved by smelters in Russia and other republics of the Commonwealth of Independent States, which could free up space for tolling. Indeed, a story in an August issue of London 's Financial Times, quoting Commodities Research Unit (London) states: "For a fee, smelters in the Commonwealth of Independent States have been treating copper concentrates supplied by mines in the West." It goes on to report that "two trading houses—Marc Rich, based in Zug, Switzerland, and Euromin, which has offices in Stockholm and Moscow—have been having concentrates toll-smelted in the commonwealth, where the smelters not only have excess capacity but are also eager to earn foreign currency." —S.W.
Buy/Sell vs. Tolling
Sample Calculation for a Ton of Lead
Costs
Whole batteries
(at 7 cents per pound) $280 $0
Other cash operating costs 320 320
Total $600 $320
Revenue
Conversion charge $0 $330
Market price
(at 31 cents per pound) $620 0
Other alloy premiums/
discounts NANA
Total $620 $330
Gross margin $20 $10
Note: Figures are provided for illustrative purposes only.
Scrap tolling arrangements can be more complicated than their buy/sell cousins, but the payoffs can be worth it.