November/December 1995
The railroad scrap market is a significant idiosyncratic microcosm within the scrap recycling macrocosm. Here’s an introduction to the workings of this important and interesting niche.
By Kent Kiser
Kent Kiser is an associate editor of Scrap Processing and Recycling
When scrap recyclers talk about frogs, knuckles, and journals, chances are they’re not referring to amphibians, body parts, and diaries.
More likely, they’re discussing grades of railroad scrap—a unique recycling niche that establishes the importance of railroads to the scrap recycling business not only as a leading method for transporting material, but also as a big-time source of scrap. Underscoring the significance of this market, there are even a handful of scrap companies that base their operations primarily on railroad scrap. Further, some consumers—notably foundries and rerolling mills—use railroad scrap as a principal raw material.
The Railroad Scrap Roster
One look at railroads and it’s obvious why they were born to be scrap generators: Their equipment is subject to heavy use, suffers the inevitable wear-and-tear of transit and metal-on-metal friction, and is exposed to the elements. This makes maintenance and replacement of rolling stock and lines inevitable, and scrap material is thus generated from “changeouts” of old worn rail on operating lines, repair work by railroad maintenance shops and field operations, and, to a lesser extent, abandonment work, when railroads pull up unused, underused, and parallel routes.
While railroads do generate brass, copper, and stainless scrap, the vast majority of railroad scrap is ferrous. (It wasn't for nothing that Native Americans called the railroad the Iron Horse.) The ISRI Scrap Specifications Circular, in fact, contains no guidelines pertaining specifically to nonferrous railroad scrap, but it does list 39 grades of ferrous railroad scrap.
This steel smorgasbord includes axles, spikes, track bolts and nuts, rail anchors, lock washers, tie plates, angle and splice bars, bolsters, truck side frames, columns pipes, grate bars, stove parts, brake shoes, couplers, knuckles, frogs, switches, rail, springs, locomotive wheels, car sides and roofs, and underframes. "If we can make money on it, we'll sell it," says one railroad representative.
Of these many items, the biggest in terms of volume is rail, which is generally divided into two types rerolling rail and scrap rail, or crops. To qualify as rerolling material, a rail must have a head (the round top part) and flange (the flat bottom part) in good condition and measure at least 10 feet in length, or come in longer sections that can be broken into even-length segments of 10 to 13 feet.
Rail is graded as scrap, on the other hand, if it lacks the length and quality to be rerolled. Scrap rail is sold based on its length, with the main categories being 18 inches, 2 feet, 3 feet, 5 feet, and random lengths.
Other materials that account for the bulk of rail scrap are railcars (which can be reconditioned or cut into plate and structural material), wheels, axles, and what's known as other track material, or OTM—a category that encompasses spikes, plates, bolts, and various track parts.
These items can also carry the biggest scrap price tag. "Typically, the most valuable railroad scrap grades are those in a prepared state such as OTM and wheels, but rail is also valuable," says Joe Kovalchick, owner of Kovalchick Corp. (Indiana, Pa.), which recycles railroad scrap as well as other ferrous and nonferrous grades.
Quantity Considerations
So how much of that scrap is out there? No industry wide figures are known to exist, but it’s a good guess that the total U.S. tonnage available every year is significant.
According to the Association of American Railroads (Washington, D.C.), there are about 530 railroad companies operating in the United States, ranging from shortlines to commuter lines to the large, well-known Class I freight carriers—and, while that last group generates the largest volume of scrap material, they all get involved to some extent in selling rail scrap, whether it's only a few hundred tons annually or tens of thousands of tons a year. Last year, for instance, CSX Transportation ( Jacksonville , Fla. ) estimates that it sold about 70,000 tons (1,366 carloads) of scrap, while Consolidated Rail Corp. ( Philadelphia ) currently sells about 42,000 tons a year.
But even with known figures like those, the quantity of railroad scrap available in any given month or year depends on a host of variables.
One of these variables is the region of the country you're in. According to Adam Rosenthal, vice president of Staiman Brothers Inc. (Williamsport, Pa.), a ferrous and nonferrous processor that specializes in rerolling rail, the railroad scrap business is focused primarily in the Eastern half of the United States for the simple reason that "there are a lot more rail lines and track miles in that area than there are going from Chicago west." Further, he adds, "in the East there's more scrapping activity because you're dealing with older tracks."
Also, there's a regional factor at work on the consumption side, with most of the principal railroad scrap consumers—foundries and rerolling mills—being located in the Northeast, Southeast, and Midwest .
Another variable that affects the quantity of railroad scrap is, of course, price. "When prices are higher, more material comes out," Rosenthal states. It's not unusual, in fact, for railroads "to sell short or long depending on what the market is doing," says Kovalchick. Thus, when scrap prices are up, railroads might dig deeper in their operations to draw out more material in an effort to maximize the return on their scrap assets.
Weather can be yet another factor that influences railroad scrap supplies, with more material generally available in the warmer months than the colder ones, some recyclers report. “For us, the business slows down almost to a halt from late November through March,” says Rosenthal, explaining that "most railroads and contractors can't do work in the winter because rail ties and other track materials freeze to the ground."
Similarly, railroad work schedules—which are often seasonal—can also determine when and how much scrap a railroad generates. Ken Annable, manager of asset disposal, purchases, and materials for CP Rail System (Montreal), notes, for instance, that his company generates the most scrap primarily when its rail crews are busiest, which is "in late summer through the fall."
Railroad Scrap for Sale
Railroads aren't in the recycling business, so they have to take steps to sell the scrap they generate. As you would expect, the hundreds of U.S. railroads approach this task in many different ways.
Some sell all or some of their scrap on an annual contract basis. Some establish trade agreements whereby they turn in, say, scrap wheels for a credit on new wheels from a wheel manufacturer. Others offer their scrap on a monthly, bimonthly, or trimonthly bid basis, while still others sell material whenever it comes available, which could mean several times a month. "Depending on the time of year, we can have four to six tenders a month," says Annable. "Ten tenders in a month would be a lot. I try to group them together to cut down on paperwork."
When a railroad sends out a bid solicitation, or tender, for its scrap, it is, in most cases, preselling the material—that is, it doesn't have the scrap already in hand. Rather, the railroad's scrap sales manager makes a best-guess estimate of the type and quantity of scrap the railroad will generate in the coming weeks or months, based on the manager’s knowledge of the railroad’s projects, such as rail changeouts, and information gleaned from its repair/maintenance division. “Once a month I try to project what we’re going to generate,” says Len Whitehead, sales manager of investment recovery for Consolidated Rail. “This is kind of like hand grenades—you just have to be close.”
When railroads conduct scrap sales by bid, they send out tenders via fax or mail to companies on their bidders' list. These tenders usually outline the type of scrap available, the deadline for bids, and the bid conditions. Some railroads, for instance, require bidders to have a certified railroad scale "so they can weigh cars in heavy andweigh them out light," notes Don Hartley, manager of investment recovery for CSX Transportation.
Also, railroads prefer—and in some cases, require—bidders to be located on their lines so that the railroads can maintain greater control and traceability of their railcars and shipments.
In any case, the majority of railroad scrap is bid on and purchased without inspection. "Unless you're dealing with a large quantity, it's bid sight-unseen, but the delivered material must fall within certain guidelines," Kovalchick says.
That said, railroads will sometimes require bidders to view material in advance, such as when a section of track is scheduled to be dismantled. "I walk a lot of rail when we're bidding abandonment lines," says Rosenthal. "It's not unusual for me to walk 8 to 10 miles in a day looking at rails." Other times, bidders push for viewing material in advance to ensure it meets their quality specifications.
When it comes to the actual bidding, some railroads allow offers to be submitted by fax, while others prefer the greater confidentiality afforded by sealed mail bids. As with most bid sales, railroad scrap is sold to "whomever has the highest number," Rosenthal says.
The railroad has the option, however, not to sell its material if the bids don't meet its expectations. "I reserve the right to reject all bids if I so choose," Whitehead says, noting that he rejects bids about two or three times a year when the offers are what he calls "atrocious." Generally, however, he opts to sell to avoid having a car of scrap sitting around. "We take the position that we're a railroad and we shouldn't play the scrap market," Whitehead says. "I want to sell the scrap so it doesn't become a burden or bother to us. Still, my goal is to get the highest price."
After a bid is accepted and a sale is made, the railroad sets about filling the order. "If I put out a bid for 20 cars of OTM, 20 cars of shop scrap, and five cars of axles, we first get the winning bid, then we create a sale order to that company," Hartley explains. "When one of our shops loads a carload of that kind of material, it lets us know and we apply the load to that sales order. Our computer automatically waybills that car to the scrap dealer, and when that order is completely filled, I put out another bid."
Since railroads presell their scrap before it has actually been collected, most stipulate a 60-day delivery period to give themselves time to generate, load, and ship thescrap specified in the bid. “We're relatively sure what we're going to produce, but we still ask for 60 days to deliver it,” Whitehead says.
Primo Material, Primo Prices
When it comes to value, railroad scrap is right at the top of the ferrous scrap hierarchy, up there with such eminent grades as No. 1 bundles, No. 1 busheling, and cut plate and structural. "It's primo scrap," Whitehead asserts, noting that most railroad ferrous scrap is sought after because it has a known, consistent chemistry and is dense, or heavy, which reduces the volume of scrap necessary for a foundry or steel mill to complete a heat.
Consumer buying prices for railroad scrap are quoted in industry trade publications and are listed by region, with some of the major railroad scrap markets beingBirmingham , the Carolinas , Chicago , Cincinnati , Cleveland , Houston , Philadelphia , Pittsburgh , St. Louis , and Youngstown , Ohio .
Some railroads, such as CSX , use these published prices as a base value for their scrap and require bids to offer a premium over these prices. Consolidated Rail's Whitehead, on the other hand, asserts, "I don't put a lot of stock in published prices. Instead, I look at the bid prices I get for my other grades, which are, to me, a more honest reflection of the market.
" Scrap recyclers also generally dismiss the trade press prices—"there are a lot of inaccuracies from region to region," asserts Kovalchick—instead using a variety of market indicators to determine what prices to offer. Some, for instance, determine their bid prices by following the monthly automaker factory bundle and busheling tags. "Though those prices aren't directly related to the railroad scrap market, they're an indication of which way the scrap market's going to go," says Kovalchick, noting, "They show the demand for tonnage."
Another factor that weighs in to what recyclers are willing to bid for railroad scrap is transportation of the material. Of course, this is an issue that affects prices offered for every scrap commodity, but when you're talking about material generated by a transportation entity, it can have a particularly dramatic influence.
In fact, railroads customarily ship their scrap free to recyclers on their lines. What this means, Rosenthal points out, is that "you'll always be able to pay more for rail on your line than when you have to pay freight or switching charges and deduct that from your offer."
Kovalchick also notes that this means "processors on the line far away get the value of the free freight." Thus, he offers, there could be times that he might bid $140 per ton for scrap rail in nearby Philadelphia , while a processor in Chicago could bid $170 "because it's a higher market and they'll get the free freight."
Rolling With the Changes
When railroad representatives and recyclers look for trends in the railroad scrap market, one observation they make is that there's less rail scrap available now than before. Annable, for one, notes that 15 years ago he was selling 25,000 tons a year for CP Rail System, whereas today he's down to about 17,000 tons. Whitehead has seen a similar decrease at Consolidated Rail, noting that "at one time, I did 8,000 to 9,000 tons a month, but now I average around 3,500 tons." And other rail reps tell a similar story.
Why this decline? One reason, Rosenthal notes, is that "the majority of abandonment work by major railroads has already been done." Also, railroads have been consistently merging as well as "leaning down," Whitehead notes, explaining, "We're cutting down on yards and main tracks. We don't have big storage yards the way we did years ago, and we don't have as much rolling stock as we used to."
Another factor, Annable points out, is that today's new rail is made and installed better than old rail, which gives it longer life in the field and, thus, postpones its scrapping date.
Aside from supply issues, railroad reps note that, as part of their downsizing efforts, railroads are increasingly contracting out work that they previously did in-house. This means that, in the future, less railroad scrap could come from the railroads themselves and more could come from their contractors.
Some railroads, in fact, are reportedly forming scrap management contracts in which third-party firms manage their scrap arisings and maximize their return in a shared-revenue arrangement—a trend similar to what's been happening between automakers and recyclers in the automotive bundle market. "Scrap was a secondary item to railroads in the past," says Ronnie Hirsch, vice president of Azcon Corp. (Chicago), a recycler of all railroad materials as well as other ferrous and nonferrous scrap. "They just sold scrap piles. But they've been getting more sophisticated about upgrading the value of their scrap, working mostly in conjunction with other parties. We're seeing a whole lot of that."
What this trend means, Hirsch notes, is that "while we expect the tonnages of rail scrap to continue to be there, what might be different is the amount bid out to the public." For recyclers and other players in the railroad scrap niche, this could be an important change. "If you share in these changes, they'll be good," Hirsch observes, "but if you're the last one wagging the tail, they'll be bad."
As these developments indicate, the railroad scrap niche is sure to change in the future. But through the changes, it seems equally certain that the market will continue to occupy its idiosyncratic place in the scrap macrocosm. Like the railroads from which it comes, the railroad scrap market will keep on rolling.
The railroad scrap market is a significant idiosyncratic microcosm within the scrap recycling macrocosm. Here’s an introduction to the workings of this important and interesting niche.