Iron- and steel-scrap is tending to consolidate its niche on the market, effectively competing with traditional raw materials, such as metal ores. The reason lies primarily in recent technological changes in the steel industry, primarily a shift toward energy-saving and environment-friendly technologies. Currently, a total of 350 million tons of scrap iron and steel are processed into commercial metal per year worldwide, of which 60 million tons constitute the world-trade turnover.

Sales by Russian enterprises dealing in scrap metal exceeded 7.5 billion rubles in the last year. Due to low domestic prices for scrap metal, the scrap-processing sub-sector of the metals industry has become mostly an export-oriented enterprise during the last five years. This cannot but concern Russian steel producers, who are the country's major consumers of scrap iron and steel.

The scrap subsector's development was strongly affected by a number of factors relating to both the sources of ferrous scrap and its demand on the domestic and foreign markets. The main sources of scrap metal are the wastes generated by metal-processing factories, engineering enterprises and the end-users of metal articles, metalware, tools, machines, etc.

In 2001, the rate of scrap-metal recycling in Russia was approximately 37 percent. Progressive trends in engineering, specifically the replacement of steel by modern materials have reduced the share of this source in the overall supply of scrap iron and steel.

In 2001, the share of scrap supplied by engineering and construction equaled 13.4 percent.

One major source of scrap metal in industrially developed countries is so-called "amortization" scrap, i.e., scrap generated by replacement of outdated machines and equipment. The volume and share of this source depends on the country's overall metal stock, effective usage periods of machines and equipment and rate of investment. Although Russia has an immense potential resource of amortization scrap, its actual supply was relatively low in 1991 through 2001 due to poor investment in equipment replacement. In 2001, amortization scrap and other industrial sources of scrap metal constituted some 50 percent of the total supply of ferrous-metal scrap (see Fig. 1).

In the future, there are reasons to expect the share of amortization scrap to increase as the rate of equipment replacement increases.

In Russia, ferrous-metals scrap is mostly recycled into commercial steel and cast iron. Metal scrap-consumption dynamics are illustrated in Fig. 2.

After analysis of the structure of the steel-production process (Fig. 3) and scrap-consumption breakdown by stages it can be concluded that the whole system is quite far from optimally efficient and there are considerable reserves for replacing cast iron with scrap metal. The planned shift from open-hearth furnaces to electric-furnace steelmaking will be effective only if at least the same amount of scrap is recycled in electric furnaces.

The low proportion of electric-furnace steelmaking (14.7 percent) and the high consumption of cast iron in the process lead to scrap-metal overproduction, thus stimulating its export.

From 1998 to 2000, Russia exported approximately 8 million tons of ferrous-metals scrap per year – or 50 percent of what was put together by the Vtorchermet enterprises (enterprises specializing in ferrous-metals scrap collecting and purchasing). In 2001, Russian export of ferrous-metals scrap declined 8 percent, mainly due to an increase in export duties and the growth of transportation fares. In the future, domestic demand for ferrous-metals scrap is expected to grow, which will reduce its export volume.

Another problem hampering effective domestic use of ferrous metal scrap is rooted in prices. In industrially developed countries, the price of A3-grade ferrous-metals scrap is between 75 percent and 80 percent of the price of cast iron, while in Russia the figure is below 60 percent. In addition to that, export of ferrous-metals scrap represents a source of hard currency enterprises need to finance their modernization and upgrading.

In order to improve the situation, it is necessary to revise as quickly as possible the system of licensing in the sphere of scrap-metal purchasing, handling and resale, reduce import duties on related technological equipment, components and parts which are not produced domestically, exempt from export duties on those kinds of scrap metal that do not sell on the domestic market and reduce railroad transportation tariffs.

It is particularly important to find ways to stimulate suppliers of ferrous-metals scrap to steel producers, give them licenses to operate throughout all of the Russian Federation and make them entitled to simplified procedures for exporting superfluous product.

(Leonid Makarov, Deputy director, Institute of Economics at the Bardin Research Institute of the Ferrous-Metals Industry)

(Lyudmila Makarova, Head of Metals Market Analysis and Forecast Department, Institute of Economics at the Bardin Research Institute of the Ferrous-Metals Industry)