Scooby Guru
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Join Date: Mar 2001
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GM Has Discovered a Strategic Metal Mine
GM Has Discovered a Strategic Metal Mine
http://www.resourceinvestor.com/pebble.asp?relid=24563
Quote:
DETROIT (ResourceInvestor.com) -- In spite of the concern about General Motors [NYSE:GM] recently, caused by the very public breakdown in the Kirk Kerkorian-sponsored "alliance negotiations" with Renault-Nissan, and the potential for a brutal proxy battle over it down the road, I am beginning to think GM is undervalued. One of the things that the Wall Street analysts, the investment community and most small investors have not taken into account is that GM appears to be leading a "sea change" in strategic resource recovery and conservation that began near the end of 2004.
This program has been kept very quiet, quite uncharacteristic for the American OEM auto industry, which seems to issue press releases on every issue, big or small, in an attempt to cultivate favour with the media.
Resource Investor, however, knows this is about to change. Not because there will be some big announcement made by the GM Chairman, Rick Wagoner, but because some of the changes now in process have the potential to alter the very fabric of the American scrap industry and its market.
RI learned some details of GM?s new revenue generating program by interviewing individuals at GM, a number of scrap dealers and a steel mill in order to bring you the following first look.
In November, 2004, A polymath at GM was appointed to a job, which is in all American Fortune 500 corporations, looked upon as a dead end for a young person or a final resting place for a good soldier to safeguard him into retirement, scrap management. As one GM CEO after another has said of the job since the beginning of time. ?We make cars not scrap. It?s just a cost to be minimized however and whenever possible.?
This time however GM purchasing chose a Professional Fellow, an unclassified rating the corporation bestows upon exceptional people who don?t fit any one mold, to oversee global scrap management. The result has been to change dramatically the way in which GM handles scrap and to uncover, for the company, a fount of revenue that was in plain sight but overlooked even by most scrap dealers, the value of the alloying metals (everyone of them a strategic metal) content contained in industrial ferrous, i.e., majority iron or steel, metal scrap.
For now the program is focused on stamping, cutting, piercing, extrusion and forging dies, typically of many tons weight. These had been traditionally sold for less than the cost of transporting them away, but have now been dramatically re-priced upward by GM to reflect the market reality that their embedded alloy metal values have increased in price by factors between 5 and 10, that?s 500% to a 1000 percent since 2001.
Scrap dealers used to self congratulating gestures for being able to keep secrets among themselves and mostly afraid of the light of day shining on their transactions were sceptical and even now only a few have seen the light, but GM doesn?t care. If scrap dealers fail to meet the new much higher minimum bid prices set by GM then the material can be shipped directly to the end user steel mills and foundries by GM and physical swaps and/or deductions against new material prices can be taken by GM for its own account.
GM has discovered and is mining a source of strategic metals equal to the output of many new mines and smelters and it is located entirely in the U.S. even though some of the metals recovered are not normally found in the U.S. Mining this source requires neither the using of digging tools to pierce a pristine plot of soil nor any furnaces to belch additional sulphur dioxide into the air. GM is to be applauded for the development of the greenest ever strategic metal mine.
This has occurred with no additional costs to GM at all! Those of us who worry about political cowardice and environmental extremism destroying America?s economic independence must take our hats off both to the polymath and his management for a job well done.
Now for the details so you can see how to invest in this new kind of mining of America?s vast scrap mine, which I have written about here before.
With no further ado I want you all to look at a recent edition of a home drawn treasure map used by GM?s scrap team to measure die & tool steel alloy values. Note well that many such maps can be created for any mass producing industrial company. GM has told me that they are working on adding to this chart. It is an organic process.
To understand how the chart is used look at the first column. ?Grade? in this case means the standard reference, used by the ASTME, for example, term for the alloy being considered.
The next column is just a label that identifies the acceptable ranges of the percentages of the embedded alloy metals being considered (as called for in ASTME specifications) that still qualify the metal as being of the particular alloy type.
The next columns show the actual percentages that denote the highest and lowest value of the particular metal contained in the alloy and the current price of that percentage amount of metal per ton at the low and high values.
The 10th column shows the total value of all embedded alloy elements at the low and high ranges within the particular specification, and?.
The 11th column shows the uses to which the tools and dies from particular alloys are put, so that their utilization points can be identified as scrap collection points.
Few dies are made entirely from the special alloys listed in the table above. The special functions of the tools and dies are typically obtained from ?inserts? bolted to the tool or die face. These inserts make actual contact with the metal being worked and need to have the high temperature, pressure, fracture and corrosion resistant characteristics to do the particular job. The scrap industry typically has not removed the alloy inserts before ?breaking? the die into manageable pieces for furnace feed, but that is changing too. The relatively small amount of labour necessary to unbolt or cut off the inserts is trivial next to the value of the beneficiation of the scrap. Collected inserts sorted as to type can be a direct feed for specialty alloy makers such as Carpenter Steel, for example. Instead of paying as much as (currently) $56,000.00 a (short) ton for ferromolybdenum, for example, to make a Hastalloy, a mill can use scrap Hastalloy inserts collected as described here as a feed to provide all of the necessary alloy elements in the correct proportion. And significantly reduce the need for new ferrometal alloys.
Steel mills that make bar stock, for example, (so called bar mills) can utilize selected tool and die scraps as a replacement for some of the expensive virgin ferroalloys that they use now. The limiting factor for them is vanadium content.
Stainless steel makers can utilize contained nickel and chrome values in certain scraps for the same savings.
You might ask, ?Why hasn?t this been done before?? There are two answers, one economic and one psychological.
American steel mills and foundries are mature businesses run by MBAs, who, more and more have no specialized knowledge of the details of the processes for making steel or iron. They are loathe to change what works particularly in the light of current fierce competition. GM?s scrap manager told ResourceInvestor.com that he had to meet with many executives of steel mills and foundries before he got the first ones to agree to review their processes in the light of GM?s approach to, essentially, creating grades of scrap outside of the traditional grades with their idiosyncratic names memorialized in the industry?s newspaper of record, The American Metal Market.
Two companies have already implemented programs of using the GM identified scrap values to reduce costs. One is a major steel producer and the other a major foundry. They have been successful beyond their expectations in reducing their need for new ferroalloys, and this immediately went to their bottom lines.
Scrap dealers, which are used to paying low prices for tool and die scrap, because they say that their mixed metal aspect, makes them incur substantial costs for separating the contents for re-use, are naturally resistant to paying more for what is now realized to be their higher value, but, ?the times they are a changing.? One major privately held scrap dealer and processor in the Midwest is actively utilizing the new paradigm. I suspect that what I will call the ?GM approach? will be a topic of conversation at a conference being sponsored by the American Metal Market early next month. I also suspect that the rest of the other large privately held scrap companies will shortly thereafter claim that they are being outed and have been doing this all along. I doubt however that this is true.
Portable metal analyzers have undergone a silent revolution recently with perfect timing. It is now possible to buy an XRF, x-ray fluorescence analyzer, which safely shoots x-rays into the metal being tested and, from the returning signal determines and, has a readout display that tells you what alloying elements are present quantitatively. A very nice unit that is easy to use, as is attested to by many scrap dealers, is made by Niton, LLC.
Thermo Electron Corporation [NYSE:TMO], which has acquired Niton principally makes professional laboratory spectrographic equipment of very high calibre. The latest Niton branded portable models now even tell you what the ASTME alloy name and number is! This portable device costing around $30,000.00 replaces the large fixed installations with their skilled operators that as recently as 10 years ago would have cost a million dollars just for the equipment and this cost and the issue of manning with highly educated and skilled technicians kept many scrap yards from even looking at the equipment.. The versatility of the portable machines will undoubtedly trigger the great strategic metal scrap rush of 2007. There are untold tens of thousands of tons of abandoned dies and other sources of tool steel in the U.S., either because the cost of disposing of them was greater than their value under the old, now obsolescent, paradigm or, because they were abandoned in bankruptcy as worthless.
In any case the run up in commodity strategic metals prices has, in my opinion, established a much higher floor price for all of the metals listed in the table above. GM is the first car company that I know of to technologically audit its scrap operations and make a fundamental change, and then inform its scrap dealers that it will now operate under this new paradigm of contained value. This is a sea change. It will become a Tsunami and those who don?t react to this new reality of scrap metal valuation will be swept away.
The challenge for Ford [NYSE:F], DCX [NYSECX], Toyota [NYSE:TM], Renault-Nissan, Honda [NYSE:HMC], VW, Fiat [NYSE:FIA] and others, as well as US Steel, AK, SDI, Acelor, Severstal and Metals management, Commercial Metals, OmniSource, DJ Joseph and Hugo Neu is to accept GM?s new scrap paradigm or fight a delaying action. The change is inevitable.
One thing is certain maximizing embedded alloy value in scrap is an excellent way to maximize shareholder value. Perhaps more dead end assignments should be given to people who specialize in multi-disciplines like GM?s current scrap manager.
Next time you see a note in the American Metal Market that ferromolybdenum imports are down unexplainably keep in mind that another company on the list above has probably joined the program.
This is a great example of what was once called good-old-American-know-how. It means more business for scrap dealers, more revenues for car companies, lower costs for steel companies and a lowered dependence on imports of strategic metals from places like the People?s republic of China (molybdenum, tungsten) and the republic of South Africa (chrome, vanadium) and from friendly competitors who produce the nickel, cobalt and manganese we use.
Consider the difference between what GM has done and the approach taken in the very recent past by the Ford Motor Company under the tutelage of Jacques Nasser. Ford decided, as part of Nasser?s plan for vertical integration, to get into the scrap processing business by overpaying for a shredder operation that was later, when Ford realized that they had gone too far from their core competency, sold to a group including a former Ford insider for 40 cents on the dollar. The fiasco made Ford eardrums impervious to any discussion of scrap. I wouldn?t be surprised if Ford is getting much less for their alloying metals containing scrap than GM. It would be a good barometer of their latest turnaround plan to see if that is true, and if it is, then Ford is unlikely to recover anytime soon.
If you are an investor in OEM automotive, steel or publicly owned scrap processors, use the new GM paradigm as a measure of the awareness of those companies in saving and making money from what used to be called ?hidden value.? Make sure that the companies in which you invest don?t lose the value of the strategic metals in their scrap.
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