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Sector Snap: Overcapacity Faces Metal Shredders

Stocks in this article: CMC SCHN SMS

NEW YORK (AP) â¿¿ An analyst on Tuesday cautioned that shredding overcapacity could force scrap metal companies to pay more for materials and in turn cut into their profits.

U.S. shredding capacity increased significantly after scrap prices and supply jumped in 2007 and 2008, but the supply of metals has tapered off in recent years and the owners of those shredders are being forced to bid more aggressively for the materials in order to keep their machines running, Cannacord's Eric Prouty said.

"In this hyper-competitive environment, generating sufficient volumes has become the topmost concern for some operators, often superseding margins/profits as primary business decision drivers," Prouty wrote in a note to investors.

The analyst pointed to Schnitzer Steel Industries Inc., noting that while the company recently said it hasn't had any problems with overcapacity, privately held West Coast Recycling Group plans to build a shredder not far from Schnitzer's metals recycling facility in Sacramento.

West Coast Recycling appears to be encroaching on the Northern California territory of both Schnitzer and Sims Metal Management Ltd., Prouty said.

"It's too early to say what competitive impact West Coast Recycling might have on scrap availability in Northern California, but again, this issue of shredding overcapacity isn't likely to go away anytime soon and is an industry issue definitely worth watching," Prouty said.

Schnitzer shares fell 28 cents to close at $57.37, while Sims shares rose 3 cents to end at $19.08. Commercial Metals Co. lost 22 cents to close at $14.29.

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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