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Canaccord Genuity research points toward shredding overcapacity in U.S.

Boston, Massachusetts — July 18, 2011 — A research note authored by Eric Prouty with the firm Canaccord Genuity poses the question of whether or not there is a shredding overcapacity in the United States.

In support of the possibility that auto shredding capacity may be exceeding supply, Prouty says that in a recent discussion with the steel minimill Steel Dynamics (SDI), the steel company pointed out that shredding capacity in the United States has increased by around 65 percent over the past nine years without a similar increase in scrap supply.

Adding to the trend, the research note points out that a significant number of auto shredders were installed during the end of the last decade when ferrous scrap prices were sharply climbing. After the sharp decline in price and demand in late 2008, price and supply have rebounded, although volumes are still far lower than they were five years ago.

The result, according to Prouty’s note, is that auto shredders are having to compete more aggressively to obtain the material to feed their machines. Prices for auto hulks and other types of raw material that are used to feed the machines have been bid up, narrowing profit margins.

The research note points out that shredding overcapacity is problematic in certain areas where there are an abundance of shredders.

“We’ve heard horror stories about shredders put in place over the last few years that have proved disastrous for their owners because of poor locations (e.g., too much existing competition and/or limited scrap flows) or a lack of experience/know-how in managing the shredder,” Prouty writes.

He adds, “The bottom line is that while shredding may look easy enough, it’s not easy to do profitably, according to our conversations with those in the industry.”

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