Fading like ghosts: Port of Brownsville firms reel after high steel prices vanish

Under a steely gray December sky men outfitted in leather chaps and face shields sliced into massive sections of a 16,000-ton liquid-bulk tanker called the USS Adonis, tearing the beast into 2 foot by 3 foot rectangular chunks.

Bronze sparks flew where liquid oxygen torches cut steel, blanketing the shipyard in the acrid odor of burnt metal.

The cutters tossed the rusted scrap into piles, which have grown to epic proportions in recent months as the market for scrap metal has all but disappeared amid a global economic storm.

In June, when the price of scrap steel was fetching more than $500 per metric ton, International Shipbreaking Limited, L.L.C. paid the U.S. Maritime Administration an extraordinary $1.1 million for the ship.

The vessel belonged to a group of aging Navy ships collectively known as the Ghost Fleet. Its sentimental value aside, the Adonis was worthless, but broken down it was worth millions of dollars.

"Every kind of mill was buying as fast as they could and at high prices," recalled Bob Berry, chief operating officer of International Shipbreaking.

The beginning of the end

The highflying days of summer would not last. By October the economy was in a tailspin. Manufacturers wound down production and steel mills' voracious appetite for steel came to an abrupt end.

The shock was felt throughout the supply chain. The heart of the American shipbreaking industry in Brownsville collapsed.

The financial crisis rooted in the U.S. ensnared economies across the globe, hitting manufacturing and construction especially hard.

Record high steel prices took a dramatic tumble, plummeting below $100 per ton. Facing an uncertain future mills stopped purchasing scrap.

Suddenly the shipbreaking outfits were sitting on inventory that had lost its value in a market that disappeared overnight. The developments leveled a crippling blow to the heart of the U.S. shipbreaking industry at the Port of Brownsville.

"We refer to it as the crash," Berry said of the economic reversal of fortunes. "This thing is unprecedented both in the rise and the crash."

Before the crash

Earlier this year the shipbreaking industry was enjoying unparalleled growth.

The orders poured in and shipbreakers worked at a dizzying clip to keep pace with demand.

The abundant scrap steel from aging Navy ships, known as ferrous metals, was helping fuel industry in Mexico. The metal is widely used in automobile manufacturing, appliances and to make rebar for construction projects.

At more than 150,000 tons of scrap in 2008, Brownsville's shipbreakers produced a mere fraction of the 80 million tons of scrap in the United States.

But the ship recycling operations are among the largest employers at the port with nearly 1,000 workers.

"There are currently seven ship recycling facilities in the United States qualified to perform work for the Maritime Administration," said Susan Clark, spokesperson for MARAD, "four of those are in Brownsville."

Clark went on to say that if troubled shipbreakers at the Port of Brownsville were unable to take on new projects it could force the agency to seek foreign facilities.

"It obviously would greatly restrict the choices the agency has," Clark said.

 Anatomy of an industry 

Ship disposal is a dirty and dangerous job, but necessary to ridding Navy ports of their aging ships. Demolition is particularly important because the ships contain a variety of environmental hazards.

As the government releases ships from its Ghost Fleet the companies in Brownsville, including International Shipbreaking, ESCO Marine Inc., Marine Metals Inc. and All Star Metals LLC, compete vigorously for the rotting vessels.

Since 2007, Marad has awarded 27 contracts to Brownsville's shipbreakers.

A single contract could bring in more than $1 million and was equivalent to several months of work. The companies supplemented their earnings by selling the scrap steel.

By midyear scrap had become so valuable companies were selling the scrap for more than they were receiving from the government.

To capitalize on the demand for recyclable material from industrial products Brownsville's shipbreakers expanded their operations, investing between $6 million to $14 million for car shredding equipment.

Hundreds of cars are broken into bits every day, though the return is not as abundant as ships, perhaps 70 percent of an automobile is recyclable compared to more than 90 percent of a ship.

The industry was no longer simply disposing of aging Navy ships.

The business was tapping into the larger and emerging recycling market.

In response to the changed and favorable market conditions, the bidding process for shipbreaking projects flipped. From now on companies would pay the government for the projects.

The move away from government fees was celebrated in Washington D.C. as a relief on taxpayers, but the change would also leave the industry vulnerable to market volatility.

If the scrap market ever slowed the government would return to a fee-for-service program, in which the government paid companies to dispose of its ships. But, nobody anticipated the sea change on the horizon.

A sudden turnaround

By October, economic conditions had reached a breaking point.

The companies that had invested heaviest were now holding on to a product that had lost over 80 percent of its value in a market that had evaporated.

Before October nearly 40 percent of scrap steel leaving the port was loaded on trains headed for steel mills in Mexico.

Mexican steel mills purchased American steel due in part to the favorable exchange rate, but as recession gripped the U.S. economy the Mexican peso began to devalue, making American products expensive.

"The last time I bought a 1,000 tons was six or seven months ago," said Pablo Moraya, of Transamerica E&I Trade Corp, a subsidiary of Ternium, one of Mexico's largest milling operations. "And the last time I bought scrap in the U.S. was maybe three months ago."

Moraya buys steel, including scrap, for Ternium's mills in Monterrey. But his clients have cut production due to a weakening economy.

Ternium dialed down its ovens to half capacity while its fully integrated oven, which is used for scrap, has been shut off for months.

In the short-term forecasters are expecting demand to remain weak. If his clients begin buying again, Moraya said, it's likely to be from domestic sources.

"We hope by the end of the year things will begin changing little by little," Moraya said. "We have hope, but not like before."

The crash in context

 When searching for context to describe the severity of today's economy businessmen in South Texas are quick to recall the 1994 Mexican peso crisis.

The sudden devaluation of the Mexican peso hit businesses and their Mexican clients hard. The crash of 2008 will replace the peso crisis as the base for all future comparisons.

What makes this crisis different, Moraya said, is that everybody is hurting this time around.

The market for scrap hasn't turned a corner yet, according to Bob Garino, director of commodities for the Washington D.C. based Institute of Scrap Recycling Industries.

Garino reiterated what others in the industry had been saying - the timing and severity of the drop is unprecedented.

"It fell off a cliff," Garino said of the market. "This literally was a free fall."

Domestic mills are running at 50 percent capacity while the flow of scrap is expected to be off by nearly 70 percent in the fourth quarter.

Most of the companies had already begun shortening the workweek, now there would be layoffs.

The downturn takes its toll 

Chris Coello was hired as a cutter at ESCO in December of 2006.

A few months ago he was regularly clocking 50 hours a week as new ships were towed into the yard. The company's payroll expanded to nearly 450 employees.

But with five ships and no buyers, ESCO was eventually forced to layoff 200 workers, according to Richard Jaross, chief operating officer for the company.

Employees were told their services wouldn't be required until the following week, but on payday a line of workers began to form outside the locked gate.

That's when Coello found out he was unemployed.

"I don't know what happened," he said. "They just gave us our checks and the address to the unemployment office."

The fired employees were also given a sheet of paper urging them to contact their congressmen to make them aware of what was happening in Brownsville's shipbreaking yards, Coello said.

ESCO was not alone. International Shipbreaking cut staff from its peak at 350 to 130 workers. And Transforma Marine, the smallest operation at the port, has temporarily closed after wrapping up its last project.

Despite the absence of buyers, companies are eager for the government to release more ships. A project would keep companies afloat while helping to offset losses.

"If there was ever a time for MARAD to award contracts now is the time," Jaross said recently.

What the future holds 

Peripheral businesses have taken a hit too.

A hundred meters down the road from the gates of the port, Blanco's bar is a popular after-work haunt for many port workers, including the shipbreakers.

Owned by a former longshoreman, Blanco's draws hundreds of workers on payday who stop by the bar to cash their checks and unwind after work.

Ramirez is now silent for much of the evening.

" The jukebox that played popular Norteño hits from Los Cardenales de Nuevo Leon and Agustin We used to get 300 people in here every Friday," said Eduardo Blanco, owner of the bar. "We're lucky if we get 100 now."

This isn't the first time the ship recycling business has been under fire. A series of articles in the Baltimore Sun in the late 1990s, chronicling dubious business practices, sent the industry reeling.

Companies were forced to bolster environmental oversight and adhere to stringent regulations.

Berry still winces when the subject is brought up, but if three decades in the industry have taught him anything it's that the largely misunderstood scrap business will bounce back.

Berry sat in a golf cart that cold windy day in early December, surveying the fields of scrap. He squinted while considering the tumultuous end of the year, his blue eyes disappear momentarily behind his white hair and beard.

"What's the market going to do?" he finally muttered. "I don't know. I'd be a rich man if I did."

Five average monthly scrap steel prices in 2008.

No. 1 Heavy Metal Steel

Jan.

$329.17 per gross ton

May

$519.17 per gross ton

July

$523.16 per gross ton

September

$297.50 per gross ton

November

$100.50 per gross ton