Friday, July 25, 2008

SWIM WITH THE FISHES

Swim with the Fishes?
By: Alan C. Iannacito

Think of a school of fish all rushing for the same bait. You understand how fast a single, voracious, cold blooded, torpedo like, vertebrate can target and devour its prey. Just imagine what a whole school of barracuda could do.

Now think of adjectives like “cold blooded” that can have double meanings. Cold blooded can define an animal with internal body temperatures that vary with the temperature of its surroundings. Or, cold blooded as in a total lack of kindness, pity or care for somebody’s suffering. Think about those two differences or similarities in relationship to industrial markets and unlimited money.

Does unlimited money mean private funds, governments; individuals? History teaches that money has always influenced or attempted to control markets. There are unregulated pools of capital whose managers can buy or sell any assets. Whatever drives industrial markets there is money available to invest in commodities like corn, soybeans, energy other raw materials, and interim products like steel and gold bars.

Raw materials are influenced by demand and by the cost of extraction. The cost of another commodity, oil to make fuel for example, helps drive the cost. Iron ore, bauxite, copper ore, nickel, gold ores and the like are processed into radiated gold seeds for the treatment of prostrate cancer, to aluminum packaging, ships, utensils, planes and seemingly infinite uses.

Where does all of this start? The earth, the oceans; the air we breathe. Increasingly, a lot of it comes from scrap metals and recycle too. We tear up the earth and the atmosphere when we extract metals and fuels. It’s like plastic surgery. In today’s hopefully regulated extraction parameters most of it looks good on the outside, all smooth and neat, but the cuts and scars are in the inside where no one notices. So recyclables are good.

What’s not so good is that scrap metals may come from perfectly usable things like the wiring just installed in your new house, the tin from your factory roof, the stainless steel vessels that you may have in your yard for future use. I mean, watch out there, nail down the silverware or you may find it has gone missing.

Years ago I was involved in the dismantling and reselling of vessels and used equipment from a Brooklyn brewery. The sales crew was advised to skedaddle out of the location before 5:00pm each day, because, you could actually hear things moving in the far reaches of the brewery as the scavengers gleaned the guts of the brewery pipe lines and electrical wiring. Was I going to be the person, flashlight in hand, to walk into the bowels of an unlighted nasty hole to inquire “who’s there please? And, will that be cash or credit card?” You get the picture.

So, in my profession as a machinery and equipment appraiser, what does this do to the value of equipment? Scrap value is good today, salvage materials are better, and late machinery still has a good market. That means that costs increase, and despite what the media reports, manufactured goods still have a market. This also means that industrial machinery appraisers are looking more closely at materials markets that are steady for certain things. Look closely into your salvage yard. Now is the time to clean and glean. Scrap dealers call it, “cleaning the corners.”

Of course this is all cyclical, but I believe that the cycles get more mileage as the population demands more, restrictions grow, shortages abound and there are those increasing mouths to feed. Like those voracious fish big money finds what’s hot and targets the bait. Sanford and Son is a nostalgic benchmark, but the big guys are global conglomerates with plenty of money funding their scrap heaps.

Now this rhetoric is only from my personal experience in buying and selling, and there’s that waggling phrase: “yah-but.”

Yah-but what about the recent “Open Letter to All Airline Customers,” from UAL and signed by twelve major air carriers telling us why crude oil and fuel costs have skyrocketed. Airlines lay the blame on commodities traders driving the price, buying, selling and never taking delivery of oil. Who knows without examining all of the facts? Reality says that the interest in a perceived scarcity of commodities and strategic metals influence speculators. Like “futures,” buy short sell long, buy, sell and add weight to the commodity like a growing ball of string.

This goes back to the example of some scrap metals. If it’s scarce it becomes valuable. A Bloomberg News article had an interview with some steel producers, Nucor and Arcelor-Mittal, that the “price of steel-making raw materials such as iron ore, coal and scrap metal will continue to rise for several years, keeping pressure on manufacturers.” It’s all relative: demand, money, and supply -- like bait fish.