Thinning Down, Pricing Up

From the Hazardous Cargo Bulletin, January 2006

Steel drum producers have been having a worrying time of late. The rise of new competition from Asia is a constant issue along with raw material prices and quality of end result. However, the story is not as clear-cut as one would think

The US 55-gallon steel drum gained popularity throughout the world when standardised by the American Petroleum Institute (API) during World War II. This standard was adopted in most countries and so today the 216.5 litre steel barrel is the most widely used. Today around 140 million drums are produced each year worldwide. If laid end-to-end, they would allegedly span the equator three times.

Steel drums are as popular today as ever. Increasing volumes of exports and imports create more hazardous material shipments and in turn a larger demand for containers. As drums developed over time, they became lighter and thinner as the pressures of raw material costs grew and availability shrunk. Today a steel drum with rolling hoops weighs roughly 20 kg, a third of the weight of a similar drum a hundred years ago. Improved steel quality and advanced production technologies and techniques have supported this change but some in the industry would claim that the decreased weight, as a result of thinner steel, has gone too far.

Recent rapid rises in the price of cold rolled steel have put yet further pressure on manufacturers to reduce drum weight, and this trend is not limited to the established markets. Manufacturers in the 'new' markets in Asia — even in China — are facing the same pressures and are keen to meet customers' demands for cheaper drums in order to prevent them from switching to alternative packaging formats. All of this is bad news for reconditioners, who depend on a reliable supply of high-quality used drums for their livelihood.

Eastern promise

Steel drum manufacturers in Europe and North America might well be heartened to hear that their Asian competitors, who are seen as enjoying a significant labour cost advantage, are also suffering from these problems. But the drum manufacturing sector is highly localised — there is no profit in shipping empty drums over long distances — and news does not often get out. One Asian producer, however, is beginning to shout more loudly about its capabilities and its plans for the future.

Great Eastern Providence (GEP) has its headquarters in Singapore but has branched into China and is currently constructing a new steel drum plant in the Chemical Park in Shanghai. The new manufacturing plant will commence operation in the second quarter of 2006. Furthermore, GEP has appointed a European director, Marc Jaeger, who was formerly director of Mauser's steel drum division Gallay and arrives at GEP with a wealth of European communication know-how and advanced technological background.

"Asia will continue to have a strong impact on western industry," states Jaeger. "China is a major economic powerhouse in Asia and will continue its growth. We expect China to walk the path of highly developed and industrialised nations like Japan and Korea, except at a more compressed rate," he says. The abundance of both skilled and unskilled labour in China, the rich pool of talent in the major cities and the availability of land at affordable rates will continue to draw foreign investors into China to produce cheaper products as long as the present political stability prevails, Jaeger predicts. However, even with the optimism of new projects, GEP is still fighting the battle of steel drum quality with its global counterparts.

"For Singapore, high steel cost is still affecting the steel drum market, pushing users towards choosing cheaper packaging alternatives wherever possible," explains Jaeger. "Unless the economics work out to be in favour of steel drums, we do not anticipate any rise in drum sales despite the increase in oil and chemical activities in our local and south-east Asian markets," he says. However, another worrying trend is also emerging from the ashes of invention.

"Small drum manufacturers are emerging and attempting to gain market entry through dumping prices," Jaeger explains. "These small drum manufacturers attain cheap local steel as raw material for their drums and push their drums into the market disregarding the importance of drum quality, integrity and supply continuity," he says. Major drum producers like GEP are now trying hard to do create a balancing act, ensuring that quality, price and sustainability are not comprised. This means having to give up market share to certain small customers that are less quality-conscious or highly price-sensitive.

You are not alone

Other sources complain of the changing competitive environment in Asia. Mr T Imai, president of the Nippon Steel Drum Company, faces the daily effects of Chinese competition in Japan. "The development and trend of Chinese industry is a serious issue for us. Our Japanese customers export to China and are opening factories in China also," he explains. Steel prices are soaring in the East, and Imai complains that competition from alternative containers is leading to his customers requesting thinner steel drums.

Meanwhile, though the competition from China is escalating, Imai does not see a change in customer choice to other sources of industrial packaging. "The switch to IBCs due to the increase of steel drum prices is still limited so far. The price of IBCs is also getting high due to the significant price increase of oil," he says. "In the future, there may be a possibility of a switch to IBCs if customers" conditions change in terms of their needs to develop a more efficient distribution system."

However, it is not just the Chinese market that is developing, Nippon Steel Drum has a unique development all of its own. The company has developed chromate-free caps which attach to the steel drum and never release materials hazardous to the environment. This newly developed cap is anti-corrosive and contains no chromate. In short, these 'clean caps' are reported to be the first of their kind in the world. Nippon Steel Drum is now planning to supply 'clean drums' fitted with the caps on a trial basis to its customers so they can evaluate such properties themselves. In Japan, lead in the outer paint of drums has been removed by switching to lead-free alternatives. Also, lead in the zinc die-cast plug has been resolved by switching to a steel plug.

The Nippon Steel Drum Company reports a small decrease in sales revenue in 2005 compared to 2004. That year saw a significant increase in sales of drums specifically for the chemical export market. JFE Container Company, based in Itami, Japan, is also experiencing a lull in sales at present. Kazuo Nagai, director of JFE, explains the sales position at present: "We have been experiencing a dip situation for months compared with earlier months, although it is not severe. However, we have a feeling of rebound from November 2005 and expect a full recovery starting from the New Year," Nagai states.

Again this sentiment is echoed by another Asian company, Stanta Metal Drum, based in Malaysia. Steven Ng, general manager of the production plant, reports that the Malaysian market has experienced "stagnant growth in steel drum usage overall". However, whereas Ng believes that the price of cold roll steel coil is having a profound impact on customer choice and the use of steel drums, believing that end-users will choose a product substitution such as a bulk tank, Nagai thinks there may be a different form of difficulty ahead for the Asian market.

Reconditioned drums are currently running short in Japan, Nagai says. He trusts the "rock-solid" demand for steel drums yet he also witnesses customers choosing to buy IBCs instead of steel drums. Marc Jaeger concurs, "The switch to IBCs is definitely a consideration but it is not the only consideration that needs ironing out before one can make an effective switch," he says. "This means a lot of new investment in operational equipment which some customers find difficult to justify. Thus, they choose to tide over this high price period believing that the steel price will eventually return to its normal level," Jaeger states. However, whether users choose to switch to IBCs or stay with drums, the thought of using alternative industrial packaging has definitely been sown and may be explored further if a facility upgrade or new contract were to arise.

Too thin to re-use

These worrying trends in the Far East reflects those of the European market. But it is not the switch to IBCs nor fluctuating steel prices that is the most concerning factor in the market at present; rather, it is the lack of drums fit for reconditioning due to the use of thinner steel. Rudy Geens, group commercial director of Blagden Packaging in Belgium, outlines this problem. "This down-gauging process makes the drum weaker and weaker and has a detrimental effect on the steel drum reconditioners and environment," he states. "The thinner the steel the less reconditionable the drum becomes and this shortens the lifecycle of the steel drum so it will make it even more difficult for reconditioners, who are already struggling to day to find good, empty drums," he continues.

The crux of the matter is that drums are getting thinner in order to offset the impact of steel price rises which, in turn, stem from growing demand in Asia. Geens believes that western industry must not be short-sighted and continue to use yet thinner steel, whatever strain the European market is under. "Countries like Spain and the UK are affected heavily. Spain, which was a mid-range labour cost country, cannot compete any longer with the low-range labour cost Asian countries," he says. "On top of the migration of manufacturing industry out of the UK there is an extremely low demand at the moment due to very high utility costs as a result of the government's decision to deregulate the utility industry," he says.

However, Blagden admits that it is under pressure itself, with figures poor compared to those of previous years. There has been a significant decline in recent months on top of the already weak first half year of 2005. Compared to the same period in 2004, the drop in volume is eight to nine per cent. The company is bracing itself for a difficult start to 2006 also. However, this has not stopped Blagden in France and Spain acquiring more reconditioning companies to enlarge the group's geographical reach. In 2005 the company opened two production plants in Russia for the manufacture of large steel drums and plans to expand into intermediate steel drums this year.

The company recently launched the Blagden Return Service, known in France as Blagden Valorisation, which is a European collection network for used industrial packagings. These are then processed at Blagden's reconditioning sites in compliance with current environmental legislation. Blagden is also looking at product diversification, as Geens explains: "We have just installed a brand new, state-of-the-art production line for open-top and tight-head pails this year. Pails can now be 100 per cent leak-tested at full speed functioning at over 2,000 units an hour," he says.

Blagden has felt a very strong market need for reconditioned drums, as Geens explains. "A lot of users would have made the switch to reconditioned drums if they could! But the lack of drums to recondition is preventing this move on a large scale," he explains. "Nowadays reconditioned drums are not only cheaper, the quality of the reconditioned drums has improved a lot and the whole industry has got a much improved image."

Running on empties

The reconditioning industry is not only looking better by the day in Europe, Australia continues to fly the flag for recycling also. Don Riddle is general manager of Drum Reconditioners (NSW) and also vice-chairman of the Australasian Container Reconditioners Association (ACRA). He believes it is not only increasing prices that are changing customers' minds to reconditioned rather than new steel drums, but also the quality. "Quality, especially with respect to external decorations and finishes, has improved dramatically in recent years with the added benefits of saving resources, reduction of greenhouse gas emissions and various other environmental advantages," he says. Not only do steel drum manufacturers have to face the wave of increased raw material prices and offshore competition, the escalating social conscience of environmentally friendly production may also play a considerable part in the market for 2006.

"In respect of new drums, customers have a choice of thinner gauge drums which may have long-term performance issues and result in environmental liabilities," explains Riddle. "Customers buying reconditioned drums don't have too many issues other than adequate feedstock if light gauge drums cause a shortage of 'regular' gauge drums," he says. Customers have many choices in 2006; 'environmental liability' as Riddle calls it, may have an impact but it is not expected that big business would consider this factor in the same league as cost and quality issues.

However, in the US, environmental contamination caused by unclean scrap drums extends back to the generator, as Paul Rankin, president of the Reusable Industrial Packaging Association (RIPA), informs his members. "The demand for scrap steel is so high in the US that some unclean drums are going to scrap yards and, from there, to steel mills," he explains. RIPA believes steel drum reconditioners expanded their market share slightly during 2005, to approximately 53 per cent of the total drum market. The Association estimates that approximately 32 million reconditioned steel drums were sold in the US while some 28.5 million were freshly produced. It believes the increase was down to persistently high costs for raw steel sheet and thinks this trend will continue for the coming year.

RIPA members have expressed certain worries for 2006, in particular the availability of empty drums, the thinning of steel drums and the increased scrapping of usable drums by emptiers. "Emptied drum availability is important because reconditioners depend on such containers for their feedstock. For a variety of reasons, including increased export of products in new drums, increased scrapping of drums, seasonal fluctuations and fewer large-scale users of drums, adequate supplies of emptied drums are becoming more difficult to obtain," says Rankin.

Thin steel is having an affect in the US just as it is the rest of the world. The US and Canada have regulations that prohibit reconditioning of drums for use with hazardous materials that do not meet certain minimum thickness. "Thinner steel is forcing reconditioners to adjust production methods and, in some cases, remanufacture drums, to ensure availability for hazardous materials customers," says Rankin. For several years, worldwide demand for scrap steel has been high. So high, in fact, that the price of scrap steel has fluctuated between 150 and 300 per cent of its normal price range. As a result, scrap facilities have been reaching out to industrial accounts in a search for any form of steel available.

Evidently, there are considerable risks present in the US and global drum reconditioning market because of the thickness of steel drums. However these are not confined to reconditioning but also US manufacturing, Howard Skolnik, president of boutique steel drum manufacturer Skolnik Industries, is just one of those concerned. "With the thinning of metal in order to reduce costs, the drum is reaching minimum performance criteria and, therefore, cannot withstand many of the unexpected issues that cause in-field damage," he says. "If this trend continues, I believe the steel drum will not be the reliable package that earned it global fame. Drum usage grew because steel drums were durable under extreme transport conditions," he continues.

The future of the steel drum does not hang dramatically in the balance. However, the expectations of the industry are rather obscured by current economic events. The future of the steel drum is an interesting avenue; Skolnik offers some possible routes for it to take. "I think multinational companies will continue to dominate the market and campaign for thinner walled 55-gallon drums that are not suitable for reconditioning. Independent companies will thrive due to the limitations and non-responsive corporate culture exhibited by multinational competition," he says. "Independent companies will lead innovation to combat commodity stereotypes of steel drums. I think performance standards will be re-evaluated in favour of minimum specification standards," he concludes.

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