Although the year-over-year profit picture is skewed because of a large one-time gain that Schnitzer Steel (Nasdaq: SCHN) reported last year, business was still off in the first quarter in all segments and costs surged because new equipment was installed.
Volumes were particularly hurt in Schnitzer's primary recycling business as it installed mega-shredders in Boston and Oakland, California, while the costs associated with their installation rose significantly. Down the road, this new equipment should improve business for the scrap metal recycler, but for now the costs are a drag on performance.
Recycling was also off as prices for ferrous and non-ferrous metals continued to decline from the record levels reached in the fourth quarter. While they were up substantially from the year-ago period, it portends softness in metal prices going forward. Auto parts were also off as significantly higher costs for purchased vehicles led to a decline in demand and a 51% decline in operating income. Lastly, Schnitzer's steel manufacturing facilities experienced lower volumes than in the previous quarter and unexpectedly low production as well.
Schnitzer has said that the only way to make real money in the recycling business is to be the low-cost operator. While it's working toward that goal, fending off the likes of Metal Management (NYSE: MM) and Commercial Metals (NYSE: CMC), it has been faced with higher costs -- such as shipment timing problems and higher inventory costs from the Northeast facility -- that have cut into margins and delayed cost savings.
The outlook for the second quarter seems a little flat, and depending on weather conditions, could actually be worse. Metal prices will continue to be off their highs, which trickles down to the prices Schnitzer can command. If second-quarter weather turns bad, the auto parts business may suffer and steel manufacturing could experience typical seasonally low volumes. Scrap metal will still be feeling the pinch of the costs and start-up headaches associated with installing the new equipment, though volumes should go back to their usual levels now that the Oakland facility is operational.
The metal recycling business is cyclical and depends on the price of various metals. That these metals seem to be on the retreat now may mean that the cycle is on the wane, and there may be a time when an investor can get in on Schnitzer at a lower price.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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