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Canaccord Genuity released a note discussing the issue of shredding overcapacity within the domestic scrap industry.
In the report, the firm said that "we maintain that shredding overcapacity remains a concern in certain local/regional markets where there are simply too many shredders, but is not (yet) a problem for some operators given their particular geographic locations...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."
The firm has Schnitzer Steel Industries (NASDAQ:SCHN) as a "buy" and believes that the company operates in markets "that aren't oversupplied with competing schredders."
One way to gain exposure to the domestic scrap industry without betting directly on a single player is to search for an ETF that holds a basket of these companies. The SPDR S&P Metals and Mining ETF (AMEX:XME) has 2.62% of its holdings in Schnitzer, 2.6% in Commercial Metals (NYSE:CMC), and 2.59% in Nucor (NYSE:NUE), amongst many other industry names. Another ETF with many of these holdings in common is the First Trust Materials AlphaDEX Fund (AMEX:FXZ). FXZ is up 7.4% since the beginning of the year, while XME is up about 2.3% over the same period.
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