Our raw material and starting stock inventory primarily includes ferrous and non-ferrous scrap metal and alloys such as nickel, chrome, molybdenum, cobalt, vanadium and copper. Our semi-finished and finished steel products are work-in-process in various stages of production or are finished products waiting to be shipped to our customers.

Operating materials primarily include forge dies and production molds and rolls that are consumed over their useful lives. During the nine months ended September 30, 2020 and 2019, we amortized these operating materials in the amount of $1.4 million and $1.7 million, respectively. This expense is recorded as a component of cost of products sold on the consolidated statements of operations and included as a part of our total depreciation and amortization on the consolidated statements of cash flows.

Inventory is stated at the lower of cost or net realizable value with cost principally determined on a weighted average cost method. Such costs include the acquisition cost for raw materials and supplies, direct labor and applied manufacturing overhead. We assess market based upon actual and estimated transactions at or around the balance sheet date. Typically, we reserve for slow-moving inventory and inventory that is being evaluated under our quality control process. The reserves are based upon management’s expected method of disposition.

Due to lower activity levels at our production facilities caused by the COVID-19 pandemic, management revised its accounting estimates for the absorption of costs into inventory. As a result, $4.3 million of fixed overhead costs were not absorbed into inventory and $2.1 million of negative operating efficiency variances were incurred. The total impact of $6.4 million was charged directly to expense in the quarter.

	September 30,		December 31,
(in thousands)	2020		2019

Raw materials and starting stock	$	9,510	$	9,815
Semi-finished and finished steel products		103,606		127,713
Operating materials		12,210		13,090

Gross inventory		125,326		150,618
Inventory reserves		(4,379)		(3,216)

Total inventory, net	$	120,947	$	147,402