'97 Roundtable Reports—A Mixed Outlook

November/December 1997 

As some primary and secondary metals face deteriorating fundamentals, others are seeing their prospects brighten. This could make 1998 a mixed bag for metal markets, according to experts at ISRI’s commodity roundtables.

The state of world metal markets took center stage at ISRI’s commodity roundtables, held in September and October in Chicago, Washington, D.C., and Pittsburgh. Close to 700 metal executives attended these annual events to hear 25 experts offer their views on the markets for aluminum, copper, iron and steel, lead, zinc, nickel, stainless steel, and ferrochrome.

Notably, two base metals—copper and lead—were viewed as moving toward oversupply, while opinions differed with respect to the aluminum and nickel supply-demand balances. In the steel sector, growing capacity, record imports, and escalating inventories of finished metal all suggested weaker times ahead for steelmakers. Zinc, in contrast, had bright near-term prospects, with its market defined by low LME stocks and demand outstripping supply.

Price expectations for these metals ranged from outright bullish to convincingly bearish, reflecting what were seen as changing world supply-demand fundamentals. And, as usual, the outlook for several of these metals hinged on the economic health and purchasing decisions of overseas consumers, especially China.
Following are more detailed reports of each commodity’s prospects.

The Primary Aluminum Picture

Western World primary aluminum production is projected to reach 16.1 million mt in 1997—4.1 percent above 1996—with 1998 production expected to rise another 3.6 percent to 16.7 million mt, said Roger Scott-Taggart, director of industry analysis for Alcan Aluminium Ltd. (Montreal), at the aluminum roundtable.

The industry’s 1997 production represents a capacity utilization rate of almost 95 percent, leaving producers with around 913,000 mt of idle capacity as of July, Scott-Taggart noted. Western World aluminum production capacity is expected to increase 2.6 percent this year to 17 million mt and could grow another 3.1 percent in 1998 to reach 17.5 million mt, he reported.

Firoze Katrak, vice president of Charles River Associates (Boston), painted a darker picture of the industry’s capacity situation, asserting that already there’s about 2.5 million mt of idle or excess refined aluminum capacity worldwide. Plus, another 500,000 to 1 million mt of additional capacity is slated to come online from 1997 to 1999, Katrak said, suggesting that “the market for aluminum ingot will be in a slight oversupply over the next two or three years.”

Total Western World aluminum supply, which includes production and imports from Eastern Europe, is projected to reach 18.4 million mt this year, or 3.5 percent higher than 1996, and 18.9 million mt, or 2.8 percent higher, in 1998, Scott-Taggart said, predicting a declining rate of aluminum imports, particularly from C.I.S. countries.

As for demand, world aluminum shipments could rise 5.3 percent this year to 18.7 million mt and another 2.1 percent to 19.1 million mt in 1998, Scott-Taggart offered.

Katrak was less optimistic, forecasting that overall global consumption of aluminum will have a “reasonable growth rate of about 2 percent” in the next two years, slower than the metal’s historic 4-percent annual rate.

Regarding primary aluminum prices, Scott-Taggart quoted a Wall Street Journal average price of 86 cents a pound and a broad range of analysts’ prices of 76 to 95 cents a pound for the year. 

Katrak was more bearish, expecting the aluminum ingot price to dip to 60 to 70 cents a pound from 1997 to 2000.

As for aluminum scrap, Katrak said that in the next five years “the global supply of old aluminum scrap will grow rapidly, probably at a rate of as much as 5 to 10 percent a year.” Given the rapid increase in aluminum use in the past 20 years and the fact that the supply of obsolete aluminum scrap (excluding UBCs) lags aluminum consumption by 6 to 25 years, “the world is now entering a period when the supply of scrap will accelerate,” he said.

This ample supply and the potential to use scrap in not only cast aluminum products but also wrought goods “will encourage the primary aluminum companies to be more proactive in scrap purchase and pricing over the next five years,” Firoze maintained.

Notably, he added, this global increase in aluminum scrap supply could have the effect of holding down the net demand for primary aluminum to little more than 1 percent a year in the next three years.

A Secondary Aluminum Challenge

Primary aluminum producers should stick to the business of making aluminum—that is, producing primary aluminum and primary aluminum products—rather than remaking it by competing in the secondary smelting business, said Joseph Viland, president of Wabash Alloys (Wabash, Ind.). Purchasing scrap “to make products is not your business—it is ours, so leave it to us,” he asserted.

After issuing this challenge, Viland recounted how primary producers entered the secondary smelting side of the business. One turning point came when the LME established its primary aluminum contract, which created a transparent price that “could be used to make a comparison to the market price of scrap,” Viland said. Primary aluminum producers decided that when the scrap market value dipped below the LME primary price, they would buy scrap, melt it, and sell the ingot to the LME, but when the scrap price was higher, they would melt primary aluminum. “So furnaces and scrap handling equipment were installed, either in-house or via toll operators,” Viland said. This move put primaries in direct competition with secondaries for scrap supplies, particularly high-grade material for which primaries can often afford to pay more than smelters.

In the future, supplies of high-grade aluminum scrap will come under greater pressure as the automotive industry produces more sand and semi-permanent mold castings, which have lower iron and zinc specifications than die castings. “As our demand for higher grades of scrap increases,” Viland said, “I believe it should be the primary producer or primary alloyer who should use P1020 [primary aluminum] rather than the secondary industry.”

In the end, he called on primary producers to reconsider whether “the melting of scrap is the optimum way for them to produce wrought product alloys rather than using the primary metal they produce.” (For more on the secondary aluminum industry, see “The Fate of Secondary Aluminum Smelting,” beginning on page 49.)

Focusing on Quality

Quality is the keyword these days in all facets of the aluminum industry—from scrap to finished product, said Robert McHale, director of metal purchases (East) for Alumax Mill Products (Cressona, Pa.). Specifications have generally tightened, he said, and Alumax’s customers are demanding the utmost in the quality of their shipments, in turn prompting Alumax to raise the quality standards for its suppliers.

Noting that “Alumax sheet products are manufactured to less than half the Aluminum Association commercial tolerance for flatness and gauge,” McHale stressed that the company expects its suppliers, including scrap processors, to adhere to the same high quality standards.

To ensure the quality of scrap shipments, processors should read their industry’s and consumers’ specifications, communicate with their consumers, make sure they have a spectrometer, and educate their employees about quality issues, McHale asserted.

The Future of Aluminum Minimills

In a review of the aluminum minimill industry, Robert Unger, a principal of Planned Technology Associates Inc. (Ridgewood, N.J.), asked, “When will continuous casting of aluminum be used to produce can sheet?” Answering his own question, he said, “I don’t see can bodystock being produced on narrow-width continuous casters—defined as 30 inches or less—of any design in the near future.”

The main reason is that “the can market is already well-served by its main aluminum suppliers,” he said. “Just consider how many multipurpose DC mills in the United States have essentially dropped out of the can bodystock market in the past few years.”

The growth of can sheet applications in North America has peaked compared with the 1970s and 1980s due to the maturity of the market and the inroads of plastic containers in the beverage market, Unger observed.

In the automotive niche, however, “a scrap-fed continuous caster minimill appears to be the low-cost route to auto bodystock,” he said, noting that 6xxx alloys are currently used for a number of sheet applications. 

For aluminum sheetmakers to overcome their current cost disadvantage of producing $1.50-a-pound sheet, “a major decrease in processing costs is required,” Unger stated. Estimates put the price of 6xxx aluminum coil at $1.10 a pound based on metal costs at the current market.

Copper Variables and the China Factor

The most important factor affecting the copper market in the near term is “the anticipated growth in world copper supply,” said Kevin Weppler, manager-secondary markets for Noranda Metallurgy (Toronto), at the copper roundtable. New copper supplies will come from both the concentrate side—as a result of new copper mines and expansions—and additions from solvent extraction/electrowinning, a low-cost refining process that bypasses traditional smelting and refining of ores and concentrates, he explained.

Although solvent extraction is expected to grow significantly, numerous other smelting and refining capacity additions are also expected to add to the overall supply stream, Weppler pointed out. All told, with world copper demand estimated to grow at “near 3 percent” next year, there are “strong suspicions that the growth in supply will exceed projections for growth in demand,” he said.

While the growing copper supply is worrisome, the growing weakness in copper demand around the globe is “the more important variable” in determining copper price movement, said William O’Neill, first vice president of Merrill Lynch & Co. (New York City). This demand weakness currently manifests itself in rising inventories and slowing industrial output in both the West and Asia. Though current business output appears strong, much of this new production isn’t being consumed but is instead going into inventories, thus causing downward price pressure on most copper-related goods, O’Neill said.

As further evidence of diminishing demand, U.S. GDP growth is expected to slow to 2.5 percent in 1998, down from the 3.4-percent growth rate forecast for this year, O’Neill noted. Internationally, Japan’s economy is expected to remain weak, while ongoing currency problems in the Far East will continue to hamper growth there, he stated.

China, as an “unpredictable” buyer of concentrate, cathode, and scrap, will ultimately direct the world copper market—and hence prices—in the months ahead, Weppler said. O’Neill, however, asserted that China’s growth rate in the second half of this year won’t keep pace with its first-half expansion, which he placed at a 9.5-percent annual rate. “Bulging inventories” will limit its economic growth and thus what China will consume for the balance of the year, O’Neill said, noting that “the myth of infinite growth in China” is being dispelled.

As for copper’s price prospects, Weppler maintained that the market’s movement toward oversupply hints at lower copper prices in the long term, with Noranda expecting it to trade in a range of 90 cents to $1 a pound next year.

Merrill Lynch, O’Neill said, sees the red metal trading “sideways with a weak tone overall” and forecasts lower copper prices, with a major cycle low next year “or as late as 1999.” In his view, copper will hover in the low 90s-cent-a-pound range into 1998, with prices “briefly” dipping below the 90-cent mark in the first half of 1998. This scenario isn’t “gloom and doom” thanks to relatively positive U.S. and European copper demand, O’Neill said, though he reiterated that Asia in general—and China in particular—won’t be the robust economic engines they used to be.

Copper’s European Picture

Despite weakness in construction and “poor domestic consumer spending,” German copper consumption posted a 4-percent year-on-year increase through June, with overall demand in 1997 set to exceed last year’s 1.055 million mt, noted Gerd Hoffmann, commercial director of Huttenwerke Kayser A.G. (Lunen, Germany). Paced by the electrical and telecommunications sectors, other major European countries are also expected to reflect consumption increases this year and next, he reported.

To meet the current demand for copper, the supply situation for cathode in Europe remains relatively firm and inventories are low, in part because the United States did not export cathode to Europe this year and South American producers were focusing their exports to the Far East, Hoffmann explained. More recently, however, material has been redirected to Europe, while at the same time more Russian cathodes have arrived in Rotterdam, he said.

Scrap supply is also a concern to European consumers, especially the competition for scrap from consumers in Korea and China, Hoffmann noted. According to European copper scrap consumers, “this competition is based on unfair duty and tariff protections that generate higher domestic copper prices in Far Eastern countries,” he said. “This markup in their local copper prices enables Asian consumers to overpay their imports of raw materials, be it concentrate, blister, or scrap.”

Fortunately, he said, two factors have lessened this threat: increased Eastern European supplies, especially scrap from Russia—with overal C.I.S. scrap exports expected to exceed 400,000 mt this year—and a slowdown in Chinese scrap buying.

While most Western European refiners are well-supplied through 1997, concerns remain about Russian scrap flows to Europe in 1998 and beyond, according to Hoffmann.

Copper Scrap in Perspective

Addressing world copper scrap markets and trends, Janice Jolly, a copper market analyst based in Dayton, Md., illustrated that the accumulation of copper in use, in place, or buried in the Western World has grown to more than 200 million mt since 1940. The United States alone, based on cumulative consumption, has an estimated resource of 77.7 million mt, she said. Although this supply is large and still growing, Jolly stated that most of this material will be unattainable as recoverable scrap without adequate prices and support for new recovery practices.

As for world copper recycling rates, copper recovered from all forms of scrap in 1996 made up about 35 percent of total copper consumed, down slightly from 37 percent in 1995, Jolly said. Since 1965, this percent has ranged from 30 to 38 percent, with the lower rates coinciding with periods of low copper prices and surplus copper supplies (1975 to 1978), and the higher rates occurring in tight supply years (1965 to 1970) and again in the “higher price years of the 1990s,” she noted.

According to Jolly’s research, the Middle East and Asia have shown the highest growth trend in copper scrap consumed since 1980, while Western Europe has continued to consume the most scrap of all regions. In contrast, the growth in North American scrap usage has “languished,” she said, at about 1.5 million mt annually.

Notably, direct-melt or customer-returned “new” scrap remains the largest category of scrap currently recycled, comprising more than 60 percent of all scrap used and outpacing obsolete or “old” scrap recovery, Jolly said, adding that this trend will likely continue.

Looking ahead, as the supply of copper from primary smelting and refining increases in the next several years, the ability to obtain copper units from obsolete scrap will become more difficult, Jolly said. Lower copper prices, she explained, will ultimately result in lower overall recovery rates since the greatest variability in scrap recovery and consumption occurs within the obsolete scrap sector.

The LME After Sumitomo

In the wake of the Sumitomo copper trading debacle, the London Metal Exchange (LME) asked the Securities and Investment Board (SIB) to review its market rules, regulations, and procedures, said Ken Davies, an LME board member.

The SIB released a formal report at the end of 1996 in which some 33 “implementations” or recommendations were addressed, many of which were viewed as “minor” and thus immediately acted on, Davies noted.

For one, the LME has restructured its board to allow for two additional invitees, giving it a total of two from industry and two from outside interests. A suggestion that the board be reduced in size and that the ring members’ majority be diminished, however, was vetoed by the ring members, Davies said.

The SIB report also covered large-position reporting, price transparency, and market manipulation, Davies said, noting that manipulation is “easily said, but continues to be a word difficult to define.” In a free market environment, he explained, squeezes aren’t easy to control, especially when market supplies are in deficit, as seen in copper in the past few years. For the LME board to intervene, it has to balance “what is genuine and that which is perceived to be manipulation,” he said.

Davies contended that introducing restricted backwardation limits can, in fact, be detrimental when markets are genuinely in short supply, as fresh supplies of metal may not necessarily follow, thus prolonging the squeeze. A real or imagined squeeze becomes a question, of understanding the customer’s intent, he said. But when LME stocks are substantial, he conceded that “there can be no justification for unwarranted squeezes.”

In sum, Davies asserted, the LME board is determined and committed to deter those who act outside the interest of the market and its major functions.

A Domestic Steel Paradox

The U.S. steel industry is currently experiencing a paradoxical good news-bad news scenario, said Jordan Estra, managing director of BT Alex. Brown Inc. (New York City), at the ferrous roundtable. On the positive side, steel consumption is at a 25-year high. Paraphrasing the popular beer commercial slogan, he said, “it ain’t gonna get any better than this in terms of steel demand.”

On the negative side, however, “we’re seeing a dramatic increase in steel production capacity, and that capacity is just now beginning to come online and is still not fully utilized, so the worst is yet to come, in my view,” Estra said.

Record imports of steel have also been a “huge” problem, with year-to-date 1997 imports running 30 percent ahead of comparable 1996 figures, he stated. Foreign steel has flowed into the U.S. for several reasons, including the strong U.S. steel demand and high prices—more than $100 higher on some grades than in Europe, Estra reported.

Also, steel production is rising around the world, especially in Europe, which means that foreign steelmakers have had surplus steel to sell abroad. In the first half of 1997, for instance, European steel consumption was up 3.8 percent but production expanded 6.3 percent. Looked at another way, Europe has the capacity to produce 175 million tons of steel but consume only 150 million tons, which leaves 25 million tons to export, Estra said, noting that traditionally half of Europe’s surplus steel is sold into the U.S. market. “This is a serious issue we have to look at,” he said.

The strong U.S. dollar has also been encouraging imports of steel. “A strong dollar is death to international businesses based in the United States,” Estra asserted. Given that the dollar doesn’t appear to be weakening and that many Asian economies are in turmoil, with letters of credit hard to come by, high imports could continue to plague the U.S. steel market.

Beyond imports, another warning sign in the market is the rise in inventories of domestically produced steel held by service centers, traders, and merchants. Though these stocks are “not at terribly worrisome levels, the pattern is worrisome,” Estra said.

As for how these factors will affect steel prices next year, that will largely be seen when U.S. steelmakers negotiate their annual price contracts with the automotive companies in the fourth quarter. “Don’t expect automakers to be in a ‘generous mood,’” he warned, noting that flat prices may be optimistic.

Turning to ferrous scrap, Estra noted that rising minimill production has been creating steadier demand for scrap and pushing scrap prices higher. In the past 30 years, he indicated, the scrap price trend has been steadily upward, while finished steel prices have trended lower. And if minimill expansions continue—some 2 million tons a year in the United States and 77 million tons planned worldwide in coming years—both scrap demand and prices will continue to trend upward.

Yet “it’s not all a bed of roses” for ferrous scrap in that it faces competition from DRI and other alternative metallics. World production of DRI has increased in a parabolic curve since 1970, reaching about 34 million tons in 1996, with the potential to reach 44 million tons by 2000, Estra noted. Though DRI has its own limitations—namely, taking twice as long to melt than ferrous scrap and requiring huge amounts of reasonably priced natural gas—new technologies such as the coal-based Fastmet process could free DRI from its dependence on natural gas and make it more attractive.

Ferrous scrap has also been facing competition from pig iron, which has been a “cash crop” for C.I.S. countries such as Russia and Ukraine, as well as China, Estra said. According to his estimates, about 14 million tons of pig iron entered world trade last year. In his view, however, pig iron is an “intermediary product” and “there’s no rational reason why it ought to be involved in world markets.”

The gist of all these factors, Estra summed up, is that “we’ll see steel prices weak but scrap prices strong.” He added, “it could stay that way for quite some time to come.”

A Future Rife With Challenges

In the future, ferrous scrap recyclers will face challenges such as having to supply “quite large” tonnages of material, meet ever-increasing quality requirements, and provide top-flight service, including just-in-time delivery—“all at prices that allow electric-arc steelmakers to remain competitive with traditional integrated steelmakers,” said Stephen Wulff, vice president of planning for the ferrous division of David J. Joseph Co. (Cincinnati).

On the plus side, U.S. ferrous scrap demand is projected to grow from 58.2 million tons in 1996 to 68.2 million tons by 2000, an increase of 10 million tons or 17 percent, he noted. This demand is based on expansion in electric-arc furnace capacity. In the United States alone, for instance, an estimated 12.35 million tons of additional capacity was slated to come online between the third quarter of 1996 and the fourth quarter of 1997.

Worldwide, planned new capacity is nearly double the increase in production required to support most consumption growth forecasts, Wulff observed. This indicates, unfortunately, that “overcapacity is an epidemic that the steel industry worldwide has been unable to stem,” he said.

This overcapacity will put downward pressure on new steel prices, yet keep upward pressure on both scrap supplies and prices, with the result being that mills will face increasing margin pressure. This could create a problem for ferrous recyclers, Wulff said. “Mills that can’t expand margins by raising selling prices will seek to lower costs and share some of that misery with their suppliers,” he noted.

This year, the steel market has posted record electric-arc furnace production and record steel demand, yet lower average scrap prices. Why? Because the market is well-supplied with domestic scrap and scrap alternatives such as imported low-residual scrap and pig iron, reoriented export scrap, and DRI—all of which have been “limiting scrap prices on the upside,” Wulff observed. In addition, mills have increased their inventories in terms of both tonnage and number of days, which has served to moderate scrap prices, he said.

On the plus side, the long-term expanded availability of scrap “substitutes” will bring more stability to scrap markets by establishing a ceiling for scrap prices, as well as setting a floor below which processors may refuse to sell, he said. Moreover, the use of scrap in more products and the counter-cyclicality of those markets will tend to level scrap demand and, hence, prices. Even so, Wulff noted, “there will undoubtedly continue to be short-term fluctuation of scrap prices, sometimes extreme.”

Notably, expansions in the scrap supplement market are expected to add 10 million to 15 million tons of capacity to a U.S. market of only 8 million to 10 million tons of new low-residual demand. “When we reach that point, DRI ceases to be a niche product and will begin to compete with more of the commodity scrap grades based on cost and value-in-use in the furnace,” Wulff stated.

Interestingly, if imports of scrap supplements grow as much as projected, the U.S. “could become a net importer of metallics, while still exporting millions of tons of scrap each year,” Wulff said. Pressures to lower costs through the expanded use of lower-priced raw material, however, will prompt domestic mills to consume more obsolete scrap that was previously earmarked for the export market.

But moving scrap is becoming more and more difficult in the United States. In the ocean-shipping industry, for example, there are fewer than 10 bluewater vessels available to ship scrap between U.S. ports due to restrictive legislation in the Jones Act. The rail industry, meanwhile, is undergoing radical consolidation, creating a shrinking number of carriers, service glitches, and the potential for higher rates. And in the trucking niche, “increasing regulatory restrictions and the need to raise the pay scales of commercial drivers will push truck rates higher,” Wulff maintained.

Aside from transportation challenges, ferrous processors also face ongoing difficulties keeping up with the “seemingly endless stream of regulations” and the increasing number of consumers that are vertically integrating into the scrap business, Wulff said.

Touching on the issue of consolidation, Wulff noted that consolidation is not new in the scrap industry, though the pace has accelerated. The main reason is that “outside investors perceive scrap as an industry in which earnings are bound to expand. After all, if you produce a material that’s in short supply, isn’t that a seller’s paradise?” he asked.

While scrap demand is expected to grow, the extent of growth is uncertain, Wulff noted. Also, rising scrap sale prices don’t automatically translate into expanded margins for processors. Given the industry’s fragmented nature and low entry barriers, “it’s difficult to identify regions where one can hope to achieve market dominance necessary to expand margins significantly and permanently, either through lower raw material prices or higher sales levels,” he said.

In sum, the big question is whether profits earned by consolidated companies will be able to make up for the “huge” prices being paid for the operations and generate enough earnings to deliver acceptable returns to investors. “The bets being made are large and success is not assured for all who are in the race,” Wulff stated.

The Northeast Scrap Scenario

In the Northeast, homes are readily available for most grades of steel scrap, said Peter Avagliano, executive vice president of Schiavone-Bonomo Corp. (Jersey City, N.J.). “With the mill capacity utilization rate over 90 percent and electric furnaces producing 42 to 44 percent of total steel production, mills have a continuing need for our scrap production,” he noted. And in coming years, scrap-fed electric-arc furnaces are expected to gain a larger share of total steel production, which bodes well for future ferrous scrap demand. At the same time, however, production of scrap “substitutes” such as DRI and iron carbide is increasing and pig iron “at the right price” is attractive to scrap consumers, he observed.

While Northeast ferrous processors continue to supply their traditional mill consumers in eastern Pennsylvania, Delaware, and Maryland, they are also shipping to newer mills in northern New Jersey as well as New Jersey pipe foundries, Avagliano said. Given the current high melting schedules, these Northeast consumers use a combined total of 4.25 million to 4.5 million tons a year, he offered.

Yet Northeast scrap can and does flow to farther points via rail and barge, including Cleveland, Canton, the Pittsburgh district, West Virginia, and beyond. Schiavone Bonomo, for instance, recently shipped 33,000 tons of ferrous scrap by oceangoing barge to Louisiana, where it was offloaded onto river barge for delivery to Arkansas mills. Given this geographic reach, Northeast processors often look at prices being paid by mills as far away as Illinois and Kentucky to the west and the Carolinas to the south.

As for the export market, “Northeast ports are quiet and should stay that way for now,” Avagliano said. The main problem is that the strong dollar has made U.S. scrap less competitive against scrap from the United Kingdom and Northern Europe.

Another detracting factor has been scrap from the Black Sea region, particularly Ukraine, which has been shipping 100,000 to more than 200,000 tons a month of ferrous scrap to Turkey, Greece, Italy, and Spain. Though these Black Sea scrap shipments are reportedly erratic and less than prompt, the material is of excellent quality and is less expensive than U.S. and European scrap, Avagliano noted.

The Asian market, meanwhile, is “not exactly bright” given the currency problems in Thailand and Malaysia, as well as the continuing economic doldrums in Japan, Korea, and Taiwan, he said. Japan’s hardships, in fact, have prompted it to export more and more of its scrap to Korea and Taiwan, thus reducing demand for U.S. scrap in those countries, Avagliano remarked.

Taking the Measure of Mexico

While Mexican steelmakers used to buy significant quantities of ferrous scrap and then withdraw for months at a time, the country’s emerging economy will lead them to exhibit much more consistent buying in the future, said Larry Stein, district manager of Luria Brothers (Houston). “We are now experiencing a different Mexico than what we in the scrap industry have experienced in the past. Mexico is here for the long haul,” he stated.

To illustrate Mexico’s economic growth, Stein noted that Mexican steel production—of which 80 percent is electric-arc-furnace-based—has risen from about 8 million tons in 1990 to 13 million tons in 1996, with another 2 million tons of capacity expected by 2000, Stein reported.

On the raw material side, Mexico generates only 4 million tons of ferrous scrap annually, but it is rich in natural resources such as iron ore and natural gas, which makes DRI production an attractive alternative to ferrous scrap, he said.

By 2000, Mexico will produce about 5 million tons of DRI, 4 million tons of pig iron, and just over 4 million tons of ferrous scrap, leaving a deficit of approximately 3 million tons of ferrous scrap or scrap alternatives, according to Stein.

Traditionally, Mexico has sourced much of its ferrous scrap from the United States through Texas, though supplies also come via vessel from Florida and New England, as well as by rail from as far as California, Stein said.

When trading with Mexico, transportation problems abound, Stein said. For one, Mexican ports generally aren’t equipped to unload ferrous scrap, which requires shippers to use self-unloading vessels, adding cost to the material. And even when material can be unloaded from ships, there’s also a dearth of rail gondolas for timely unloading and delivery to inland Mexican mills, he noted.

U.S. shippers to Mexico have their own rail problems due to the recent mergers of U.S. rail carriers in the West, which have “made what used to be an aggravating situation into something intolerable,” Stein said. In short, he commented, “it is apparent the railroads do not wish to move their equipment into Mexico and are forcing Southwest shippers to choose a domestic home for their scrap.” This has created a market situation in which a true supply-and-demand picture does not exist. Mexican mills “are forced to place orders for quantities of scrap significantly larger than they would normally purchase in hopes of receiving a portion of their orders,” he explained. This adds confusion to the market and forces domestic consumers to match pricing against demand that is articially inflated by the inadequate supply of railcars. And on the supply side, he continued, the lack of railcars gives the appearance of a tight scrap market, even though processors have larger inventories than desired.

Another transportation issue is congestion at the border, which can add weeks to shipment schedules, and the “continuing phenomenon of shrinkage”—or the theft of material en route to its destination. These losses, which can total 2 to 3 percent, make imported scrap less attractive to Mexican mills and could “lead to increased dependence on scrap alternatives,” Stein asserted.

While Mexico’s demand for ferrous scrap is expected to remain strong for years, that demand is dependent on several factors. First, the peso must continue to trade in a relatively stable pattern against the dollar, Stein said. Second, the U.S. economy must remain healthy, as Mexico’s economy tends to follow it. And third, Mexico’s political situation must make its way to a more stable democracy, with open and free elections, he offered.

For the remainder of 1997, the Southwest scrap market—including Mexico—will remain steady thanks largely to tight demand for long steel products, Stein said. “Add to this the shortage of available gondolas for scrap movement and you have a situation where most mills are unable to drive down scrap prices without disrupting the flow of material,” he noted.

Heading for a Scrap Imbalance

On the West Coast, the flow of scrap has been strong and transportation has been fairly secure, though gondola constraints have had an impact in recent months, said Jay Robinovitz, general manager of Schnitzer Steel Products Co. (Rancho Cordova, Calif.).

On the selling side, though the market weakened in the summer, “we’ve had a real strong market to play into” overall, he said, predicting a fairly level market for the remainder of the year. In the long term, Robinovitz said, “we like to think that there’s going to be a significant future for us here and that shipments and supplies will continue to grow.”

This future growth will be driven by major steelmaking capacity expansions planned both domestically and internationally. “Schnitzer sees demand exceeding supply, with growth in supply lagging far behind worldwide steel production,” Robinovitz said, asserting that “an international metallics imbalance is expected.”

For West Coast shippers, Asian consumers will drive a significant share of this future demand. Currently, about 87 percent of U.S. ferrous scrap exports land in Asian ports, primarily Korea, Malaysia, Taiwan, Turkey, and Japan, he noted.

By 2000, China is expected to increase its ferrous scrap demand to 45.4 million tons, Korea to 27.6 million tons, India to 14.4 million tons, and the ASEAN countries to 17.3 million tons, which will expand the current “Asian scrap gap” to 17 million tons a year, Robinovitz said.

Lead Slouches Toward Surplus

Despite tightness for refined lead today, Western World supplies will soon overtake demand and bring about a gradual softening of lead prices, with average prices in the 1998-2002 period projected to be lower than the expected 29.25-cent-a-pound average for this year, said Tom Schnull, manager-lead department for Noranda Mining and Exploration Inc. (Toronto), at the lead/zinc roundtable.

The impending growth in lead supplies is being driven by the positive world macroeconomic outlook that should last into the next century, he asserted. In 1998, Western World lead consumption is expected to grow 2.2 percent to 5.3 million mt, with U.S. demand expanding 3 percent, recovering from last year’s relatively weak market for automotive replacement batteries.

While this increasing demand is positive, “supply issues will have the greatest impact on the marketplace and prices,” Schnull said, asserting that as new mine production comes onstream next year, the market could move into surplus. “Higher treatment charges are expected to encourage primary smelters to increase their consumption of concentrates, with some smelters reducing their use of residues and other secondary materials in favor of cheaper primary feed,” he explained. Underutilized smelt-ers in the C.I.S. may also be called upon to treat surplus concentrates.

Thus, with lead concentrates readily available, Western World primary production is expected to increase 2.4 percent next year to more than 2.2 million mt, Schnull said, noting that the secondary lead supplies will grow 3 percent to 2.8 million mt. Adding to the market will be lead imports from the Far East and sales of stockpiled metal by the U.S. Defense Logistics Agency.

In summary, Western World lead supplies could increase 160,000 mt, or 3.1 percent, in 1997 and 142,000 mt, or 2.7 percent, in 1998, Schnull said. And if demand grows only 2 percent this year and next, it won’t “be sufficient to keep the market in deficit.” Though there will likely be a small deficit this year, the market will shift into oversupply next year, with surplus metal showing itself in a gradual buildup of LME stocks, Schnull said.

Lead Oxide Looks Good

In a review of the U.S. lead oxide market, Steven Rau, manager-marketing for Omni Oxide L.L.C. (Indianapolis), noted that the oxide market closely mirrors the lead market in general given that the majority of lead oxide is consumed by lead-acid battery manufacturers. About 80 percent of Omni Oxide’s shipments, for example, are earmarked for the battery industry, with the balance going to nonbattery markets, primarily the television glass manufacturing industry, he reported.

Other nonbattery uses for lead oxide include lead crystal glass, lead glazes for ceramics, non-TV electronics glass, pigments, ceramics, and plastic stabilizers. All these outlets are small, however, and most “will only get smaller as lead is legislated out of these end-use markets,” he said.

Though every major battery manufacturer has become vertically integrated with respect to oxide production, Rau expressed optimism for independent producers such as Omni Oxide. The past three to four years have been “pretty good” in both the battery oxide market and the glass industry. An oxide shortage in 1994 boosted sales 30 percent compared with 1993, while 1995 and 1996 were also defined by strong demand. This year is shaping up to be a “another good year,” though the unusually mild summer made him “a little wary of how long this fall’s battery production will hold up.”

As for the future of lead oxide, Rau said “it will continue to grow slowly with the mature markets of the lead-acid battery and the TVs,” pointing to mid-term opportunities in the expanded use of lead-acid batteries in electric vehicles and growing consumer demand for high-definition TVs.

Bullish Times for Zinc

Positive demand for zinc, coupled with limited smelter capacity, translate into a bullish future for the metal in the next few years, with the LME three-month price expected to hold at or above 70 cents a pound, said Graham White, director of marketing for Hudson Bay Mining & Smelting (Toronto), at the lead/zinc roundtable.

Zinc’s current strength stands in stark contrast to its status in the early 1990s, which were defined by “the extraordinary rise in LME zinc metal inventories,” White said. Warehouse stocks began swelling following the disintegration of the former Soviet Union economies. While the Soviet Union had been a net importer of zinc, the newly independent states became huge net exporters. Combined with increased Chinese zinc exports, LME stocks grew to an “incredible” 1.24 million mt by October 1994, he reported.

Zinc began its turnaround in late 1994 as inventories finally began to decline, with strong demand from 1995 onward working down LME stocks 860,000 mt through August, White said. This ongoing reduction has played a vital role in keeping the market supplied and has, in fact, masked the strong fundamentals that have also existed, he asserted.

Looking ahead, zinc’s fundamental picture “continues to look very good,” White said. Demand is expected to outstrip supply by an additional 200,000 to 250,000 mt by the end of 1998, leaving LME inventories at “precariously low levels,” he stated. Zinc concentrates will no longer be the constraining factor. Rather, insufficient smelter capacity will continue to keep the zinc market in deficit until 1999, White maintained.

As for the recent runup in LME zinc prices, he noted that “massive” Chinese short positions and the subsequent squeeze by others holding substantial long positions have put zinc in backwardation. “The net result is that instead of dampening the price as might have been expected, Chinese sales have actually fueled the price increase and increased volatility,” White explained.

Zinc Sulfate—Small But Growing

As a basic nutrient for both plants and animals, zinc sulfate monohydrate is an important building block in fertilizers and animal feed, said Michael Barry, vice president-quality and technology for American MicroTrace (Virginia Beach, Va.).

With approximately 80 percent of annual zinc consumption in major markets such as galvanizing (47 percent), brass and bronze (19 percent), and zinc-based alloys (14 percent), demand for zinc sulfate monohydrate is relatively small in comparison, Barry noted. Agriculture applications, for example, account for only 3 percent of the domestic zinc market.

North American demand for zinc sulfate is approximately 80,000 tons, with its largest single end-use—62,000 tons—being the fertilizer industry, he said. Another 15,000 tons goes into animal feed, with 3,000 tons being used in other industrial applications. Although relatively small, the market for zinc sulfate is expected to grow 4 to 6 percent a year over the next five years thanks to its acceptance as a nutrient, availability, and other inherent properties such as water solubility and low toxicity, Barry said.

Zinc sulfate is produced from prompt zinc scrap, with the chief feed sources including sal skimmings, brass fume, ball mill fines, and hot-dip and continuous-line galvanizing dross and ash, Barry reported.

Nickel’s Misplaced Optimism

Nickel began the past two years under the high expectations of market analysts. The basis for this bullish sentiment was ongoing concern about world nickel supplies. In contrast, nickel demand was supposedly a given since “we all knew that the long-term growth of the stainless steel industry was running at close to 6 percent per annum,” said Martin Abbott, an industry consultant based in Stamford, Conn., at the nickel, stainless steel, and specialty metals roundtable. Deviations from that growth rate were believed to be short-lived, and several new stainless steel mill expansions were soon due online. Thus, two years ago, the future for stainless production—and therefore nickel consumption—looked bright indeed, Abbott said.

Other market signals also seemed to indicate future strength for nickel, including falling LME nickel inventories, low raw material inventories at consumer and producer plants, and the assumed dependence on primary nickel from the troubled Nor-ilsk plant in Russia, Abbott noted. In addition, nickel premiums were termed firm, and full plate cathode was trading at a premium to cash LME.

As it turned out, stainless mill projects were canceled, the Japanese and European economies sputtered, and analysts learned that stainless steel production isn’t the same as stainless consumption, Abbott said.

Thus, despite this seemingly bullish scenario, the price forecasts offered at the time were wrong because “demand failed,” he noted. Analysts looked at planned stainless capacity and calculated the growth in nickel accordingly. What happened, however, was that stainless steel mills around the globe were producing product inventory and these stocks weren’t ending up in end-use markets, Abbott said. The buildup of stainless product inventories went largely unnoticed by analysts because there was no central body for recording such inventory changes, he maintained.

And while it was true that LME nickel inventories did continue to fall, the nickel was simply being transferred from the highly visible primary inventory into less visible product inventory, Abbott noted. Ironically, he added, LME nickel prices remained firm because “we thought there was a shortage of the stuff.”

But overestimating demand wasn’t the only issue. The assumed supply shortfall from Russia’s Norilsk plant didn’t quite materialize and, hence, the “supply chain didn’t materially change” as expected, he said. Plus, Abbot said, the Sumitomo copper scandal in the summer of 1996 negatively affected all LME-traded metals.

Inventory Causes and Effects

Thomas E. Abrams, vice president-equity research for Credit Suisse-First Boston Corp. (New York City), offered a closer look at the causes and effects of the inventories of stainless steel products. To illustrate, he reported that 304 stainless steel sheet prices overseas “collapsed” by late 1996 due to a combination of “nonexistent demand growth in Europe, capacity increases, and a large inventory liquidation phase by customers in Europe.” These factors, he said, ultimately led to a “downward price spiral” in Europe, which, in turn, forced down domestic prices for 304 sheet.

Abrams’ analysis of the stainless steel market from 1996 onward noted a pattern among European producers of curtailing production, rebuilding inventories, destocking, and shipping excess material to Far East customers, which has caused Far Eastern stainless prices to fall “dramatically.” European producers were more reluctant to ship too much material to the United States for fear of antidumping suits, he said. Nevertheless, lower overseas prices had the effect of lowering third-quarter domestic prices compared with second-quarter tags, Abrams noted.

A Return to Solid Fundamentals?

How will the nickel and stainless steel markets fare in 1998 and beyond? Abbott and Abrams were cautious in their forecasts for nickel prices and stainless steel consumption due to rising stainless steel inventories, especially in Europe. Even U.S. order books, which Abbott termed “good,” aren’t as encouraging as they could be. “The market is not running away,” he observed.

In Abrams’ view, apparent U.S. consumption of stainless steel (domestic shipments plus net trade) could reach 2.684 million tons next year, up 4 percent from an estimated 2.581 million tons consumed this year. Of that total, domestic shipments are expected to account for 2.271 million tons, representing an increase of nearly 8 percent, he said.

Brian R. Leslie, director of stainless steel market development for the Specialty Steel Industry of North America (Washington, D.C.), offered a slightly different scenario, pegging 1998 domestic consumption (shipments plus imports) at 2.45 million tons, 7 percent greater than the expected 1997 consumption of 2.295 million tons. Sheet and strip will pace overall stainless steel demand, he said, with “transportation, construction, and the food markets all positive and growing.”

As for nickel’s price outlook, Abbott saw upside potential thanks to the market’s underlying supply-demand fundamentals, namely “dangerously” low LME inventories, uncertain Russian nickel supply, and a return to what he termed “established stainless steel growth trends.”

Nickel is a “bargain” at its recent $3-a-pound price, he said, maintaining that the potential for an increase is “good” and that buyers should be wary of a price breakout. Forward-buying is all but absent in today’s market, Abbott noted, adding that “everyone is living hand-to-mouth.”

The Russian Scrap Export Factor

In previous years, most of the stainless scrap exported from Russia—pegged at 470,000 mt in 1996—ended up in European scrap plants. But today, a significant portion of these exports is now moving directly to a couple of European consumers, bypassing European processors, said Barry Hunter, senior vice president of Keywell L.L.C. (Elizabeth, N.J.).

If this direct-selling continues, 50 percent or more of Russian stainless scrap could be removed from the European processing structure, he said, adding that “this significant reduction in available nickel and chrome units would decrease the overall blending impact allowed for by the utilization of 10-percent nickel-containing material.” Obviously, he noted, this would reduce the overall available tonnage of 18/8-type product for European stainless producers.

As for current supplies of high-grade Russian scrap, most of the material contains significant contamination levels of cobalt, molybdenum, and tungsten, Hunter said. In the future, the country is also expected to generate a large volume of low-grade scrap—containing 1-to-2-percent nickel—mainly in demilitarized material, he said.

European stainless production, meanwhile, is proceeding at a high level, Hunter reported. While there has been talk of cuts in output, “so far it’s just talk and it remains to be seen if any significant cuts come about in the fourth quarter due to either overproduction or destocking,” he said.

European stainless producers, which produce three times as much finished product as U.S. producers, require significant quantities of scrap to meet current production capacities, and their demand is expected to increase 3 to 6 percent a year, Hunter reported. However, a disruption in Russian flow or a reduction in nickel content in available scrap may put pressure on an already-thin market, he indicated. Also, if European finished stainless products continue to be exported in large volumes to Asian and U.S. consumers, the resulting scrap will be lost forever to European mills, he noted. 

In the United States, stainless production continues to be decent, with no talk of destocking or production cuts and with a relatively high scrap utilization rate being met by the U.S. scrap industry, Hunter said.

For U.S. processors, quality scrap is tight and expensive, he said, noting that with margins eroding and with scrap costly to grade, process, and transport, individual processors must be responsible for their own buying policies. “With production levels and anticipated growth, it will not be easy to profitably cover sale requirements,” Hunter concluded.

Ferrochrome Heads Sideways

In an overview of the ferrochrome market, Joel Filner, vice president of Huxley Barter Corp. (New York City), noted that when world prices reached 82 cents a pound, new incentive production was brought on-stream, and this cycle eventually led to a sharp price decline. Today’s price is around 45 cents a pound, with the current market moving “sideways to softer,” he said. “Pricing pressures are there from all sides, but supply-demand is still the major force in pricing.”

While inventories aren’t high, they also aren’t expected to be worked down further as all major purchases are now complete, Filner said. Mills, meanwhile, have little excess tonnage to melt, yet they’re delaying purchases until 1998. As a result, ferrochrome prices won’t likely rebound before the first quarter, after which they should continue steady in the 45-to-50-cent-a-pound range throughout the year, he projected.

In terms of supply, South African ferrochrome producers have become a major factor in the European market. In the past seven years, Filner noted, the pendulum has swung from free market nonproducer tonnage high carbon to the reinstatement of the South African charge chrome producers maintaining their market share.

The United States absorbs approximately 400,000 to 450,000 mt a year of ferrochrome, with imports in 1996 accounting for about 360,000 mt and projections calling for about 330,000 mt in 1997, Filner reported. About 68 percent of these imports come from the Big Four ferrochrome producers—Turkey, South Africa, Zimbabwe, and Kazahkstan. If Canada is included, these countries supply about 78 percent of the U.S. market, he noted.

The Muni Scrap Question

Each steel mill must decide whether to consume ferrous scrap recovered from municipal incinerators based on its scrap strategy position, said Stephen Farley, principal raw materials analyst for the Timken Co. (Canton, Ohio). “It is that strategy that must determine whether muni scrap is an appropriate raw material,” he told the ferrous division meeting during    ISRI’s national membership meeting in Washington, D.C., in September. 

Reviewing the pros and cons of pre- and post-burn municipal scrap, Farley noted that mills must consider the material’s quality due to its potentially high residual copper and tin content. Also, the material’s density of about 35 pounds per square foot poses “extreme” freight costs and furnace-loading challenges. Further, material loss from ash and other nonmetallics can be 22 to 42 percent, plus an additional 8 percent lost in the melting process, which means muni “isn’t contributing much liquid metal to the process,” Farley said.

In addition, muni also adds 400 to 450 kilowatt hours per charge ton, increases the volume of KO61 electric-arc furnace dust, extends power-on times, increases the cost of diverts, and causes sequence breaks at the caster, he noted.
Many of these penalties, Farley said, “can be eliminated through value-added processing at the point of origin, ” including minimizing the amount of nonmetallics such as ash to increase the material’s melt yield, reducing its residual content, and densifying the material to cut freight costs.

Timken, which produces 1,500 types of steel at its two mills, buys 80,000 tons of scrap a month and consumed 120,000 tons of incinerated muni from 1990 to 1995. But, Farley noted, “based on our current raw material strategy, the Timken Co. no longer melts muni scrap.” •

 

As some primary and secondary metals face deteriorating fundamentals, others are seeing their prospects brighten. This could make 1998 a mixed bag for metal markets, according to experts at ISRI'’s commodity roundtables.