May/June 1991
While the U.S. economic recession weakened most scrap and prime markets during 1990’s second half, many commodities were surprisingly strong through the first part of the year.
By Robert J. Garino
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (Washington, D.C.).
By most accounts, the U.S. economy entered a so-called recessionary period sometime during the third quarter of 1990, with the metal and paper industries feeling the pinch like other economic sectors. In fact, on the metal side specifically, many industry executives noted a marked slowdown--in terms of both volume of scrap material processed and quantity of refined metal consumed by industry--in the second half of last year. Not surprisingly, prices for most metal and paper commodities also weakened in the second half of 1990 amidst reports of lower industrial production, slumping auto sales, and an all-but-depressed housing market. Company profits also suffered.
As confirmation, the U.S. government's measure of overall economic health, the gross national product (GNP), registered a 2.1-percent decline in 1990's final quarter--its worst quarterly showing since 1982.
The fact that the GNP turned negative in 1990 did not come as much of a surprise to the scrap industry. The U.S. economy had been humming along, virtually uninterrupted, for more than seven years--a record peacetime expansion--but as 1990 wound down, many felt that a period of lower growth was just around the corner.
The December macroeconomic indicators only reconfirmed what most in the metal and paper industries already knew: Business was hurting. Industrial production of primary metals, for example, fell in December by 5.9 percent from November's levels. Overall, monthly industrial production sank by 0.6 percent in December; this followed a fall of 1.8 percent in November.
When key scrap industry leaders predicted what 1990 markets would bring, there was general resignation that an economic "soft landing" was in the offing for the year. While that appears to have proved correct, the timing predicted was off. Most of those surveyed in 1989 were guessing that 1990's first half would be weaker, followed by an uptick in the second half.
Now, with clear hindsight, it is apparent that the U.S. economy continued to expand, albeit weakly, through the first half of 1990. Some now point out that sluggish economic performance, added to a string of economic and political upheavals, ultimately tipped the economic sales downward into recession in late 1990. The chief catalyst may have been Iraq 's August invasion of Kuwait and the subsequent spike in oil prices.
This review of 1990 commodity markets highlights many of the same elements found in an examination of the larger U.S. economy--principally, a relatively positive first half, followed by a weak second half with an especially poor fourth quarter. It also reveals how close to reality our "1990 Market Forecast" authors' predictions (written in October 1989) came.
Aluminum
“The prime aluminum market in 1990 should trade between 68 and 78 cents per pound.”
--Stanton A. Moss, Stanton A. Moss Inc. (Bryn Mawr, PA)
The tenor of the 1990 aluminum market moved decidedly bearish as the year progressed. As ingot prices ran up through the summer months, inventories followed suit, moving sharply higher. These factors, plus diminishing demand, ultimately resulted in downward price pressure on prime ingot as well as aluminum scrap.
The nation's 23 primary aluminum smelters poured 4.05 million metric tons of metal last year, a slight increase over the 4.03 million metric tons produced in 1989. At the same time, however, domestic mill shipments for 1990 were 4.5 percent behind last year's total. Consequently, based on preliminary numbers, overall domestic consumption fell by 2.7 percent in 1990. Scrap usage was also lower, despite an increase in the can scrap sector.
According to Metals Week, the U.S. market for prime ingot averaged in at 74.040 cents per pound during 1990. Monthly prices ranged from a low of 65.500 cents (posted in February) to a high of 88.053 (recorded in September)--not far off the mark from Moss's forecast.
Copper
“[In 1990,] prices should fall, margins narrow, and volumes decrease.”
--Ron Peek, Tex-Tin Corp. (Carrollton, GA)
Most of the indications of demand for refined copper in 1990 reveal that while overall copper usage slumped in the final quarter of 1990, year-on-year comparisons with 1989 show little change. Through the first three quarters of last year, brass and wire mill consumption of refined COPP" and copper scrap was running above 1989. Consumption at foundries, ingot makers, and others, however, was behind the previous year's pace.
Still, the copper industry held surprisingly firm in 1990, with preliminary data recording increases in both refined production (up 4 percent) and scrap recovered (up 1 percent). On the downside, other data pointed to slightly less overall domestic copper consumed in 1990. Thus, with slightly higher scrap usage but lower overall consumption, scrap's market share is expected to have moved one percentage point higher.
Copper prices, which many forecast would peak during the second quarter of 1990, held through the summer and rallied at the end of the third quarter. The fourth quarter, however, was dominated by price weakness on both sides of the Atlantic . Spot COMEX averaged $1.19 per pound in 1990 (compared with $1.27 in 1989), while No. 2 copper scrap averaged $0.98 (compared with $1.01 in the previous year).
Iron and Steel
“We should look forward to a viable steel industry and a good scrap business in 1990. There are still likely to be swings, but they shouldn’t be as violent as in the past.”
--I Michael Coslov, Tube City Inc. (Bala Cynwyd, PA)
Productionwise, the steel industry held remarkably steady in 1990, especially in view of weaknesses reported in the auto, appliance, and construction markets. For example, while new orders at steel mills fell by 17.7 percent in November--the largest monthly decline in nearly eight years--data compiled by the American Iron and Steel Institute (Washington, D.C.) showed 12-month steel production marginally ahead of the 97.9 million net tons produced in 1989. In addition, electric furnace output ran at a higher rate in 1990 compared with 1989 (36.8 percent vs. 35.9 percent). Should these preliminary figures hold up, 1990 net domestic scrap consumption may surpass 1989 by approximately 0.05 percent, for a total of 46 million net tons of scrap iron and steel consumed in 1990.
Mill shipments of finished products are also expected to have posted a small increase in 1990 over 1989, but lower foundry and steel-casting shipments resulted in a slightly lower overall apparent steel consumption figure (105.8 million net tons) for 1990. Lower consumption, combined with slightly higher scrap usage, resulted in a scrap market share of 43.4 percent, 0.4 percentage points higher than 1989.
Prices for No. 1 heavy melt scrap averaged $106.61 per gross ton during the year, with the monthly low ($98.23) recorded in March, and the high ($118.50) in August. Pricing patterns in 1990 confirm a fourth-quarter slowdown in the steel industry, but as Coslov predicted, 1990 scrap prices did not show as much volatility as they had in the previous year.
Lead
“We should expect lead prices to drift lower during 1990.”
--Lee D. Raymond, Roth Bros. Smelting Corp. (East Syracuse, NY)
The lead market did drift lower in 1990 as anticipated by Raymond, but not before posting numbers above most earlier consensus forecasts. The lead market in 1990 experienced an unusually firm first quarter, with the LME price approaching 60 cents per pound in mid-March. Credit for the firmness (experienced on both sides of the Atlantic ) was given to unexpected supply disruptions and stronger-than-anticipated replacement battery demand. The market also received a boost during the summer as a result of Canadian mine and smelter strike activity.
According to the Bureau of Mines, domestic secondary lead smelters operated at 90 percent of capacity last year, setting new production records for both old scrap reclaimed and total throughput.
Despite a record number of replacement battery shipments in 1990, actual lead consumed for all markets, at 1.437 million tons, was slightly lower than the previous year, largely because of lower demand from original equipment manufacturers and a decline in the industrial battery sector.
Scrap's market share moved higher, accounting for 64 percent of total lead consumed. Scrap battery recovery accounted for approximately 90 percent of the total secondary lead recovered last year.
Nickel/Stainless Steel
“[1990] will be fair to good to the nickel/stainless market, but not like the past two-and-one-half years.”
--Arnold I. Plant, Samuel G. Keywell Co. (Baltimore, MD)
During the first quarter of 1990, many observers characterized the primary nickel industry as "bottoming out" following a slide that began in early 1989. Primary nickel consumption declined approximately 5 percent in 1990.
Although the outlook in the stainless steel sector appeared positive in North America , Europe , and Japan , many believed that the effects of the stainless steel stock cycle were out of sync with weak underlying fundamentals. By midyear, however, production at U.S. flat rolling mills was still running well ahead of earlier, negative forecasts. Nickel prices also held firm in the third quarter, but, like other base metals, values fell sharply lower in the fourth quarter. By mid-December, spot nickel was looking at lows not seen in more than 10 months.
Although the U.S. stainless steel market was being described as "flat" in 1990, shipments totaled 1.52 million net tons (nearly 3 percent higher than the 1.47 million tons shipped in 1989)--arguably more of a “fair” to “good” year. Scrap consumption was hampered by relatively tight supplies of industrial scrap and was reported slightly lower in 1990. This resulted in a two-percentage-point decline in scrap's share of the market. Preliminary reports indicate that primary nickel was used for about 43 percent of the stainless industry's nickel requirements in 1990, compared with approximately 41 percent in 1989.
Paper and Paperboard
“It appears that negative pricing of several bulk grades is here to stay.”
--Richard M. Foohey, Great Eastern Packing & Paper Stock Corp. (East Weymouth, MA)
A price review of certain bulk secondary paper grades in 1990 confirms that negative prices (quoted by processors, not end users) were an important feature for packers and mills alike. Higher scrap paper grades also trended lower throughout the year, picking up only slightly in the last weeks of 1990.
The declines can be attributed to an apparent oversupply of scrap paper in the domestic marketplace, coupled with reported weaknesses in the virgin pulp market due to a glut of market pulp. Key offshore buyers, for example, were said to be substituting virgin material for U.S.-generated computer printout. Also negatively affecting the export markets in the last quarter of 1990 were fuel surcharges and a lack of containers to meet export demand.
Lower prices in 1990 notwithstanding, domestic consumption increases were recorded for mixed paper (up 5.8 percent), old newspaper (up 13.1 percent), corrugated (up 4.5 percent), pulp substitutes (up 6.9 percent), and high-grade deinking paper (up 6.9 percent). Overall scrap consumption in 1990 rose 6.9 percent above 1989 levels, helping secondary paper inventories move down. An equally important factor in 1990 was the push toward mandating recycled-fiber content in paper products, prompting paper and paperboard manufacturers to consider greater use of secondary fiber in their products.
Total U.S. paper and paperboard production reached 78.5 million tons last year-a record, 2.1 percent higher than 1989.
Zinc
“1990 prices should hold fairly firm with no tremendous fluctuations in price.”
--Russ Robinson, U.S. Zinc (Houston, TX)
The principal zinc-consuming sectors--nonresidential construction and automotive industries--held reasonably steady through 1990's first half. Apparent weakness in the U.S. industrial base, however, coupled with uncertainties about the potential for economic recession, higher interest rates, and increased energy costs, resulted in a particularly weak fourth quarter in terms of zinc consumption. This was in spite of the fact that reported shipments of slab zinc in 1990 were essentially unchanged compared with 1989. Atthe same time, domestic mine production recorded sharp gains. Outside the United States , new mine and smelter capacity was increased and earlier supply disruptions were resolved.
U.S. slab zinc consumption fell in 1990 by an estimated 5 percent (dropping to 1.11 million tons), marking the second consecutive year of lower domestic zinc usage. Scrap zinc usage, however, is estimated to have increased in 1990, principally as a result of expanded capture of zinc units from electric arc furnaces. Offsetting this positive development was less zinc recovered from the galvanizing and brass-mill sectors.
Zinc prices enjoyed a rising trend for the first half of last year, with the Metals Week monthly average posting an 87.192-cent-per-pound figure at midyear. Domestic quotes slid lower through the remainder of the year, however, falling to 62.089 cents in December, and averaging 74.592 cents per pound for the year. Compared with the 1989 average of 82.019 cents per pound, that's a 9.1 percent drop.•
While the U.S. economic recession weakened most scrap and prime markets during 1990’s second half, many commodities were surprisingly strong through the first part of the year.