January/February 1991
Faced with a sluggish U.S. economy and worldwide turbulence, 10 commodities experts speculate where scrap markets are headed in 1991.
Ten members of the Institute of Scrap Recycling Industries (ISRI) have donned their forecasting caps and played soothsayer, trying their luck at predicting some trends in the constantly changing domestic and international commodity markets. The consensus forecast for 1991 is one advising extreme caution, tempered with optimism for the second half of the year. No wonder. At the time the forecasts were prepared, basic metal-working industries in the United States were facing possible war in the Middle East, a rapidly dropping dollar on international markets, oil prices that were fast approaching $40 a barrel, higher inflation expectations, record budget deficits, and falling values for precious metals.
Adding to the confusion in the marketplace, most published reports seemed to be highlighting only negative news and made comparisons to the 1981-1982 recession. Last fall, as this was being compiled, it became increasingly difficult to find upbeat reports. The Conference Board, for example, reported that consumer confidence was at an eight-year low. The board’s Consumer Confidence Index fell 24 points in October, the biggest one-month drop since the index’s inception more than two decades ago. Since consumer spending accounts for about two-thirds of the nation’s gross domestic product (GDP), many wondered what lower consumer spending portends for the metal and paper industries in 1991.
Reports of the United States economy heading for a recession are, of course, not new. In fact, since 1982 many economic downturns have been wrongly predicted despite brief periods of weakness in 1984, 1986, 1989, and--according to most economists--1990. In these cases, the economy quickly bounced back. Currently, some believe that the United States has stayed sluggish since the fourth quarter of 1989, needing only a slight push to fall into a “classic recession” (defined as two consecutive quarters of real GDP contraction).
Some economists and industry leaders believe that the catalyst for a recession could be Iraq’s invasion of Kuwait and the resultant negative effects of higher energy prices. Will this event be enough to bring an end to eight years of economic growth? Will the recycling industries escape weakness in the domestic economy, or will they experience many of the negative predictions offered for 1991? ISRI’s member-experts offer the following insights about how the new year might shape up.
Robert J. Garino, director of commodities for the Institute of Scrap Recycling Industries (Washington, D.C.)
Aluminum
By Richard Mandel
Richard Mandel is president of Mandel Metals Inc. (Chicago) and cochairman of the aluminum subcommittee of ISRI’s nonferrous committee.
The outlook for aluminum is as uncertain as the political and economic situation throughout the world. Looming worldwide recession, U.S. government paralysis, and the threat of war in the Middle East are giving everyone a case of the jitters.
If these conditions continue to overhang the market, aluminum scrap prices will probably deteriorate from current levels.
Fears of a worldwide economic slowdown have caused major aluminum scrap consumers to be cautious buyers. These consumers have no incentive to build scrap inventories. With the sales of their end products declining, scrap consumers are more concerned about getting caught with high-priced inventory than trying to buy what they might perceive as material at a bargain price.
Also contributing to the softening aluminum market is the continued record rate of production by the world’s aluminum producers. No producer seems willing to slow its production, and, if the world economic slowdown is protracted, a surplus of aluminum products will soon develop. This will filter down to help depress aluminum scrap prices.
Of course, other factors could offset these gloomy predictions. Currently, the supply/demand ratio for scrap has been in balance. Therefore, any perceived economic upturn or supply disruption could quickly revive scrap values.
The higher prices for oil could influence aluminum producers to save energy costs by melting a larger proportion of scrap aluminum, thus preventing scrap inventories from growing and overhanging the market.
Finally, the expansion and liberalization of foreign markets (including Germany, the Soviet Union, and China) could have a positive influence on aluminum consumption. Of course, these economies are still adjusting to quickly changing political climates and their effect on aluminum prices is still hypothetical.
In summary, 1991 should be an interesting year for the aluminum business. With all the factors that seem to affect the market, we will probably see the same type of price volatility that has characterized the market for the past few years.
Aluminum
By Bill Monaghan
Bill Monaghan is a buyer for Wabash Alloys (Cleveland) and cochairman of the aluminum subcommittee of ISRI’s nonferrous committee.
Aluminum took a very bumpy ride in 1990, with secondary A380.1 ingot selling for 66 to 68 cents per pound in January and rising to 78 to 80 cents per pound in late March. It continued its up-and-down ride through the end of the year. Price swings on the London Metal Exchange (LME) went from a low of 62 cents per pound in late January to a high or $1.02 per pound in mid-September.
The automotive and housing industries had their fair share of impact on the aluminum industry. Secondary producers sell 60 to 65 percent of their production to automotive companies and their related industries. During 1990, the automotive industry continued its downward spiral that had started in late 1989. Housing starts, which are also a bellwether for the aluminum industry, continued to decline each month throughout the year.
The Persian Gulf crisis is another factor affecting the aluminum industry, causing a surge in LME tags. The uncertainty in the Middle East also had had its effect on oil prices, causing great concern about the economy as a whole and the automotive industry in particular. Many economists are predicting that sales of domestically produced vehicles will fall from 12.3 million in 1990 to 11.3 million in 1991. Should this happen, great distress will be felt in the U.S. economy and, therefore, the aluminum market.
Primary producers continue to produce at close to 100-percent capacity even though the economy shows no signs of strength through the first quarter. Primary and secondary producers will continue to look to Europe and the Far East to offset the loss of business in the United States.
Demand for aluminum should increase in 1991 by 2 to 4 percent. The increased use of aluminum in automotive engine blocks, hoods, and other automotive parts, as well as a strong European can-sheet market, will add to the increase. The secondary market will continue to be sluggish in the first quarter due to its heavy dependence on the automotive market. The primary market should be constant, with production equaling demand.
Copper
By Daniel C. Gascoyne
Daniel C. Gascoyne is vice president of Frank H. Nott Inc. (Richmond, Va.) and cochairman of the copper subcommittee of ISRI’s nonferrous committee.
As of this writing in late October, the price of copper on the Commodity Exchange Inc. (COMEX) has been moving downward for two weeks, with all the indicators pointing to further decline. Other weakness is evident as well: Stocks of copper in London are double the levels of a year ago. Car sales were good last month, but only because of a push to move 1990 models. Housing starts are down and are moving lower each month. The copper tube mills are having tough times with their sales. Brass mills are not buying scrap with any enthusiasm. Cathode premiums are small. Ingotmakers are doing well, but the feeling is that their business can fall through the floorboards at any time. European business is good. Both domestic and foreign refineries are at capacity. Demand for brass in India has dropped off. Taiwan business for lower grades of labor-intensive material has fallen. Sound bad?
It may not be. My prediction is for current levels to stay firm for 1991. There will be dips because of technical adjustments and movements to fill gaps in COMEX trading, but overall I think things will be OK for the following reasons:
The crisis in the Persian Gulf has negative implications worldwide. Every country has made forecasts and budgets based on oil at $20 to $25 per barrel. Whether there is war or peace, the price of oil is going up, creating worries that higher-than-anticipated energy costs can cause less-than-anticipated growth, particularly for the new, growing Europe or oil-dependent Japan. But there is still a lot of money out there, and emerging nations want what they see. So, I predict that things will cost more, but people will still continue to buy.
I think the United States has been in a recession for more than a year, but only select segments of the economy have felt it. As new segments move into the recession, others should start to roll out and new segments should start to develop. One new segment? Recycling. Not necessarily scrap plants, but new recycling ventures, particularly municipal programs.
When the price of copper drops to an unacceptable level, Zaire, Chile, and other copper-producing countries always seem to experience a disruption in supply that brings the price up. Not that these producers do anything on purpose, but the supply side is the most important side. In the past, some countries have overproduced in glut times to generate money for their economies, so why not hold back in thin times? It makes good economic sense to control what you can to ensure a favorable price.
Never underestimate the power of the speculator, especially considering the computer-controlled movement of large amounts of money through various markets--including financial, commodity, stock, currency, and options. With the small copper stocks in the COMEX warehouses, it’s possible to see some manipulation.
Watch the dollar. It always seems that the dollar and copper move opposite each other.
Copper
By Bill Rickher
Bill Rickher is manager of metal purchasing for Cerro Copper Products Co. (Sauget, Ill.) and cochairman of the copper subcommittee of ISRI’s nonferrous committee.
What does 1991 look like? The general consensus at Cerro indicates that we should be prepared for a lean year. Despite the sluggish economy, however, our objective is to operate both of our plants at capacity.
In addition, Cerro will continue with its $50-million plant expansion and other improvement programs. We view these investments positively and intend to devote our full attention in 1991 to our plant expansion in Shelbina, Mo., and production improvements at our Sauget, Ill., facility. The additional press and tube reducers in Shelbina will significantly increase our capacity in both plants. This will allow us to be positioned well during the recession and be advantageously situated when the economy improves.
Cerro will not need to buy more scrap to feed this plant expansion, which is exclusively devoted to industrial tube production. This means that more of our cathode production will be dedicated to internal demand instead of the cathode market.
Will scrap be hard to buy in 1991? I enjoy a challenge and have fun matching wits with out competition, but I take my job seriously. Cerro will never lay off people because it can’t buy enough scrap.
It is anybody’s guess what the price of copper will do in 1991. I usually don’t try to predict the market, but I would expect copper to trade in a range of 50 cents to $1.50 per pound. Is that close enough?
Iron and Steel
By Albert Cozzi
Albert Cozzi is president of Cozzi Iron & Metal Inc. (Chicago) and chairman of ISRI’s ferrous committee.
Forecasting commodity markets is relatively easy as long as the forecaster is allowed to change the prediction frequently and remembers to predict either what will happen or when it will happen. Predicting both variables simultaneously invites folly or, worse, accountability.
Before embarking on my prediction, let’s briefly review the fundamentals underlying the world steel economy as we head into 1991:
The American Iron and Steel Institute has predicted that world demand for steel will drop 1 percent during 1991 compared with 1990 levels, but will rebound 4 percent in 1992.
The dollar has been weak compared with the yen and other Western currencies.
Eastern Bloc countries are converting to consumer-driven economies at an escalating rate and are using raw material resources, including scrap, to finance redevelopment.
Electric furnaces and continuous casting continue to dominate steelmaking. At least two additional casters will be commissioned in 1991 in the United States.
U.S. automotive manufacturers are predicting that 1991 sales will be flat or down slightly from 1990 levels.
The current Middle East situation has hampered exports to the Far East.
Keeping these fundamentals in mind, I believe that the 1991 scrap market will follow a path virtually the same as the 1990 market. Sagging demand in the U.S. industrial sector will negatively affect demand for steel and, therefore, scrap. However, the rebuilding of the Eastern European infrastructure will keep imports to a minimum, shoring up lagging domestic demand. Furthermore, the weak dollar will permit a modest amount of steel exports.
The weak dollar will favor electric furnace operations, which make products geared toward infrastructure capital projects, both foreign and domestic. This, coupled with continued funding for the U.S. highway program, should mean relatively good volumes for electric furnace producers and scrap processors producing electric grades.
Integrated producers, on the other hand, will face poor sales stemming from the lackluster automotive industry. Lagging demand from the integrated section will temper scrap prices during 1991.
Export demand is the wildcard in my 1991 forecast. The current Middle East situation has hampered scrap exports and will continue to do so until a resolution is reached. It should be noted, however, that a significant amount of export demand has been satisfied by Eastern Bloc sources. This phenomenon is likely to continue in 1991.
In summary, I project that the first quarter of 1991 will see the best pricing of the year, followed by declines in the second and third quarters, and a modest recovery in the fourth quarter.
I reserve the right to change this forecast without notice and recommend that the reader use this information at his or her own risk.
Lead
By Louis J. Magdits
Louis J. Magdits is manager of raw materials for Exide Corp. (Reading, Pa.) and cochairman of the lead/zinc subcommittee of ISRI’s nonferrous committee.
Lead at 65 cents a pound!
Traditionally sluggish price moves, the lead-producer prices reached an all-time high in mid-March 1990. For the second year, producer list prices did not accurately reflect the state of the lead market. Despite the significant price rise, primary producers continued to sell metal to large-volume customers on an LME basis, which resulted in a significant discount to list price. Secondary producers, despite supplying approximately 65 percent of the metal produced, continued to sell at discounts to even their own posted prices. The lead market could not sustain its historic level for more than a few weeks, and the price declines were as abrupt as the rise. By the third quarter, producer prices returned to the January level of 40 to 43 cents a pound.
Unfortunately, scrap processors did not experience record prices for lead-based material due to the availability of scrap and the disparity between producer list prices and actual transacted prices. Scrap processors handling spent lead-acid batteries had difficulty selling material for more than 10 to 11 cents a pound. In contrast, the last time lead broke the 60-cent level, spent batteries brought 17 to 19 cents a pound. During the third quarter, many scrap dealers reported significant delays in pickups because of excessive smelter inventories.
Eighteen states have enacted legislation requiring retailers of batteries to accept a spent unit in return for a new battery. In addition, several manufacturers and retailers initiated buyback programs at the national level. In 1990, the combination of the two resulted in a record year for the collection of spent batteries. Several major secondary facilities due on-stream in 1991 will likely absorb this temporary glut of spent batteries.
Several legislative initiatives that affect the lead industry were introduced in 1990. The lead bill sponsored by Sens. Harry Reid (D-Nev.) and Joe Lieberman (D-Conn.) could restrict or eliminate the uses of lead and the subsequent processing of lead-bearing scrap. The Environmental Protection Agency, through its Lead Pollution Prevention Plan, is pursuing a strategy of internalizing the cost of spent battery collection/recycling within the battery manufacturing industry. It is not clear what effects this plan may have on the future of scrap metal dealers handling batteries.
As in the fourth quarter of 1990, the lead market in the first quarter of 1991 will be dictated by the health of the battery industry. With the economy moving from a “soft landing” to recession, we should expect lead prices to further decrease.
Nickel/Stainless Steel
By Arnold I. Plant
Arnold I. Plant is senior vice president of Samuel G. Keywell Co., Plant Division (Baltimore), and chairman of ISRI’s stainless & alloys committee.
As I reread the comments made for 1990 on the outlook for stainless steel and alloy scrap, after attending the Nickel/Stainless Steel Roundtable in October, and after reading the New York Times religiously, I can only state that there are many mixed and different views of 1991.
It is easy to find justification for any of the various scenarios from good to lousy business for the upcoming year. The consensus of the roundtable speakers and of those in and out of our industry seems to be that the upcoming year will go from not very good in the first quarter to average at midyear to pretty good for the third and fourth quarters. There are probably more variables in this year’s projections than for any year of the past decade, with the federal budget, Persian Gulf, Eastern Europe, and many other factors having a bearing on the economic viability of the future.
Our world is moving so very fast these days that it seems to be a microcosm of time, and changes take place constantly rather than weekly as they did in the 1970s and 1980s.
It is imperative for stainless and alloy scrap dealers to watch the buying prices and all other expenses of their operations. I believe that 1991 could be a very tough year for our industry and one in which profits can only be made through attention to all factors of our business. I suggest that all expenses and purchasing be watched very closely during the new year.
Paper
By William A. Nielsen
William A. Nielsen is president of Nielsen & Nielsen Inc. (Pomona, Calif.) and president of ISRI’s National Paper Stock Institute Chapter.
The secondary fiber market is in a state of depression. Low grades and deinking grades of scrap paper have been in tremendous oversupply and likely will continue as such for the next year or two. Meanwhile, mandatory collection programs continue to generate massive quantities of old newspapers, mixed office paper, and white and colored ledger.
We likely will see temporary upswings in the marketplace, but little enthusiasm about the long-term outlook--until more paper mills increase their use of secondary fibers. The printing and writing paper mills are still deciding what percentage of secondary fiber they will use, which will tie in with federal and state government mandates.
There is greater use of deinking grades in Europe and Asia than in North America. Nevertheless, as new technology enters the marketplace, more domestic mills will consume these grades. The outlook for deinking grades of secondary fiber on a long-term basis, therefore, is good. However, with the probable increase of mandatory collection, the quality of these grades must be watched carefully.
The outlook for pulp substitutes is a bit better, but the severe depression on the virgin pulp market has had a substantial effect on the value of these grades. There is, however, enough consumption for these grades to keep supply and demand in balance on a long-term basis. Since approximately 97 percent of pulp substitute grades are already being recycled, we should not see mandatory collection have any effect on this category.
The next year in our industry will be a challenge as more and more paper stock companies experience acquisition and the industry is further consolidated.
I estimate that in three to four years there could be shortages in many grades of scrap paper, but until additional worldwide consuming capacity is created, we must work through these periods of challenge.
Zinc
By David S. Aronow
David S. Aronow is vice president of Arco Alloys Corp. (Detroit) and cochairman of the lead/zinc subcommittee of ISRI’s nonferrous committee.
The zinc industry enjoyed another profitable year as volumes and prices were at fairly high levels throughout most of 1990. After a quiet first quarter, the market strengthened and maintained price levels between 75 and 90 cents per pound from April through September. This was not only due to a strong demand but also to producer production problems, tightness of zinc concentrates, labor strikes at mines and smelters throughout the free world, and the possibility of a military confrontation in the Persian Gulf.
Economists are predicting a downturn for the U.S. economy for at least the first half of 1991. The demand for zinc in the United States should weaken as the galvanizers and die casters slow down because of softness in the automobile and construction industries. Zinc prices are expected to range between 50 and 70 cents per pound throughout next year.
However, unforeseen events such as a reduction in interest rates, lower oil prices, or a weaker U.S. dollar could have a positive impact on the economy. A prolonged war in the Middle East could cause the price of all metals to skyrocket. Factors such as the unification of Germany and the opening up of Eastern European markets to the West could have a beneficial effect on the U.S. economy.
It must be noted that all but one of the North American producers no longer publish a list price for zinc. They are now using an LME-based pricing formula, with premiums over the LME price to establish a daily spot price. In 1991, the LME is scheduled to open warehouses in the United States, which may result in smaller premiums being charged above the LME price.
Additional smelting capacity is scheduled to come on-stream in 1991, while Western World zinc consumption should be flat. Accordingly, unless there are major disruptions in the supply of zinc, which are not anticipated at this time, it is likely that zinc prices will be lower in 1991 than in 1990. •
Faced with a sluggish U.S. economy and worldwide turbulence, 10 commodities experts speculate where scrap markets are headed in 1991.