1992 Commodity Wrap-Up—The Recovery That Wasn't

May/June 1993

For the recycling industry, 1992 turned out to be another difficult year. Here's a year-end summary of how the scrap markets fared.

For many of the world's scrap processors, consumers, merchants, and traders, 1992 was another dismal year. While plenty of these industry players saw their sales volumes increase—indicating an improved domestic economy—average selling prices for their commodities remained weak or became weaker as the year progressed. Scrap buying prices, meanwhile, did not become correspondingly softer due to real as well as perceived spot shortages of some items.

U.S. scrap exporters also found the going rocky in 1992, facing weak demand from Europe and most of the Pacific Rim. This condition was perpetuated and exacerbated by yet another year of massive exports of raw materials from the former Soviet republics into Asia, Western Europe, and even the United States. Much of this material found its way into London Metal Exchange (LME) (London) warehouses, effectively stifling any chance for higher world prices based on traditional supply/demand fundamentals. Thus, in light of the rising fixed costs of processing and consuming scrap, profits for many recyclers were nonexistent.

Last year did yield some positive macroeconomic news, however, hinting at possible business advances in 1993. The gross domestic product, for example, continued to advance in 1992, growing at a faster-than-expected annual rate of almost 4 percent in the final quarter—its strongest performance in four years, according to the Department of Commerce. Residential housing starts, automotive sales, and business investment improved smartly, while overall consumer spending in the final months of 1992 was the highest since the fourth quarter of 1988. Further, productivity at U.S firms posted the biggest gain in two decades, increasing 3 percent—a significant indication that living standards in the United States are rising, the Department of Labor reports.

Despite these short-term statistical gains, most scrap recyclers appeared to have missed the recovery boat, with their markets mirroring the more-sluggish long-term economic indicators. Thus, many are left to simply hope that profits will return soon and bring about prosperity in 1993 and beyond.

Aluminum

Despite higher demand for aluminum throughout the Western World in 1992—consumption estimates range between 2- and 3- percent growth—the year was considered a near disaster following a disappointing 1991. High Western World production, coupled with more than 1.1 million tons of aluminum exports from the former Soviet Union, more than matched demand, thus swelling warehouses and depressing prices.

Domestic producers drew some comfort from the fact that their shipments rose about 7 percent above 1991 levels once exports of mill products and ingot (which dipped 10 percent) are netted out. Still, financial losses plagued the industry—a clear reflection of a world oversupplied with aluminum.

Scrap usage in the United States also increased last year, albeit moderately. Scrap exports, however, were off by 36 percent compared with 1991, a situation attributed primarily to the slumping economics and ready supplies of prime and off-spec metal in Europe and Japan.

Aluminum prices did not experience severe volatility in 1992, though they did ease lower as the year progressed, averaging 57.5 cents a pound, or 3 percent less than the 1991 year-end figure of 59.5 cents, according to Metals Week. Meanwhile, LME cash values were lower by 4 percent.

Copper

"Unspectacular"—that's how many described world copper demand in 1992. While preliminary figures show Western World refined copper consumption increased about 1 percent over 1991, refined copper production is believed to have posted a larger increase, thereby placing the red metal in a statistical surplus for the year. This surplus can be traced, in large part, to the estimated 160,000 to 220,000 tons of copper that poured into Europe from the former Soviet republics.

In contrast, U.S. copper demand was positive, with refined consumption increasing approximately 8 percent and total apparent consumption rising almost 9 percent. Domestic scrap consumption did not keep pace with the overall consumption rate, however, increasing about 5 percent compared with 1991. Consequently, scrap's share of the copper market appears to have slipped lower.

U.S. copper scrap exports also headed downward last year, falling 20 percent from 1991 levels. China was the brightest player in the market, taking nearly 85,000 tons of alloyed and unalloyed copper scrap from the United States .

Despite these less-than-robust world fundamentals, average copper prices held relatively firm thanks to supply considerations, weakening only after the summer months. For the year, spot copper averaged $1.03 a pound on the Commodity Exchange Inc. (COMEX) ( New York City ), 2 percent lower than the previous year, with the LME reflecting a similar year-on-year decline. No. 2 copper scrap, meanwhile, averaged 88.6 cents a pound, off less than 2 percent from 1991, Metals Week reports.

Iron & Steel

Though the top-five U.S. integrated steel companies suffered a collective operating loss of $739 million in 1992, that was still an improvement over their $1.8 billion loss in 1991.

On the plus side, domestic raw steel production rose 4 percent last year, reaching 91.6 million tons, while steel shipments hit 83.4 million tons, up nearly 6 percent. These figures are in sharp contrast to most other world steel producers; in fact, total world steel output is believed to have declined nearly 3 percent in 1992. Japan and the formerSoviet Union showed the biggest year-on-year drops, with both falling more than 10 percent, while China enjoyed the largest increase.

Back in the United States, total apparent steel consumption increased about 4 percent in 1992, and scrap usage increased approximately 5 percent. As a result, ferrous scrap's share of the steel market, excluding home scrap, remained essentially unchanged.

In the U.S. export market, lower steel production offshore, coupled with available iron and steel scrap in Europe and Japan , reduced foreign demand for U.S. scrap, as seen in the market's modest 1-percent decline in 1992—not bad considering that in the fourth quarter of 1992, many expected exports to be off by more than 10 percent. Instead, iron and steel scrap exports rallied at year's end, boosted by demand from Far East consumers such as China.

This flurry of activity not only exacerbated a perceived shortage of scrap for domestic consumers, but also drove scrap prices up sharply as domestic mills worked down inventories. Nevertheless, 1992's average No. 1 heavy melting steel scrap composite price was down by around $8 a gross ton from 1991.

Lead

The 1992 lead market offered little encouragement to producers and consumers everywhere. Western World consumption was estimated at 4.7 million tons, less than 1 percent below the previous year's usage. On the other side of the equation, although world production did not keep pace with reported demand, substantial exports of up to 143,000 tons from Eastern Europe more than made up the difference, creating a statistical imbalance that grew progressively worse throughout the year. As evidence, LME stocks had swelled at year end by 111,000 tons to reach 250,000 tons.

Similar to world consumption, apparent U.S. lead consumption last year registered about 1 percent lower than 1991. This dip can be traced to weak demand from the battery industry, which normally accounts for 80 percent of the market. Higher shipments of original equipment batteries—up 11 percent for the year—were more than offset by uncharacteristically lower replacement battery shipments, which slipped almost 2 percent due to a relatively cool summer and warm winter. The latter decline also translated to low domestic scrap generation, which kept battery prices firm while prime metal values eased (LME cash lead averaged 24.5 cents a pound for the year, down 3 percent from 1991).

U.S. scrap exports also suffered last year, with shipments of scrap lead-acid batteries and other lead-bearing scrap dropping 31 percent from 1991 levels. Canada continued to be the largest importer of U.S. lead scrap, taking more than 80 percent of the relatively scant total.

Nickel & Stainless Steel

Although Western World refined nickel production fell 9 percent to an estimated 675 million tons in 1992, total world nickel consumption reportedly rose. Interestingly, this rise was attributed not to any increased use of primary nickel, but to growth in consumption of secondary nickel-containing materials. And, as one might surmise, much of this material came from the former Soviet Union , with as much as 28,000 tons of unofficial "back-door" supplies of nickel-containing alloys being added to the "official" Russian nickel export figure of 123,000 tons in 1992.

While primary nickel producers were under tremendous financial pressure last year, domestic stainless steel mills fared well in comparison. An improved U.S. economy helped stainless sheet and strip producers record a 7-percent increase in shipments last year, with total stainless steel shipments expanding 5 percent compared with 1991. To meet the demand, domestic scrap consumption jumped 7 percent, pushing scrap's share of the market marginally higher.

This positive domestic demand pulled stainless scrap away from the export market, which was off approximately 4 percent in 1992. This export decline was also the inevitable result of the flood of nickel from the former Soviet Union , as well as deteriorating economic conditions in Europe and especially Japan , where stainless production fell 7 percent.

LME cash-nickel prices also headed south in 1992, falling 14 percent to a $3.18-a-pound average for the year, a price believed to be below the break-even level for North American primary nickel producers. Throughout the year, prices ranged from a high of $3.72 a pound recorded in February to a low of $2.39 a pound in November.

Paper

Statistically, the paper and paperboard industries—including paper packers—posted several important increases in 1992, but financially, most in the industry termed last year difficult, at best.

Overall paper and paperboard production rose 4 percent, while adjusted total shipments reportedly increased 4 percent compared with 1991—both records. Paper recycling also hit record levels in 1992, with paper and paperboard mills recovering a healthy 10-percent more than they recycled in 1991. Consequently, scrap's share of the market grew as well, but is still about seven percentage points below the industry's goal to recycle 40 percent of all paper consumed in the United States by 1995.

Offshore demand for scrap paper was softer in 1992, with year-end exports placed approximately 2 percent less than in 1991. This marks the first year since 1982 that paper exports posted a year-on-year decline.

Plastics

Last year was hardly fantastic for resin manufacturers or plastic scrap recyclers, but there were several highlights. Virgin resin sales, for example, posted their first "meaningful" year-to-year rate increase since 1988, rising 7 percent, with commodity-grade thermoplastics such as high-density polyethylene (HDPE), polypropylene, and polyvinyl chloride outperforming the industry average.

Nevertheless, price drops initiated by the major manufacturers hurt plastic scrap recyclers, offsetting reported increases in demand for key grades of reprocessed material. Regrind HDPE, in particular, suffered last year as a direct result of an overabundance of virgin and off-spec material on the market. Recycled polyethylene terephthalate (PET) and low-density polyethylene, on the other hand, fared surprisingly well.

Although scrap prices of certain bottle grade resins slumped to near zero last year, forcing some firms to curtail or even abandon scrap collection and processing, bottle recycling rates managed to improve. PET containers alone had a 1992 recycling rate of 26 percent—a new record, according to the National Association for Plastic Container Recovery (NAPCOR) (Charlotte, N.C.). To achieve this record, recyclers collected 175,000 tons of scrap PET, up 23 percent from the 143,000 tons collected in 1991, says NAPCOR, which maintains that PET recycling has grown 133 percent since 1987.

Zinc

Western World production and overall zinc consumption paralleled each other in 1992, both ending the year at 5.9 million tons, down less than 1 percent from the previous year. Despite this apparent balance, large quantities of zinc piled into LME warehouses, outpacing the relatively smaller increase in metal stocks reported by world zinc producers. By year's end, LME stocks had swelled to 537,000 tons—45 percent more than the 370,000 tons in LME warehouses when the year began. Zinc exports from the former Soviet Union —estimated at 254,000 tons in 1992—added to the world surplus and helped keep the market out of balance.

The U.S. market, meanwhile, was a clear bright spot for the zinc industry in 1992. Paced by improvements in the automotive and construction markets, apparent domestic zinc consumption expanded nearly 11 percent compared with the previous—depressed—year. The revival in domestic demand brought about increases in smelter production, higher imports of slab and concentrates, and greater scrap use. In fact, domestic scrap use rose approximately 13 percent to 275,000 tons in 1992, improving scrap's market share slightly.

On the U.S. export front, zinc scrap shipments were off again in 1992, dropping 22 percent on top of a 16-percent decline the previous year. The most notable development was that Taiwanese demand, which normally accounts for 80 percent of total U.S. exports of zinc scrap, fell by 14 percent compared with 1991.

Despite these less-than-bullish world fundamentals, zinc prices held relatively steady last year. As a result, no major production cutbacks were instituted in the face of LME values termed by most as "artificially high." For the year, LME cash averaged 56.2 cents a pound, 11 percent higher than the 1991 average of 50.7 cents.