January/February 1992
The Long, Slow Path to Recovery
The recession deepened and scrap markets continued to decline in 1991, leaving metal executives to cautiously hope for some recovery in the new year.
By Kent Kiser
Kent Kiser is associate editor of Scrap Processing and Recycling.
Adios 1991, and good riddance. That seems to be the sentiment of most scrap executives, who have been riding out what some are calling the worst economic recession in more than a decade. But though many speculate that the worst is over, few expect 1992 to be anything more than a slight improvement over 1991. Some even fear that their markets could drop even further this year, while others see their markets neither improving nor degenerating, but bouncing along the bottom.
Scrap executives expressed little optimism, considering the grim economic news throughout the fall. The Federal Reserve Board called the domestic economy "weak or growing slowly," while Fed Chairman Alan Greenspan described economic recovery as trudging along in the fourth quarter of 1991 as if confronted by 50-mile-per-hour headwinds. Housing starts dipped again in the fall, while new car sales plummeted, reflecting huge losses by automakers. Retail sales were "slow or sluggish" in most regions, the Fed reported, while factory production and shipments were flat or only slightly higher than previous levels.
Only Wall Street seemed to be sensing something different. Stocks managed to hit record highs in the fourth quarter as investors looked ahead positively, believing that the Dow Jones was leading the United States out of recession.
As 1991 ended, the recession continued to buffet scrap markets against the rocks, leaving most executives wondering where market fundamentals will go next. As one buyer says with great understatement, speaking for all processors and recyclers, "We've had an awfully hard time putting our finger on what the market's going to do."
Even so, two dozen scrap executives volunteered to take a candid look at their commodity markets and hazard their predictions.
Aluminum
Stanton Moss, president of Stanton A. Moss Inc. (Bryn Mawr, Pa.), is no fan of 1991: "It was a terrible year, a year of overproduction and recession, which produced downward movement on prices."
Even with announced fourth-quarter cutbacks by Alcan Aluminum Ltd., Reynolds Metals Co., Aluar SA, and several European primary producers, there has been an "incredible overhang" on the market, and London Metal Exchange (LME) stocks could reach 1 million metric tons (mt), says Moss, who is also chairman of the nonferrous division of the Institute of Scrap Recycling Industries (ISRI) (Washington, D.C.). "It seems as if each week we have a new record on the LME as far as stocks go," adds Bill Monaghan a buying executive for Wabash Alloys (Cleveland) and cochairman of ReMA's aluminum subcommittee.
Moss says the proposed cutbacks are only "teasers," with everyone waiting to see what other domestic producers will do. "You've got to hope that Alcoa cuts a meaningful amount," an industry source states, though acknowledging that all indications are that the company will continue to refuse to cut its production. Without more worldwide cutbacks, however, processors agree, the overhang will not be rectified in 1992.
In addition to bulging stocks, aluminum prices in 1991 dipped approximately 40 percent, to lows not seen since the mid-1980s, Moss remarks. Last year's prices for secondary ingot were so low, in fact, says Monaghan, that the industry has "had problems keeping a margin that would keep us profitable."
Monaghan attributes part of these problems to the unusual persistence and unpredictability of the current recession. "It's been trudging along at a snail's pace and does not want to move," he says. "Every time you think it's going to move, it falls right back." This has wreaked havoc on the industry's market expectations. "Our schedules have been up and down like a rollercoaster," he notes.
Scrap availability—both industrial prompt and obsolete—has been tight, and Monaghan asserts that some sources are hoarding their supplies in anticipation of higher prices. The current scrap squeeze will ease, however, once the overall economy starts moving, he says.
The aluminum market will be "very, very quiet" in the first half of 1992, Moss predicts, with demand, tied to recovery of the automotive and construction markets, picking up in the second half. One good sign, Monaghan asserts, is that few consumers have large inventories now.
Looking to 1992 prices, Moss expects them to be "right where they are, if not lower." Monaghan, however, thinks that secondary ingot and scrap prices could rise as much as 10 percent compared with 1991 levels.
One industry source sums up, "I wouldn't look for 1992 to be a big year for aluminum." Still, as Moss remarks wryly, "Anything will be better than what we have now."
Copper
Throughout 1991, copper bucked the trend of declining metal prices, maintaining a relatively stable price around $1 per pound. But that price stability was not trouble-free—it came as a result of limited copper scrap supplies and some mine and smelter disruptions around the world. As Jon Douglas, marketing representative for Noranda Sales Corp. (Toronto), puts its, "The problem with the scrap market is not the price of copper, the problem is an inadequate supply." Reduced industrial scrap generation due to the recession and low inventories of recovered scrap at the processor level have resulted in a temporary overcapacity in the secondary smelting industry, Douglas asserts. Many secondary smelters are buying scrap at prices that put them at or below the break-even level, and if the supply situation remains unchanged, "mounting losses may force one of these smelters to close temporarily or permanently," he notes.
On the processing side, Dan Gascoyne, vice president of Frank H. Nott Inc. (Richmond, Va.) and cochairman of ReMA's copper subcommittee, notes that scrap supplies became more available in the fall (a trend that Douglas attributes to a lack of European interest), which enabled some firms to widen their margins a little. Still, with a persistent shortage of No. 2 copper and only adequate supplies of No. 1, there won't be enough scrap available when the domestic economy improves and export demand picks up, Gascoyne says. As a result, 1992 could bring more consolidation in the copper scrap business, with supply problems as well as stricter environmental regulations forcing some companies to shut down or sell out, he says.
Meanwhile, copper's main markets—automotive, construction, and telecommunications—have been suffering in the recession. Even so, some producers of copper products note that 1991 sales, while less than 1990, were moderate to satisfactory. Everyone in the copper industry, however, hopes for a recovery in the major markets in 1992, with one source expecting a "gentle and relatively slight upturn" for copper, but "nothing to write home about." In terms of price, Gascoyne observes, "I don't anticipate copper to break $1 on the low side or $1.12 on the high side. A dollar seems to be the magic number." Douglas expects the copper scrap situation to remain about the same for some time to come, stating that "there's not going to be a meaningful increase in supply at least until the middle of 1992." Even though he believes the economic recession has bottomed out, he adds that "the problem is that hitting the bottom doesn't imply that you can't stay there for quite some time."
Iron and Steel
The market for iron and steel scrap in 1991 was nothing dramatic, showing a gradual decline in demand and prices, says Dave Valentine, vice president of sales for Luntz Corp. (Canton, Ohio). Supply and demand were basically balanced, albeit at lower levels than previous years, which one Midwestern scrap processing executive called "the saving grace of last year." U.S. steelmakers increased their shipments in August, but the volume was 9.2 percent below the same 1990 period. Scrap demand reflected this decline, especially from integrated steel mills, while minimills helped stabilize demand for some processors, the executive notes. Export markets, however, were characterized as "weaker than normal" by some, "dead" by others late last year. Scrap prices managed to be "just adequate," says the executive noting that scrap traded in a very narrow range in 1991, varying only $15 compared with the more common $40 to $50 swings. As prices continued to decline in the fourth quarter, however, scrap supplies became tighter, upping the competition for material between processors and squeezing margins.
From a producer's perspective, "it's been a weak year," says Gordon Forward, president of Chaparral Steel Co. (Midlothian, Texas), "you don't have to be a rocket scientist to figure that out." Demand for the company's structural products was off up to 30 percent compared with 18 months ago, he notes, and selling prices have been bleak. "It's been a year of cost-cutting and wondering who's going to be here next year," he asserts, stating that 1992 should be "very slow."
Iron and steel processors and producers are banking their hopes on a recovery in the automotive industry in 1992 and a return of consumer confidence, which would boost car sales and increase scrap supplies. Still, Valentine asserts, "I don't see anything earth-shattering happening on the demand side at least until the second quarter." Overall, he expects 1992 to be better than 1991—"After all, I've got to have a little optimism."
Others think 1992 will be a carbon copy of 1991. "The government would like everyone to believe that we've hit the bottom," the Midwest executive says, "but from our perspective, there's always the possibility that things could get worse before they get better."
Lead
Secondary lead smelters consider 1991 to have been an "unusual" year. In the fourth quarter, the replacement battery business and overall demand were healthy and scrap supplies were tight—the perfect scenario for higher prices and comfortable margins. Instead, prices for both primary and secondary lead hit three-year lows, hovering in the 25-to-30-cent-per-pound range, which severely depressed margins for all lead smelters, says Edward L. Puckett, general manager of the resource recycling division for GNB Inc. (Atlanta). "There's no profit margin at these prices," he notes. For refined lead, rising premiums paid by domestic consumers in the fourth quarter simply reflected the tightness of metal in North America and were not expected to last, Puckett says. Meanwhile, secondary smelters were affected by low availability of lead-acid batteries and relatively high scrap prices, which narrowed spreads.
The price problem can be traced to swelling stocks in LME warehouses, which climbed to 113,000 mt in November, compared with 44,900 mt the previous year. This metal streamed out of Eastern Bloc countries, which are pouring lead into the LME to obtain hard currency, says Dick Amistadi, vice president of sales for Doe Run Co. (St. Louis), who notes that stocks can be reduced. If European smelter capacity is cut, either from voluntary production cutbacks or plant closings due to stricter environmental-compliance standards. The LME could also adopt a high-grade lead contract, Puckett recommends, which could restrict the quantity of lower-quality lead entering the warehouses.
Will 1992 be any less "unusual" than 1991? Unfortunately, says Amistadi, "I see more of the same," though he does anticipate a modest improvement in realized prices this year. Puckett, however, asserts, "I don't see any appreciable improvement in margins or lead prices in the next 18 months," with LME prices likely to range between 22 to 28 cents per pound.
For secondaries, continued tight scrap supplies and thin or nonexistent margins could force some to reduce their production or shut down entirely next year, Puckett says. Fortunately, the replacement battery market was good in the fourth quarter, which increased short-term scrap availability.
On the demand side, the United States, Europe, and Asia are all expected to buy more lead in 1992, Amistadi asserts, adding, "Will this demand rise sufficiently to absorb the surplus?" That is the question on every lead executive's mind.
Nickel/Stainless
The two questions on the minds of all nickel/stainless steel executives are, "When will the Soviets reduce their nickel shipments?" and "When will the economy recover?" says Albert J. Wein, president of Wein Metals Inc. (Pittsburgh). Last year, hefty Soviet nickel shipments filled LME warehouses to levels not seen since 1984, pushing scrap and prime prices into the ground. Primary production cutbacks announced by Inco and Falconbridge did little to stimulate the market, Wein notes, though the effect of the cuts may be felt when business picks up.
To make matters worse, the gap between scrap and primary prices widened in the fourth quarter, which severely reduced processors' margins. "It was straight downhill all year," states Arnold Plant, senior vice president of Keywell Corp. (Baltimore) and chairman of ReMA's stainless and alloys committee. Supply was not the problem—"there was more material around than in 1990," Plant notes. The problem was demand.
Demand from the domestic stainless market was "not that bad" in 1991, Wein asserts. U.S. mills were running at about 80-percent capacity late last year, says Sam Waldman, president of Southeastern Stainless & Alloys Inc. (Charlotte, N.C.). Domestic scrap demand did drop noticeably, however, in the second half of the year, resulting in an estimated 10-percent decline in demand for the year, Wein notes. Export demand, on the other hand, evaporated. European demand was extremely soft last year, with mills operating at only 60-percent capacity, Waldman says, while Asia —which accounts for 90 percent of nickel/stainless exports—also reduced its scrap purchases. This lack of overseas demand softened scrap and primary nickel prices more than normal, Wein observes. LME nickel prices reflected this worldwide downturn, dipping into the $3.30-per-pound range last fall.
This year should see an increase in mill orders, Waldman says, but the improvement will be "somewhat anemic" for the first six months. "The normal robust economy that you would hope for in an election year will not be there," he observes. "The year will start with a whimper and hopefully end with a roar."
He expects nickel prices to be in the range of $3 to $3.25 per pound on the low side and $4 to $4.25 on the high side. Scrap inventories will likely build in the first quarter as demand remains sluggish, he predicts, but by mid-1995, scrap could be tight due to reduced quantities of available demolition, obsolete, and production scrap.
Plant is less optimistic: "I can't say to you that there's any light at the end of the tunnel. I can't even say that we've found the tunnel." The duration of the recession so far, however, leads him to believe that the market will get "somewhat better" this year. Still, he advises, "The industry had better learn that price is not the most important aspect of doing business. You have to be able to trade, buy and sell. If you can't move it, it doesn't mean anything."
Paper
"Last year was a steady, sickening, downhill slide that only began to bottom out in the fourth quarter," says Philip A. Alpert, a partner of National Fiber Supply Co. (Chicago), capturing the feelings of many scrap paper executives. Virtually all grades were either in oversupply or underdemand, prompting Alpert to note that "by many criteria, 1991 was the industry's worst year—definitely one of the worst."
In addition to the overall recession, the scrap paper and paperboard industry had to contend with burgeoning supplies from municipal and curbside collection programs. These programs have changed the industry's previous supply/demand system, directing vast quantities of paper to processors and packers as "a lesser form of disposal," asserts John Gold, vice president and general manager of North Shore Recycled Fibers (Salem, Mass.) and president of ReMA's PSI Chapter. "This is a whole new industry we're in." Alpert agrees: "The presence of the recycling movement is a wild card that's never been there before," he says, noting that the problem is that "many governments and municipalities confuse collection with recycling."
New virgin mill capacity that came on-line in 1991 also created a glut of finished product on the market, which drove down the selling prices of new paper products and, thus, limited what the mills could afford to pay for fiber, Alpert says.
This chronic oversupply has negated any demand strength. Both domestic and export consumption, for example, hit record levels in 1991, but supply outstripped it. The export market, which mirrored the domestic decline in 1991, will continue to be spotty in 1992, Alpert predicts. In the long-term, he is concerned that the increasing recycled content of domestic paper could reduce the fiber's quality and strength, which could affect its desirability overseas.
Prices nosedived in 1991, with many high grades sinking up to 50 percent, bulk grades showing dramatic decreases, and newspaper prices "dropping to zero and below," Alpert notes. Gold adds soberly, "Prices have been at levels where it's impossible to make a profit."
For the market to improve in 1992, an overall economic recovery is needed, which would increase mill demand. "We have hit bottom," Alpert asserts, "but I see nothing on the horizon to indicate immediate or sharp movement out of this recession." He expects the first half of 1992 to be a continuation of the last half of 1991. In the long-term, however, he is confident that mills will retrofit their equipment to handle more secondary fiber, but this process will take time. "You can't install a deinking or cleaning system overnight," he observes.
In the meantime, the scrap paper and paperboard industry will experience some growing pains, but despite current problems, Gold says, "I look forward to the challenge."
Plastics
According to Martin Forman, president of Poly-Anna Plastic Products Inc. (Milwaukee) the plastic recycling industry operates on a seven-year cycle, encompassing two horrible years, three transitional years, and two great years. Unfortunately, 1991 was the first of the two horrible years. "Supply of both postconsumer and industrial plastic scrap has been growing due to the added desire to recycle, and the added material has been forcing prices down because of limited consuming capacity," explains Forman, who also serves as president of ReMA's Wisconsin Chapter and chairman of the plastic committee. This plethora of supply will continue into 1992 unless manufacturers step up their use of recycled plastic—"They're shameful in their aversion to use recycled polymers," Forman chastises—or unless recycling legislation compels them to do so. "The failure to endorse any kind of minimum-content legislation is the major force in putting plastic recyclers out of business," he states.
Tax incentives could also be offered to increase manufacturer demand, says Daryl Parks, executive vice president and general manager for American Iron & Supply Co. (Minneapolis). "There needs to be an incentive somehow for manufacturers to use recycled resin," he states. Quality concerns, however, are perhaps more important to building postconsumer plastic markets, Parks says. Even though the recent postconsumer plastic market has been "devastating" and "depressed," he asserts, "If you have the right quality, there's demand."
Last year, scrap plastics were also adversely affected by the crash of virgin resin prices, especially polyethylene, Forman notes. In 1992, scrap prices could continue to fall until virgin prices rebound and demand comes more into balance with supply.
This year, Parks does not anticipate any nationwide economic recovery until the end of the second quarter. "I don't see a lot of optimism out there in industry," he notes. "I don't think there'll be a lot of improvement, but I hope I'm wrong." Parks is confident, however, that the recycling of postconsumer plastics will eventually take off, but "it's going to take years," he says.
The industrial plastic scrap market also saw lower prices, higher supplies, and limited markets in 1991, but it wasn't as hard hit as its postconsumer relative. David Kaplan, senior sales associate for Maine Plastics Inc. (North Chicago, Ill.), whose firm primarily handles industrially generated plastics, states, "It wasn't a bad year for us." Flexibility is key in these difficult times, he asserts, noting, "If one material isn't doing well, you've got to move to another. You've got to know your markets." In 1992, Kaplan expects industrial plastic scrap prices to remain flat at least until after the first quarter, and he doesn't expect the new year to be better overall than 1991.
Looking beyond 1992, Forman predicts a "terrific future" for industrial plastic scrap, particularly since the material is easier to keep clean and segregated than postconsumer plastics, which enables processors to deliver a higher-quality package to consumers.
Zinc
U.S. zinc consumption took a blow on the chin in 1991, dropping almost 10 percent, with the most dramatic decreases occurring early in the year. Worldwide demand finished better, but was still down 2 percent compared with 1990 levels, says Mike Deelo, director of marketing for Zinc Corp. of America (Monaca, Pa.).
Stocks became extremely full, reaching in excess of 150,000 mt—almost four times the 1990 warehouse amount—in large part due to metal flowing out of the Eastern Bloc, which has gone from being a net importer of zinc to being a net exporter. Even so, North American consumers started experiencing a physical tightness of metal, mainly because the warehoused stocks are not in North America, notes David S. Aronow, president of Arco Alloys Corp. (Detroit) and cochairman of ReMA's lead/zinc subcommittee. Also, as premiums began to lower in the first half of 1991, less metal flowed into the United States . Since the United States only has the capacity to meet about 40 percent of its zinc demand, any reductions in imported metal can cause inventory shortages. In addition, production problems at some U.S. and Canadian smelters caused some deliveries to be late.
After enjoying peak prices between 80 and 90 cents per pound in recent years, zinc prices were humbled in 1991, hovering in the high-40s-to-low-50s-cent-per-pound range at the end of the year. "Clearly, zinc is undervalued at the present price level," Deelo states. One bright spot has been the rising premiums above LME quotations, which could increase the flow of metal into the United States and ease some of the current supply tightness in North America . "I don't think zinc prices will go down much more," Aronow says. "I think we're at or near the bottom, although we could stay at the bottom for a while." Despite this caution, Aronow expects zinc prices to hover in the 50-to-55-cent-per-pound range in 1992.
In offering a general blueprint for next year, he expects the first quarter to be down, the second quarter to be flat, and the third and fourth quarters to show recovery. He sees continued tightness in scrap supplies and high stocks until the manufacturing and construction sectors pick up. Russ Robinson, president of U.S. Zinc Corp. (Houston), also sees a slow but steady rise this year—"Nothing substantial and nothing quick"—with 1992 being more stable overall than 1991. Deelo is more optimistic, asserting that worldwide zinc consumption will increase 3 or 4 percent in 1992, while the United States will make up most of its 10 percent deficit in demand.
In summary, Aronow notes, "I'm a little concerned about 1992, but at the same time I'm optimistic," reflecting the paradoxical feelings many producers and processors are experiencing during this recession. Looking past the current metal-market woes, all executives have faith in zinc's prospects. "We continue to expect zinc to be a long-term growth market," Deelo says. •
The recession deepened and scrap markets continued to decline in 1991, leaving metal executives to cautiously hope for some recovery in the new year.