January/February 1993
In 1992, scrap recyclers once again found themselves adrift on weak economic waters. Will 1993 blow them back on a positive course? Some scrap executives offer their predictions.
BY ROBERT J. GARINO
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (Washington, D.C.).
As difficult as 1991 was for the scrap recycling business, for many, 1992 ultimately proved to be far worse. Thus, as the industry enters 1993, the concern remains: Will recyclers see more of the same that is, a lack of wind in the U.S. economic sails or will the new presidential administration provide the leadership and confidence to propel a new ship of state for the balance of the 1990s?
The industry is keeping its fingers crossed. After all, despite predictions by economists in 1991 that the worst was over and recovery was at hand, 1992 brought little comfort. Business expectations were dashed repeatedly last year due to what one economist called the "phenomenon of the disappearing recovery." As a result, scrap volumes, prices, and margins simply did not have an opportunity to recover. Industrial activity ebbed through most of the year, and with it came an ocean of red ink. In fact, since 1990, the sputtering domestic economy has led to numerous production cutbacks, retrenchments, and bankruptcies within the scrap industry. And as many members of the Institute of Scrap Recycling Industries (ISRI) (Washington, D.C.) contend, anything short of a robust recovery in 1993 could doom others to the same fate.
Although the U.S. gross domestic product has been positive for the past seven quarters, several factors have deflated prime metal and scrap values, namely a slower interdependent global economy, perceived and actual surpluses of many raw materials, and massive exports of some commodities from the former Soviet republics. As a result, most scrap market forecasts for 1993offered by ReMA members in November were tentative. The consensus calls for a light breeze to partially fill the domestic economic mainsail rather than a full-blown, four-masted international recovery.
Aluminum: Buoyant Second-Quarter Hopes
"Conventional wisdom pointed to a turnaround for aluminum in July 1992," says Bill Monaghan, purchasing manager of Wabash Alloys (Cleveland) and cochairman of ReMA's aluminum committee. But that turnaround, of course, never happened. In fact, the markets for both prime and scrap aluminum softened in 1992 as warehouse stocks bulged. Consequently, prices in early November, as expressed by Metals Week, were close to those posted back in January, and three-month quotations on the London Metal Exchange (LME) (London) hit a 10-month low. What happened?
Market observers cite several explanations: the continuation of a worldwide economic recession that has proved far more hurtful to the European and major Pacific Rimeconomies than the U.S. economy, continued high output by primary producers around the world, and large amounts of metal flowing from the former Soviet republics to the West. Each factor, on its own, had the potential to damage aluminum, but it was the combination that really seems to have hurt prices. "Although Eastern European exports in 1992 were an important factor," explains a Midwest processor, "the fact that Western World producers maintained high capacity-utilization rates compounded an already tenuous world supply/demand balance."
On the positive side, total U.S. shipments of mill products and ingot remained positive into the final quarter of 1992. Certain key markets, however, did not live up to earlier expectations. For instance, 1992 aluminum can shipments were "very disappointing" compared with 1991 levels, says John H. Stone, scrap metal manager for Aluminum Co. of America (Knoxville, Tenn.), blaming the decline on "one of the coldest and wettest summers in memory." The demand for and supply of all-aluminum used beverage cans (UBCs), meanwhile, increased at a "surprisingly rapid pace" despite relatively weak buying prices for scrap, notes Stone, who also serves as chairman of ReMA's UBC committee. These two trends should result in a higher UBC recycling rate in 1992 compared with 1991, he offers.
But what about 1993? Monaghan contends that although the domestic secondary market should prove to be "steady," he expects "no major improvement until the middle of the second quarter." Just how major that improvement might be is anyone's guess, but, Monaghan points out, a lot depends on automobile demand in early 1993 and on the world supply/demand balance. Others also emphasize, in particular, the latter factor. In fact, the world stock overhang is currently a major worry, observes David Morton, chairman and chief executive officer of Alcan Aluminium Ltd. (Montreal). Even so, the LME inventory "could quickly be run down," he says, "if fabricators perceived an imminent upturn in demand."
The few who ventured price forecasts see aluminum trading in a range of $1,100 to $1,400 per metric ton (mt) in 1993. Still, most aluminum executives point to numerous question marks when it comes to value predictions. "Tell me what China will buy and what the Russians will sell in 1993that's the key to understanding prices in 1993," concludes one Midwest merchant.
Copper: Rising Slightly Higher
Copper showed surprising resilience in 1992 compared with most other commodities. Interestingly, forecasts made early in 1992 were not particularly bullish, with industry players focusing on reasons to sell copper, not add to their long positions. As it turned out, however, world fundamentals took more than 10 months to assert themselves. Most participants guessed wrong, as copper held above $1.00 per pound between February and October, rallying to a high of $1.17 in July. Copper prices were bolstered on the world market by supply disruptions notably, a strike in Poland and production shortfalls from Zaireand the belief that a worldwide lack of smelting capacity to treat copper concentrates would strain the demand for refined metal. It was only in the fourth quarter of 1992 that the sentiment turned decidedly bearish against the red metal.
As for demand, China proved to be an important outlet, buying more than 200,000 mt of refined metal last year, plus blister, copper concentrates, and copper-bearing scrap. The U.S. market was also positive, with apparent consumption running several percentage points ahead of 1991 levels.
Worldwide, however, a well-balanced copper market in 1991 and early 1992 gave way to surplus in the second half, as refined output proved much greater than originally projected. As demand faltered, stocks grew, and prices literally plunged in early November, with values on the Commodity Exchange Inc. (COMEX) (New York City) matching lows set back in mid-January.
Unlike other markets, North American copper demand did not fall out of bed in the second half of 1992, according to Jon Douglas, assistant manager of recycling for Noranda Sales Corp. Ltd. (Toronto) and chairman of ReMA's copper/brass committee. "Generally speaking," he says, "overall U.S. demand for copper was steady throughout 1992. In the second half of the year, however, as the Japanese economy slipped further into recession, U.S. cathode exports to the Pacific Rim declined, and surplus metal quickly found its way into COMEX warehouses in the Western United States, creating a false perception that U.S. demand had weakened dramatically." This perception was likely reinforced in late 1992, Douglas offers, "due to consumers buying less copper in order to run down their inventories for accounting purposes."
Given the above scenario, it is reasonable to expect a surge in cathode orders in early 1993, Douglas believes, which could be followed by rundowns in both official (COMEX and LME) and unofficial (producer and merchant) stocks and an increase in the price of copper as economic recoveries in Japan and Europe take hold.
How high will prices go? "With China again assumed to be a major buyer in 1993, it's very possible that copper will spike up to $1.20 per pound," offers one East Coast consumer. Douglas also sees "slightly higher" prices, on average, for 1993 compared with 1992, but loftier numbers "will have to wait until 1994." On a more bullish note, John Champagne, president of Magma Metals Co. (San Manuel, Ariz.), ventures that spot COMEX could average $1.10 to $1.15 per pound in 1993.
Iron & Steel: Sailing Toward a 1994 Peak
The U.S. steel producing industry fared much better last year than steelmakers in most other industrialized nations. For example, while domestic raw steel production through October 1992 was running 5.8 percent above 1991 levels, Japan's raw steel output slumped to its lowest level since 1986. Furthermore, forecasts offered in November 1992 called for total U.S. shipments of 81 million mt, up from the 78.9 million mt in 1991. Meanwhile, European steel consumption was depressed for most of 1992, and growth slowed markedly in the developing countries.
This year doesn't hold much promise for gains on the international scene. Given the morose world economic climate, world steel demand is "unlikely to show much improvement in 1993," says Lenhard J. Holschuk, secretary general of the International Iron and Steel Institute (Brussels, Belgium). Western World apparent steel consumption which, he notes, hovered in 1991 and 1992 at 432 million mt is only expected to rise by 12 million mt, or 2.8 percent, in 1993 to about 445 million mt. U.S. growth, Holschuk estimates, could be 3 percent in 1993.
U.S. ferrous scrap recyclers found few reasons to be optimistic in 1992, despite increases in overall domestic steel production. Relatively flat domestic scrap demand and a depressed scrap export market conspired to shrink margins, processors explain. As Tom Salome, president of M. Lipsitz & Co. Inc. (Waco, Texas), remarks, "We made sales in 1992, but not `good' sales. We didn't see our volumes significantly reduced from 1991 levels, but industry profitability suffered."
Alan Jay Perlman, vice president of F. Perlman & Co. Inc. (Memphis, Tenn.) and chairman of ReMA's ferrous domestic trade committee, says the steel scrap market "bottomed out in the second half of 1992" and is not about to recover anytime soon. This bottom, however, may finally signal a turnaround in the market, he notes, adding that "the election might also have been the much-needed catalyst for our industry." Nonetheless, Salome predicts, a "brisk recovery" will have to wait "until after the second quarter of 1993." He also cautions that upticks in the winter months should not be construed as the start of an immutable upward trend. "It'll be slow," he says, as ferrous scrap climbs toward a peak to be reached sometime in the second quarter of 1994.
Lead: Riding Out Regulatory Waves
With approximately 80 percent of the lead industry tied to demand for lead-acid batteries, the fate of the domestic lead industry generally reflects the nation's capital spending plans, as well as the weather. So what did these bring for lead in 1992? "Last year was the pits for the entire lead industry," says Carl Fischer, corporate manager of raw material purchasing for RSR Corp. (Dallas) and cochairman of ReMA's lead/zinc committee. U.S. Bureau of Mines data back him up: Domestic lead consumption was lower through the first three quarters of 1992 compared with 1991, according to the bureau. If that trend continued through the fourth quarter, 1992 can be marked as the third consecutive year of declining domestic lead consumption and the second year in a row for lower world lead demand.
One Midwest battery manufacturer summarized 1992 this way: "Replacement battery shipments remained positive, and the original equipment market made solid improvements compared with 1991." Still, he says, the lead market appeared depressed due, in part, to the relatively large inventories of finished replacement batteries waiting to be shipped. Consequently, demand for new, refined lead slowed dramatically last year, so much so that the lingering strike at the Doe Run Co. (St. Louis) refinery in Herculaneum, Mo. had virtually no impact on the market. Also, as lead fabricators point out, the drawn-out recession cut demand from smaller lead-consuming markets.
The severity of the 1992 market and the relatively expensive scrap that came with it caused several secondary lead plants to close, Fischer notes, but he also points to ongoing environmental problems as an explanation for shutdowns. Furthermore, he says, "Environmental issues will dominate the industry's thinking in 1993, not supply/demand fundamentals." In fact, many industry players say they are especially sensitive to the proposed reauthorization of Superfund, which could literally close down the secondary lead industry. Nevertheless, some lead recyclers prove that hope springs eternal, despite apparent significant short-term hurdles in the marketplace. Asarco Inc. (New York City), RSR, and GNB Inc. (Atlanta) all reportedly plan to construct new secondary lead smelters in the Southeast.
Still, supply and demand can't be ignored. In 1993, barring any unusual supply disruptions, new production and available stocks of lead will more than match projected demand, at least through the first half of the year, lead executives predict. Consequently, lead prices in 1993 are not expected to change much from 1992.
Nickel/Stainless Steel: Floating on an Ocean of Stocks
"Freefall" was the word often used by nickel executives to describe LME nickel prices in early November. But this came as no surprise to many, who believed the world nickel market was vulnerable for most of the year. Focusing on the United States, however, stainless steel production for the first three quarters was up almost 7 percent compared with 1991 figures. The U.S. market for flat-rolled products, as one example, was good virtually all year, says Louis Vari, senior vice president of Keywell Corp. (West Mifflin, Pa.) and chairman of ReMA's stainless and alloys committee.
Outside North America , however, the Japanese and European economies stalled reducing nickel consumption and worrisome quantities of primary nickel continued to flow from the former Soviet republics, known as the Commonwealth of Independent States (C.I.S.). Despite reports of lower primary nickel production in the republics in 1992 compared with 1991, reduced demand within the C.I.S. pressured exporters to ship vast quantities of metal to the West. As an added dimension to this situation, "approximately one-third of the C.I.S. metal that flowed to the West bypassed government export duties," notes Norman R. Cohn, president of Norco Alloys Corp. (Berkley, Mich.) and a vice chairman of ReMA's stainless and alloys committee. This segment the so-called back-door supply was being "sold aggressively," thus countering any positive news associated with lower nickel output from the C.I.S. in 1992. As Cohn surmises: "What happened in 1992 reflects what happened in the former Soviet Union in 1991." Lower prices for all nickel units followed.
Like the ferrous market, the nickel market is not expected to turn around soon, says Alan Goodman, senior buyer for JAR International Sales Corp. (Denver) and a vice chairman of the stainless and alloys committee. Goodman sees "downward price pressure continuing into 1993," with LME values hovering around the $2.50-per-pound mark. Vari, meanwhile, says the LME could slump to $2.25 per pound before bottoming out.
Demand prospects look promising in comparison, both here and in Japan , executives say. The assumption, of course, is that nickel-containing end-use markets, especially in the capital goods area, will show new life. If they do, scrap processors can look forward to 1993, Vari says. Much-needed world production cutbacks and higher domestic stainless steel demand should keep scrap nickel units competitive, he believes.
Paper: Profitability on the Horizon
In sharp contrast to most metal executives, paper packers and brokers have a mostly positive outlook on 1993an optimism they've avoided in the past few years, despite the fact that domestic paper mills were reportedly consuming secondary paper in record amounts. The reason for that past doom-and-gloom mindset? Positive demand could not erase several painful problems in the market, such as a large overhang of virgin pulp inventories, rising ocean freight rates, a shortage of shipping containers, and a glut of supply due to rising tipping fees and mandatory collection programs. Added to that, paper executives say, the recession cut paper and paperboard mill running times in theUnited States and abroad. As a result, virtually all grades were affected, from the relatively high-priced pulp substitutes to less-valued old newspapers.
William F. Schirmer, president of Schirmer Paper Corp. (Boston), sums up 1992 as the year of "profitless prosperity." The fixed costs of doing business continued to move higher, he notes, and "net profits were nowhere near the levels of one or two years ago." Furthermore, scrap paper exports, recognized as an important supply safety valve, could not save the industry, registering a 4.5-percent drop between January and August 1992 compared with similar 1991 numbers.
Although the general outlook was brighter at the close of 1992scrap paper prices, in fact, reached their highest point of the year in September, reports the Bureau of Labor Statistics several executives worried that international weakness in the virgin pulp market would again be a feature in 1993. Others were confident the industry was well on its way to recovery. "I see light at the end of the tunnel," remarks Jonathan Gold, vice president and general manager of North Shore Recycled Fibers (Salem, Mass.) and chairman of ReMA's nonmetallics division. Despite the negatives of "increasing costs and shrinking margins," Gold points out that some mills are following through with their commitments to use more reclaimed paper. As a result, there should be healthy demand in 1993 for high grades such as white and sorted office paper, predicts Wayne DiCastri, president of both Pioneer Fibers Inc. (Minneapolis) and ReMA's PSI Chapter. "Mills will be looking for much greater volumes of both printer's grade and office papers," notes DiCastri, who is also chairman of ReMA's paper committee.
Gold also asserts that "old corrugated containers look to be well-positioned in 1993." He foresees higher domestic usage and increasing reliance on bulk shipments to help move scrap to the Pacific Rim . Thus, for many in the scrap paper industry, 1993 could be the long-awaited year in which the market will shift from oversupply and thin margins to positive demand and profitability.
Plastics: More Rough Sailing
Data released in June 1992 concerning the growth in plastic recycling in the United States contained some positive news for firms processing and reusing postconsumer plastics. According to the study, commissioned by the Society of the Plastics Industry (Washington, D.C.), polyethylene terephthalate (PET) soft drink bottles were recycled at a rate of 36 percent, up from 30 percent in 1990. The report also noted that a total of 640 million pounds of postconsumer plastic packaging was recycled in 1991. When matched against a 14.4 billion-pound plastic packaging market, the overall plastic recycling rate in 1991 was 4.4 percent.
In general, however, the plastic recycling industry struggled in 1992 as it attempted to balance new legislative initiatives that could affect plastic packaging, virgin resin supply/demand fundamentals, and depressed values for certain commodity-grade plastics. On the postconsumer side, mixed signals pervaded, says Marty Forman, president of Poly-Anna Plastic Products Inc. (Milwaukee) and chairman of ReMA's plastic committee. "Some markets for scrap plastic processors fared quite well," he explains, "while demand was virtually nonexistent in other markets."
The PET market, for example, proved to be profitable in 1992, especially for those who supplied material free of polyvinyl chloride. As Forman points out, however, "Contamination doomed many in 1992." This problem will not be resolved soon, he believes, and it will limit PET recycling outside the nine so-called bottle-bill states.
In contrast, the market for mixed high-density polyethylene (HDPE) was depressed in 1992, according to several processors, due to scrap oversupply, huge olefin overcapacity, and depressed end-use markets. On top of that, virgin resin prices remained soft, creating a market in which processed scrap was being offered at a premium to its virgin counterpart. Only companies that specialized in HDPE milk jugs came away with a profit in 1992, executives say.
Despite last year's market woes, Forman sees "windows of opportunity" in 1993 in niche markets such as linear low-density polyethylene scrap including stretch film and pallet wrap. PET also holds promise, but "only if it's clean," sources indicate. Some express concern that industry rationalization will again be a feature in 1993 due to the depressed state of both postconsumer and industrial scrap. Announced price hikes by major resin suppliers in late 1992 were, in the words of one processor, "too little, too late." Thus, it looks as if plastic scrap recyclers could find rough sailing again in 1993.
Zinc: Drifting Away From Fundamentals
While no commodity is ever truly predictable, analysts assume that, in the long-term, prices reflect world production matched against world consumption and stocks. This may be true over time, but in the short termin this case 1992zinc's fundamentals took a back seat to other market forces. "The zinc market in 1992 appeared to be controlled by commodity investment funds and speculators," explains David Fink, treasurer of Allied Metal Co. (Chicago) and cochairman of the ReMA lead/zinc committee. Others add that, in fact, the zinc industry has been subject to periodic bouts of "unusual influences" ever since North American producers abandoned their list prices in favor of LME basis prices in mid-1990.
To many in the zinc industry, 1992 was especially unsettling because of the large influx of options used on the LME. A report published in early 1992 by Billiton-Enthoven Metals Ltd. (London) cautioned that zinc prices could be "distorted" in 1992 by options-related squeezes, producing even "higher year-end levels than warranted by underlying fundamentals." The firm predicted zinc prices to average 52 cents per pound in 1992.
In hindsight, the report was indeed prophetic. Zinc prices responded strongly during the second and third quarters of 1992, pushing LME monthly averages above the 60-cent-per-pound mark. Domestic zinc consumers were clearly using more zinc in 1992 compared with 1991, but zinc officials were not crediting higher zinc prices to the positive demand reported by die casters and galvanizers. Rather, they cited "manipulation," not fundamentals, for a 10-month zinc average of just under 58 cents per pound.
Looking tentatively ahead to zinc prices in 1993, Fink notes that the November drop in prices could encourage forward buying in early 1993 in anticipation of an economic turnaround. LME prices, he speculates, could be "around 59 cents per pound, maybe by the second quarter of 1993." William Adams, an analyst with Rudolf Wolff ( London ), sees the LME at an average 63 1/2 cents, "with most growth coming in the second half of the year."
Offering a more pessimistic view, Peter Goodburn, director of Waterside Futures Ltd. (London), believes that the LME cash zinc price will bottom out at approximately 23 cents per pound in 1993 or early 1994. It's important to note, however, that this shocking forecast is clearly at odds with most U.S. zinc executives, who believe that more not less zinc will be consumed in 1993 than in 1992. The U.S. government Industry Advisory Group to the International Lead and Zinc Study Group (London), in fact, forecasts U.S. slab zinc consumption to be 1.037 million mt in 1993, up 2.9 percent from the 1.007 million mt projection for 1992.
In 1992, scrap recyclers once again found themselves adrift on weak economic waters. Will 1993 blow them back on a positive course? Some scrap executives offer their predictions.