January/February 1994
International economic factors are restraining the domestic recovery of most industrial commodities, leading recyclers to wonder if the market situation will, or even can, improve in 1994. Here are some predictions.
By Robert J. Garino
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (ISRI) (Washington, D.C.).
The U.S. economy may be pulling out of the economic doldrums that have plagued it for the past few years, but most scrap-related commodity markets have yet to get back on track--and there’s no guarantee that they will in 1994, even if the domestic economy picks up speed.
One potential holdup: Today’s global commodity marketplace is tied to the interdependence of a number of national economies. Thus, while the United States is showing definite signs of rejuvenation in some scrap-related market, its progress is apparently being slowed by other international economic engines--Germany and Japan, in particular--that are lagging behind or still stuck in the station. And until the world’s key national economies begin to steam ahead as a group, all may simply putter along, stifling many scrap commodity markets in the process.
Equally important is the outlook for renewed balance in the metallic and nonmetallic markets that have been overshadowed by oppressive oversupplies in recent years--another factor that obliges market watchers to look far beyond domestic supply and demand. For example, while it may sound glib, perhaps even ludicrous, to blame the former Soviet Union for depressed aluminum can prices in Nashville, there’s an undeniable connection between Soviet shipments of aluminum into into London Metal Exchange (LME) (London) warehouses and low aluminum scrap prices in the United States, and there’s little hope for much price improvement in 1994 unless the flow subsides.
Similarly, domestic brass and bronze ingot makers are among those metal businesses directly affected by the volume of puts and calls exercised by commodity and pension fund managers, so future pricing trends could also be influenced by the ever-growing role of futures, options, currency swaps, and other financial derivatives. What’s more, potential changes in interest rates and capital spending plans could influence markets over the next 12 months.
Chugging Along
What are the chances of economic recovery among the world’s economic engines? One report, issued by the International Monetary Fund (IMF) (Washington, D.C.) last fall, asserts that international economic growth should pick up “gradually,” but cautions that signs of this recovery are “still uncertain.” Significantly, the IMF has scaled back its growth projections for all industrialized countries, except the United Kingdom, from its forecasts released early in 1993, revising Japan’s 1994 growth downward from 3.5 to 2 percent, the European Community’s from 2.2 to 1.6 percent, and the United States’s from 2.7 to 2.6 percent.
Other forecasts call for similarly slow progress. In early December, London’s Financial Times, for example, pegged Germany to record a modest 0.75-percent growth in its gross domestic products (GDP)--the total amount of goods and services produced in a country--in 1994, after a fall in output of 1.5 percent in 1993. And a consensus survey of the National Association of Business Economists (Cleveland) released in August predicts that GDP growth in the United States in 1994 will be 2.7 percent, down from earlier estimates of 3 percent in April and 3.2 percent in February.
The Clinton administration, meanwhile, is predicting 3-percent GDP growth in 1994. And even if this more-optimistic forecast works out, the U.S. economy is far from rolling on wide-open tracks. Federal Reserve Chairman Alan Greenspan, who said the U.S. economy faced 50-mile-per-hour headwinds in 1992, stated in October that these winds had only diminished “to about 25 miles per hour.”
Then there’s the outlook of Geoffrey Bell, president of Geoffrey Bell and Co. (New York City), who believes that economists have been guilty of overstating global recovery in recent years. The biggest errors have occurred in forecasting consumption, he says, but notes the officials have also been slow to recognize that many government policies--such as budget-cutting, which started in the United States and spread to Europe--may be of long-term benefit but can have a negative short-term effect on growth. Thus, Bell holds, there’s a good chance that the economic picture being painted for the major industrial countries “is once again too rosy,” pointing out that with U.S. growth assumed to be around 2 percent in 1994, the country is hardly a locomotive for the world economy.”
Still, there are new undeniably encouraging signs in the U.S. economy. Revised third-quarter GDP figures released by the Department of Commerce in early December, for example, placed growth at 2.7 percent, up from a modest 1.9-percent growth rate in the second quarter. Also, the National Association of Purchasing Management’s (Tempe, Ariz.) November index, which reflects manufacturing activity, continued to rise, increasing 1.9 percent over October levels--more than a percentage point stronger than investors had forecast. And finally, the Department of Commerce reported that construction spending rose in October for the sixth straight month, representing the longest string of advances in more than six years.
On top of these outlooks for the economies of the industrialized nations is the wild card of 1994’s commodity market forecast: China, which is believed to have invested $12.6 billion in infrastructure and industrial projects last year, beating its 1992 investments by $3.9 billion. Will that nation be able to match its 1993 double-digit growth rate in 1994? While China’s official GDP forecast is set at 9 percent and many international economists fear that its economy may be overheating and, thus, vulnerable to a sharp downward correction, most continue to see China as an important new market for both virgin and scrap raw materials over the long term.
Given this rather uncertain backdrop, how might the major metallic and nonmetallic scrap-related commodities fare in 1994? Here are some predictions.
Aluminum
“Few expect world prices to rally anytime soon.” That’s how Larry Sax, vice president of material management for Barmet Aluminum Corp. (Akron, Ohio), concluded his discussion of aluminum prospects at the Bureau International de la Recuperation’s (Brussels, Belgium) conference in October--a time when LME aluminum inventories exceeded 2 million metric tons (mt) and trading prices were at lows last seen eight years ago. With the supply situation only worsening since then, virtually all aluminum experts see the metal’s 1994 price picture inexorably linked to reductions in supply. Demand, most believe, is simply not the issue.
Analysts trace aluminum’s oversupply woes to new capacity that has come on-stream in recent years and the unrelenting metal supplies flowing out of the former Soviet Union, two factors that have more than offset smelter closures in the same period. Oversupply may be less of an issue in 1994, however, according to an October report by Rudolf Wolff & Co. (London). Citing the likelihood of additional production cutbacks, the firm states that three-month LME aluminum prices could increase to average 55.8 cents per pound in 1994, compared with an estimated average of 39.9 cents in 1993. Metals & Minerals, another London-based research firm, agrees with this prediction, also expecting an average of “about 55 cents” for the coming year. A more lofty forecast comes from Peter W. Merner, president of Merner Research (New York City), who said atScrap Processing and Recycling’s aluminum roundtable in September that the metal could be “in the vicinity of 80 cents by September 1994”--provided aluminum producers show more restraint.
In scrap trenches, however, experts generally agree that prices will head nowhere as long as ingot supplies overshadow demand. Bill Monaghan, metal purchasing manager for Wabash Alloys Cleveland Division (Cleveland) and cochairman of ISRI’s aluminum committee, sees 1994 as “probably” a repeat of 1993, adding that it surely “will not be a banner year” due to slow world economic growth. At the same time, he’s confident that domestic consumption of alloy will remain positive and that there will be enough aluminum scrap available to feed his smelters. Even so, “it’ll be tough for some to survive,” Monaghan warns, predicting that relatively low values will keep downward pressure on margins throughout the year.
Stanton Moss, president of Stanton A. Moss Inc. (Bryn Mawr, Pa.) and chairman of ISRI’s nonferrous division, is decidedly more upbeat, mainly because he sees Europe recovering, stimulated by relatively low interest rates. “The European Community will again start consuming, thereby reducing the overhang of aluminum,” he says. “I expect to see a noticeable recovery by mid- to late 1994.”
Copper
As 1993 ended, it was difficult to find any copper bulls, especially after watching the red metal fall from the lofty perch it enjoyed long after other nonferrous metals had plunged. As with aluminum, the issue has not been a lack of demand or actual consumption, but rather growing metal surpluses and bizarre price behavior on the LME. Now that supply-demand fundamentals have reasserted themselves, what could happen?
Some--including Neil Buxton, research manager for Metal Bulletin Research (London)--contend that bearish fundamentals will remain a feature in 1994. He sees LME cash copper averaging only $1,650 per mt, or 74.8 cents per pound, in 1994, with the market possibly testing $1,430 per mt, or 64.8 cents per pound, “sometime during the year.” On a more optimistic note, Bob Cooper, president and chief executive officer of Kennecott Corp. (Salt Lake City), speculates that 1994 spot copper on the Commodity Exchange Inc. (COMEX) (New York City) will trade “between 89 and 90 cents” per pound, compared with an expected average price of 84 cents per pound for 1993.
On the supply side, Cooper projects that 1994 world refined production will reach around 9.8 million mt, surpassing the 1993 total of about 9.4 million mt. Though copper will be in oversupply this year, Buxton believes, the statistical surplus being forecast will be less than the one in 1993.
Comparing copper’s 1994 demand prospects with 1993, Buxton sees European demand growing 3 percent, Japanese offtake rising 6 percent, and U.S. consumption expanding just above 2 percent. Overall, Cooper speculates that Western World consumption will hit 9.4 million mt in 1994, up about 2 percent higher than the estimated 9.2 million mt in 1993. Other analysts, meanwhile, reckon that copper demand could grow by as much as 2.5 percent in 1994, though most of this improvement is not expected before the second half of the year.
Iron & Steel
In contrast to its metal colleagues, ferrous scrap will remember 1993 fondly as the year of its price comeback. In November, for instance, the composite price for No. 1 heavy-melting scrap was $129 per gross ton--a number not seen in 20 years, according to scrap veterans. Such prices emerged due to relatively high steel mill operating rates, positive mill shipments, and a period of rising exports, producing what some recyclers called a ferrous scrap “feeding frenzy” in the fourth quarter. Others also assert that market fundamentals changed late last year due to “mavericks” looking to book business at any price, thereby artificially raising expectations, prompting some to look for a near-term price correction.
A few experts, however, aren’t convinced that iron and steel scrap prices have peaked. “I believe there’s room for even higher prices in 1994,” offers Tom Salome, president and chief executive officer of M. Lipsitz & Co. Inc. (Waco, Texas), who accurately predicted last year’s forecast that a “brisk recovery” would occur “after the second quarter of 1993.” Ferrous scrap prices may not reach their potential until sometime between March and May, he asserts--clearly an upbeat assessment, and one, he believes, that has implications for nonferrous metals as well. Why? Because it’s unusual, Salome notes, for ferrous and nonferrous scrap prices to move in opposite directions for sustained periods of time. Thus, higher ferrous prices in 1994 may be the harbinger of higher base metal prices as well.
For his part, Cap Grossman, president and chief executive officer of Grossman Iron & Steel Co. (St. Louis) and ReMA first vice president, expects steel scrap demand to stay strong in early 1994, stimulated by what he sees as growing strength in the automotive and construction markets. He expresses less optimism for the second half of the year, hinting that the market may cool off after the second quarter. Thus, for the near term, Grossman is less worried about a possible price fall than his firm’s ability to secure and process the scrap needed in today’s competitive market. “Overall,” he adds, “we expect to stay on the lean path in 1994. We do expect to be busier, but not necessarily any more profitable.”
Lead & Zinc
For these two nonferrous base metals, often geologically--if not commercially--linked, 1993 proved to be another difficult and frustrating year. With lead and zinc dragging along bottoms that many said threatened the existence of several world primary producers, forecasts offered in the fourth quarter of 1993 suggested that higher prices are possible, particularly in light of the announced cutbacks in Canada, Europe, and Mexico that boosted the standing of both metals in the fall.
Speaking at Scrap Processing and Recycling’s lead/zinc roundtable in September, Robert Jordan, manager of raw materials for Exide Corp. (Reading, Pa.), cited record world inventories in 1993 as the principal reason why lead prices remained “depressed” last year. At the time, in fact, lead was closing in on a seven-year low. Price improvement in 1994, Jordan said, depends on economic improvement in Europe and Japan, though actual lead demand outside the U.S. market isn’t expected to show much improvement “until middle or late 1994.”
Rudolf Wolff & Co.’s 1994 predictions call for a modest price recovery for LME lead, with values climbing to an average of 22 cents per pound, up from an expected 1993 average of about 18 cents per pound. The firm bases its positive price forecast on what it sees as steadily improving world supply-demand fundamentals. Mine supply in 1994, for example, is expected to record a modest increase over 1993 (2.15 million mt vs. 2.12 million mt), while refined production is forecast to be flat at 4.25 million mt. The report also places Western World consumption at 4.51 million mt, compared with 4.43 million mt estimated for 1993. The International Lead and Zinc Study Group (London) is even more optimistic, forecasting 1994 lead consumption to rise 132,600 mt, or 3 percent over 1993.
Domestic smelters and manufacturers also seem reasonably confident that lead prices will, on average, be higher this year if only because prices have been so low for so long. On the smelter side, at least, many also are hoping that, if LME prices indeed move up in 1994, their peers will exercise raw material buying discipline, of further rationalization will occur in the domestic secondary lead industry. In 1993, they recall, the market for scrap whole batteries was extremely competitive, thus virtually eliminating margins and forcing some smelters to concentrate solely on tolling business.
For zinc, which touched price lows in 1993 last seen six years ago, the consensus is that demand simply isn’t strong enough to carry existing inventory and, therefore, cutbacks are the only way to reduce the huge stocks overhanging the market. With this view in mind, David Fink, treasurer of Allied Metal Co. (Chicago) and a cochairman of ISRI’s lead/zinc committee, believes that zinc will begin to show a firming trend “sometime in the first half of the year,” gaining momentum by late 1994 or early 1995.
As for prices, Fink forecasts an LME three-month quote of around $1,050 per mt by mid-1994, a figure that comes close to one offered by Steve Brown, vice president of U.S. Zinc Corp. (Houston). At the September roundtable, Brown asserted that zinc had finally bottomed out, but that recovery would not be swift or robust. His guess: Zinc will average in the “mid-40s-cent-per-pound range” for 1994.
A slightly different spin is offered by David S. Aronow, president of Arco Alloys Corp. (Detroit), who suggests that without smelter cutbacks, LME zinc could well continue to drift lower in early 1994. But, he says, “Cutbacks, plus an economic recovery in Europe, should result in higher zinc prices by the end of 1994,” with the net result being an LME average of mid-40s to 50 cents per pound for the year.
Nickel & Stainless
When asked to hazard a guess about nickel’s 1994 outlook, Norman R. Cohn, president of Norco Alloys Corp. (Berkley, Mich.) and chairman of ISRI’s stainless and specialty metals committee, replies, “That one is easy. Nickel prices have to go up.” After all, LME three-month nickel values in 1993’s fourth quarter were hovering at a six-plus-year low of $4,030 per mt, or $1.83 per pound. Other industry experts agree that there was little to cheer about when discussing either primary nickel or stainless steel scrap last year, primarily due to burdensome nickel supplies and the world stainless steel industry’s inability to consume nickel units fast enough. Even strong domestic mill shipments in 1993 did virtually nothing to stem the flow of nickel into world warehouses.
As the fourth quarter of 1993 started, some optimism surfaced following an announcement that Inco Ltd. (Toronto) would cut production by 30,000 tons beginning in December and continuing into the first quarter of 1994--traditionally a strong period for nickel. Al Goodman, a senior buyer for J.A.R. International Sales (Englewood, Colo.) and vice chairman of ISRI’s stainless and specialty metals committee, says that, at the very least, the Inco announcement “raised the 1994 price floor” from the lows posted in October. Exactly where that 1994 floor might be isn’t clear, but Albert J. Wein, president of Wein Metals Inc. (Pittsburgh), reasons that $2 per pound might prove to be a “bargain” in 1994. Lending credibility to that prediction, Peter Salathiel, Inco’s executive vice president of marketing, said in October that $2 nickel “is the greatest bargain of the decade, both in the short run--the next three to six months--and the long run--the next three to five years.”
Several nickel and stainless steel market participants see a gradually improving nickel market in 1994, assuming nickel’s supply-demand balance moves from surplus to deficit--a significant assumption. Even so, Wein forecasts that stocks of metal will have to record impressive drops before prices respond in kind. Consequently, nickel’s ceiling in 1994 looks to some to be around the $2.50-per-pound mark, bringing the average for the year to somewhere below that. Further, domestic scrap supplies are expected to remain tight owing to earlier drawdowns of obsolete material and less prompt scrap being generated. This, processors maintain, will keep 18-8 stainless scrap margins “slim to nonexistent” most of the year.
Stainless mills don’t necessarily share that view, but they do believe that product demand in 1994 will again be positive. Obtaining competing raw materials such as 18-8 scrap, ferronickel, or prime metal will not, they say, be much of a challenge this year.
Paper
Unlike most metals industries, where oversupply has dogged the market and limited sellers’ ability to increase prices, paper packers and paper and paperboard manufacturers center their concerns as much on uncertain 1994 demand prospects as on the industry’s ability to supply furnish. Thomas F. Bowers Jr., president of Schirmer Paper Corp. (Boston), for one, questions whether the consuming mills can, in fact, pick up the slack in the marketplace that he anticipates in 1994. “Weak finished product markets in 1993 weren’t offset by downtimes taken by the consuming mills,” he reasons.
More-than-abundant virgin pulp supplies were also an industry issue last year, along with a low-growth U.S. economy and lingering recessions in Europe and Japan, all of which have been blamed for causing mill buying prices for scrap paper to ratchet lower throughout the year. As if the confirm this, a survey published by the Paper Stock Report in October revealed that the overall recovered paper prices paid by processors at end-September were at their lowest point of the year. Nevertheless, it’s interesting to note that through the first three quarters of 1993, domestic scrap paper consumption was actually running close to the consumption record set in 1992. The American Forest & Paper Association (Washington, D.C.), in fact, expects 1993 paper recovery of 36.7 million tons to exceed for the first time the tonnage of paper disposed, projected to 33.1 million tons.
Philip A. Alpert, a partner with National Fiber Supply Co. (Chicago), is cautious in his 1994 business outlook. “There’s very little on the horizon to suggest that 1994 will be an improvement over 1993,” he says. “At best, it’ll be no worse.” Projected weak U.S. and Western World economies will act to squelch any substantial improvement, he predicts, also expressing concern about the growing supply of paper from municipal collection programs, as well as legislation that could replace certain scrap paper grades with others at no net gain to paper recycling. In addition, both Alpert and Bowers suggest that excess mill capacity, oversupplies of virgin pulp, and lackluster scrap paper exports will continue to weigh heavily on packers in 1994. Adding to this low-key forecast, a report by Noranda Forest Inc. (Toronto) anticipates no price improvement for pulp, newsprint, and commodity papers “until well into 1994.”
On a more upbeat note, packers point to the Canadian Pulp and Paper Association’s (Montreal) forecast that pulp, paper, and paperboard capacity in Canada will climb about 4.3 percent in the next two years, with much of this new capacity centering on recycled grades.
Industry experts are less certain about the impact of the Clinton administration’s recycling executive order, signed in October, which requires federal agencies to increase the recycled content of the paper they buy from the current 10 percent to 20 percent by the end of 1994. Though federal government purchases represent only 2 percent, or 300,000 tons, of annual demand for printing and writing papers, the executive order has set a precedent that could motivate others in state and local government, as well as commerce, to adopt similar procurement measures.
Plastics
When it comes to finding forecasts about the plastic industry in general, there’s no shortage of data, but finding information on plastic recycling is another story. Published outlooks, in fact, tend to focus on only a few resins and end uses out of an annual 60-billion-plus-pound market.
Worldwide plastic demand is expected to increase 3.9 percent per year to 119 million mt (or approximately 262 billion pounds) in 1997, while plastic production will increase 3.7 percent annually to 124 million mt (or about 273 billion pounds), according to a report by the Freedonia Group Inc. (Cleveland). The report also forecasts significant capacity expansion, particularly for linear low-density polyethylene, high-density polyethylene, and polypropylene.
Is this good news? Plastic recyclers assert that adding to current capacity in the broad-based olefin group is not what the domestic plastic recycling industry needs. Marty Forman, president of Poly-Anna Plastic Products Inc. (Milwaukee) and chairman of ISRI’s plastic committee, attributes what he calls plastic recycling’s “dismal” near-term outlook to a worldwide glut of key commodity-grade virgin resins. Short of legislation that mandates use of recovered plastics, others also foresee continued depressed prices in 1994, possibly forcing collectors and processors out of business, thus adding to the conspicuous industry rationalization seen throughout 1993.
Despite this difficult business environment, Freedonia’s report forecasts positive growth in domestic plastic recycling, based mainly on technical advancements in processing scrap plastics. (According to a related Freedonia study, the recycling of all types of packaging in the United States will grow about 7 percent a year through 1996, and plastic packaging recycling will grow at more than four times that rate to reach 2.5 billion pounds, up from 685 million pounds in 1991.)
The market for recycled polyethylene terephthalate (PET) is certainly one success story. Forman aggress that the niche is “hot” and should remain so in 1994 because the installed capacity to consume virgin or reclaimed PET far exceeds the ability of processors to supply the required raw material. As a result, PET consumers are said to be seeking more supplies of so-called custom PET containers--those other than soda bottles--which were heretofore considered unsuitable for feedstock. Processing scrap PET, therefore, looks extremely positive, pricewise, in 1994. On the other hand, the near-term outlook for other recovered resins used in packaging, with the exception of natural high-density polyethylene, looks poor, sources say. •
International economic factors are restraining the domestic recovery of most industrial commodities, leading recyclers to wonder if the market situation will, or even can, improve in 1994. Here are some predictions.