May/June 1996
While most scrap commodities enjoyed strong markets once again in 1995, the supply-demand picture changed dramatically for some in the second half. Still, it was a solid year overall, and most expect the good times to keep rolling in 1996.
By Bob Garino
Robert J. Garino is director of commodities for ISRI.
By most accounts, 1995 was a respectable year for scrap processors and consumers. In some regards, it was at least as good as 1994 and, for ferrous recyclers at least, it was clearly an even better year.
Yet plenty of recyclers look back on 1995 with mild disappointment. As one Midwest processor sums up his feelings, “It wasn’t 1994.”
And therein lies part of the explanation for this disappointment. By most measures, 1994 was an exceptional year and, consequently, expectations for 1995 were perhaps a tad unrealistic. “It’s the old cliché,” offers a nonferrous scrap veteran. “In a bull market, all news is bullish. In a bear market, all news is bearish.” In his view, many anticipated the same level of volume and profits experienced in 1994 and, for some, that simply didn’t happen—hence the disappointment.
Another reason for the mixed feelings about 1995 was that the pace of economic and business activity slowed considerably in the second half. For all of 1995, the U.S. economy’s gross domestic product grew 2 percent—its slowest annual growth since the country began its recovery from the 1990-1991 recession—with the fourth quarter posting a tepid 0.5 percent annual rate, according to the Department of Commerce.
This economic slowdown affected most scrap markets. In some instances, domestic scrap consumption was lower than in 1994, though relatively firm prices in the first two quarters of 1995 helped sustain profit margins. At the same time, however, many processors saw their cash flow positions weaken during the second half of the year as the cost of doing business rose and commodity prices fell. “For us, the fourth quarter of 1995 and the first quarter of 1996 were almost recession-like,” said a Midwest paper broker.
Still, in a historical comparison, 1995 will likely be remembered by most recyclers as a good-to-excellent year.
Commercial Metals Co.’s Secondary Metals Processing Division (Dallas), for instance, called fiscal year 1995 “one of the best years in the division’s history” in its annual report, noting that ferrous and nonferrous shipments increased “dramatically” from the previous year. Total revenues, meanwhile, rose to $511.1 million—a 49-percent increase over 1994’s $342.3 million—and the division’s operating profit jumped a whopping 126 percent, to $11.3 million.
But what about 1996? While industry participants don’t expect a return to the glory days of 1994 and early 1995, they do believe the U.S. economy is resilient enough to avoid a recession this year. Most, in fact, are looking for a solid recovery in the second half.
Following is a look at how eight scrap commodities performed in 1995, as well as a glance at their midyear status.
Aluminum
The U.S. and world aluminum markets started off 1995 in impressive fashion, continuing an upward trend that began more than a year before. Several factors were at work, including exceptional world aluminum demand, the psychological and real impact of the 1994 memorandum of understanding that helped trim a surplus market, and hedge and commodity fund buying on the LME.
As the year progressed, however, the pace of economic and aluminum activity slowed. While Western World aluminum consumption increased around 4 percent over 1994, this rate of increase was less than half the increase of 1994 over 1993. The market’s decline was clearly reflected in aluminum’s price, which hit its highest LME three-month average of 95 cents a pound in January, ending the year with an 83-cent-a-pound average. Then again, this was still 22 percent above the 1994 average.
In the U.S. market, aluminum shipments (including imports) decreased 0.2 percent, while apparent aluminum consumption slipped 1.8 percent compared with 1994, according to data from the Aluminum Association (Washington, D.C.) and ISRI. Even so, scrap consumption increased 7 percent, despite a 3-percent fall in the number of UBCs melted in 1995. (For more on the UBC recycling rate, see “An Up-Down Year for Cans” on page 19.)
Midyear Outlook. In sharp contrast to the start of last year, the LME three-month aluminum average hovered around a 16-month low as 1996 began. Equally discouraging, LME inventories bottomed out last October at 523,000 mt and have since increased steadily, totaling 733,600 mt in March.
While domestic demand is expected to pick up, concerns remain about supply, particularly the potential reactivation of idled capacity and continued heavy Russian exports of metal. In addition, key U.S. smelter labor contracts are due to expire in May, adding to an already-unsettled market. These and other factors have prompted several independent forecasters to lower their price expectations for the balance of 1996.
Copper
Like aluminum, copper recorded its highest LME three-month average of 1995 in January, registering $1.36 a pound. But unlike aluminum, the red metal showed more market and price resilience as the year progressed, with LME copper averaging $1.30 a pound in 1995, 24 percent above its previous-year average of $1.05.
Western World copper consumption underpinned the market by remaining positive at 11.9 million mt, an increase of 2.7 percent over 1994, according to the International Copper Study Group (Lisbon). At the same time, world mine and refined production set records of 9.984 million mt and 11.044 million mt, respectively, the group reports.
Domestically, however, copper consumption appears to have fallen about 4 percent compared with 1994, mainly due to lower copper usage by wire rod and brass mills, according to ReMA data. As a result, scrap consumption was down a slight 2.4 percent from 1994, though scrap’s market share held at 37 percent.
Of note, copper enjoyed a banner year in the scrap export market, posting the largest year-on-year increase—53 percent—of all scrap commodities. (For a detailed look at scrap exports, see “Exports Explored,” beginning on page 97.)
Midyear Outlook. Market analysts expect the global copper market to shift from its statistical deficit of last year to a surplus in 1996, despite forecasts of increased copper consumption. If this shift occurs, warehouse stocks will increase as production exceeds supply, and transacted prices for both refined metal and scrap will likely face increasing selling pressure, say analysts. Thus, recent price forecasts suggest that copper could be closer to $1 a pound by year’s end, which would represent a 13-percent decline from the $1.15 posted at the start of the second quarter.
Not all market watchers are bearish, however. Some insist that refined output will lag scheduled mine output, producing a market that will again be in deficit, thereby supporting continuing $1-plus copper prices through 1996.
Iron & Steel
By all measures, the steel industry racked up impressive numbers in 1995, both internationally and domestically. World steel output, for example, was estimated to have hit 732.3 million mt, 4 percent greater than in 1994.
As for the domestic market’s strong showing, raw steel production climbed 2 percent to 103 million tons, shipments rose to 96.9 million tons—their fourth consecutive year of growth and their highest level since 1979—and exports of steel mill products exceeded 7 million tons, the highest level since 1940, according to the American Iron and Steel Institute (Washington, D.C.).
Against this backdrop of sizzling numbers, last year saw a noticeable second-half business slowdown, intense competition, and announcements of new steelmaking capacity. Most steel market volumes held, but weaker second-half prices caused considerable anxiety and consternation.
Still, ferrous scrap processors worked at a feverish pitch to meet the demands of both domestic and offshore consumers. While total apparent domestic steel consumption fell by around 3 million tons compared with 1994 (with much of that decline attributed to the almost 6 million tons of cuts in steel imports), scrap consumption rose 3.3 percent. As a result, scrap’s share of the market rose from 43 to 46 percent.
Midyear Outlook. After an uncertain start this year, optimism has returned regarding the economy in general and steel in particular. Sheet prices headed higher in the first quarter and inventories were considered on the low side. In addition, integrated producers’ new orders started off the year “on the strongest note in more than a decade,” according to Salomon Brothers (Chicago).
Ferrous scrap processors and consumers are, therefore, looking forward to another growth year, with some expecting more than 100 million tons of steel products—or about 3 percent more—to be shipped in 1996. And with forecasts for strong domestic demand, coupled with continued firm export orders, many believe higher scrap prices are in the offing in the months ahead.
Lead
While the world lead industry posted solid consumption gains last year, the rate of increase was less than in 1994. Still, as in 1994, the market ended the year in deficit. According to the International Lead Zinc Study Group (ILZSG) (London), Western World lead usage reached 4.906 million mt, a 3-percent gain over 1994, while refined primary and secondary production totaled 4.574 million mt. Even adding in imports of lead from Eastern Europe and others, as well as U.S. stockpile material, Western demand exceeded supply last year, creating a statistical deficit of 100,000 mt, ILZSG reports.
Thanks in large part to this favorable supply-demand scenario, LME prices firmed as the year progressed, averaging 29 cents a pound for the year compared with 251/2 cents in 1994.
In the U.S. market, lead consumption grew 3.3 percent over 1994, reaching 1.544 million mt, notes ILZSG. Production and shipments of replacement and original equipment lead-acid batteries were lower, however, by some 3 percent.
In the scrap arena, domestic consumption declined 4.8 percent to 958,000 tons, though this diminished demand was more than offset by surging exports—which climbed 26 percent, from 91,000 tons in 1994 to 115,000 tons last year.
Midyear Outlook. Lead’s fundamental picture for 1996 and 1997 looks favorable both for primary and secondary lead producers. Another metal shortfall is anticipated this year, with estimates ranging from 86,000 to 110,000 mt. This means above-ground stocks are likely to again be called upon to make up some of the shortfall—possibly pulling Western World inventories down to “critical” levels. They stood at only about 41/2 weeks’ worth of demand as the second quarter got under way, with reported LME inventories at their lowest level since 1991.
The domestic situation is expected to mirror this general outlook, with producers likely to be hard-pressed to keep up with anticipated 1996 demand. Despite abundant, relatively inexpensive scrap feedstock, secondaries are struggling to meet their potential capacities. Primary production, meanwhile, will undoubtedly be affected by the announced closure of Asarco Inc.’s smelter in Omaha, Neb.
These tightening market factors have prompted many industry participants to predict higher second-half 1996 list prices.
Nickel & Stainless
Although Western World primary refined nickel output increased almost 10 percent last year, total metal supplies came up short by an estimated 80,000 to 90,000 mt due to a dropoff in exports from the former Soviet countries and a surge in world stainless steel production, which increased more than 10 percent, hitting 14.8 million mt. Under this favorable supply-demand picture, LME nickel averaged $3.79 a pound in 1995, or 30 percent higher than the 1994 average.
Reflecting this trend, North American nickel demand grew 8 percent over 1994, to 2.6 million tons, while U.S. stainless shipments were placed at 1.894 million tons for a 10.1-percent increase over 1994.
Given such strong all-around demand, it’s not surprising that domestic stainless scrap consumption also climbed, jumping 9 percent last year to 726,000 tons. In the same vein, stainless scrap exports also established a new record, with 406,000 tons shipped.
Midyear Outlook. Nickel demand, primary metal production, and stainless steel production are all forecast to increase in 1996, albeit at lower rates than last year.
Industry participants point to one concern, however: With the stainless production sector currently overbuilt and prices for stainless products decreasing as a result, it may be only a matter of time before stainless mills try to make up for these price declines by paying less for their refined and scrap nickel units.
This worry aside, the consensus is that the world nickel supply-demand balance will, once again, end the year in deficit, with estimates ranging from 40,000 to 60,000 mt. Although the market quieted in early 1996, fresh stainless steel orders for the second half of the year, coupled with ongoing reductions in LME nickel inventories, will likely limit nickel’s downside. Nickel price forecasts, however, have turned more conservative since the beginning of the year.
Paper & Paperboard
Record sales were a feature in 1995, as domestic and foreign demand for pulp, paper, and paper products reached all-time highs. Prices, likewise, hit incredible levels, with northern softwood kraft pulp rising 33 percent, to a peak of around $1,000 a ton, and newsprint fetching nearly $800 a ton, a 39-percent increase.
Driven by the year’s outstanding demand, the integrated paper making sector operated in the 93-to-95-percent range for most of last year, while the integrated paperboard sector ran near capacity at 97 to 98 percent, according to the American Forest & Paper Association (Washington, D.C.).
Recycled fiber-consuming mills also enjoyed generally strong demand and, thus, boosted their scrap consumption 5 percent to 33.4 million tons. Exports of recycled fiber increased even more dramatically, rising 35 percent to reach an all-time high of 10.4 million tons.
The industry’s positive overall performance in 1995, however, belies the drastic drop in finished paper shipments and scrap consumption in the second half, not to mention the corresponding price volatility. OCC and ONP, for instance, soared in the first half, only to plummet in the second, with OCC prices dropping by as much as 80 percent, and ONP values falling 80 to 85 percent.
Midyear Outlook. Despite pessimistic expectations for the first half of 1996, paper and paperboard officials are reasonably confident that an expanding domestic economy and stronger overseas demand will result in higher demand for paper, paperboard, and recycled fiber in late 1996.
Consequently, scrap paper prices are expected to gradually recover from the lows seen at the end of last year. Recyclers also believe that the volatility of last year will not be repeated, although new capacity could stretch scrap supply lines—OCC in particular—and thus drive prices up sharply. Similarly, few expect to see scrap paper exports this year match the rate of increase recorded in 1995.
Plastics
Though plastics, like paper, experienced price extremes last year, 1995 was predominantly a year of adjustment for the plastic industry. That is, the robust demand and higher prices in 1994 gave way to reductions in the overhang of virgin resin supplies and more normal demand last year. From the better-than-normal growth rate of 6.25 percent recorded in 1994, the market grew at about 2.5 percent in 1995, analysts report, with domestic resin production totaling 34.1 tons, 3.6 percent above 1994.
For plastic recyclers, 1995 will be remembered as a year when scrap PET values soared and HDPE prices plunged. Though recycled PET tags eased at the end of last year, consumers reported that prices for processed pellet rose more than 150 percent throughout the year. HDPE prices, on the other hand, ended the year lower than at the beginning, falling more than 60 percent from April to December. Although final figures weren’t available at press time, 1995 is also believed to have marked the first decline in the PET bottle recycling rate in seven years. The explanation: though scrap collections were believed to have increased, PET production grew even faster.
Midyear Outlook. Significant production expansions notwithstanding, world shortages of natural fiber are expected to keep upward pressure on scrap PET, which is used in the production of synthetic fabric. And PET and HDPE should continue to pace plastic recycling efforts in light of optimism expressed for most plastics in general.
Zinc
Among the base metals traded on the LME, zinc was a price underachiever in 1995. As with aluminum and copper, zinc hit its 1995 LME three-month price high—53.6 cents a pound—in January, averaging 47.9 cents per pound for the year, only 3.4-percent above its 1994 figure of 46.3 cents.
Despite lackluster prices, world fundamentals were positive, according to ILZSG data. Total world slab zinc production increased less than 2 percent last year, failing to keep pace with total world consumption, which rose 5.4 percent to 7.354 million mt—besting the 5.7-percent increase registered in 1994. To make up some of this shortfall, buyers drew down zinc stocks by 518,000 mt last year (though it should be noted that this drawdown followed a buildup of nearly 1 million mt of metal since 1990).
The domestic zinc market started last year strong but quieted in the second half. Faced with lower consumption prospects and ready supplies, premiums for SHG metal eased as the year progressed. Still, overall domestic consumption improved almost 4.2 percent to 1.367 million tons, according to preliminary ReMA data. Scrap consumption also improved—albeit only a marginal 1 percent—enabling scrap to maintain its market share at 21 percent.
In the scrap export market, however, zinc was the only commodity to post a year-on-year decline in 1995, as its total slipped 4.5 percent to 42,000 tons.
Midyear Outlook. There is a growing consensus that, as the world economies improve, Western World zinc demand will again exceed supply. Though supply is forecast to increase, limited smelter capacity would not to be able to keep up with anticipated new mine production. To meet the projected supply shortfall, world stocks are expected to drawn down further, with some projecting a decline of 300,000 mt by year’s end. This supply-demand imbalance is expected to persist for the next couple of years.
In light of the market’s supply tightness, price prospects this year appear relatively bullish, with all conceding—at the very least—that zinc’s downside is limited. Several forecasts offered in early 1996 point to an LME average around 51 cents a pound, with most of the increases occurring in the second half of 1996. •
While most scrap commodities enjoyed strong markets once again in 1995, the supply-demand picture changed dramatically for some in the second half. Still, it was a solid year overall, and most expect the good times to keep rolling in 1996.