May/June 1995 Recyclers finally benefited from improved business conditions in 1994, and the prospects for most major commodities look positive this year.
By Robert J. Garino
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (ISRI) (Washington D.C.).
“These are the good days.”
That's how one Midwestern scrap processor put it when asked about how his business and the commodity markets that affect it fared in 1994 and the fist quarter of 1995. And he's certainly not alone in that assessment. Indeed, the last year will be remembered not only for the increased volumes of scrap metal and nonmetallic commodities bought and sold, but also for much better profit margins than the previous couple of years.
But the U.S. economy has, in fact, been expanding for the past four years, as measured by gross domestic product and confirmed by a host of economic indicators. Why is it that the collective cheer for the scrap processing and recycling industries has come so late in the current business cycle?
A brief look back shows that the 1990-1991 recession took a heavy toll on scrap processors and consumers alike. And, as economic recovery finally began to take hold in the economy in general domestically as well as abroad-nonferrous recyclers were confronted with a new problem: a flood of material from the former Soviet Union following its collapse in late 1991, which depressed many commodity prices. Consequently, oversupply, not gradually improving demand, was the dominant theme until recently.
What changed in 1994? The U.S. economy grew at a solid 4-percent rate for the year, achieving its largest expansion in a decade. U.S. productivity had been rising steadily for several years, and corporate profits reportedly hit their highest levels in more than two decades. Economic expansion was also finally apparent in Europe and the Pacific Rim last year (although Japan continued to lag).
Thus, in sharp contrast to 1992 and 1993, demand became the dominant issue, in many instances overriding the former Soviet Union 's exports and turning world commodity surpluses into deficits.
Significant, also, is the fact that while prices for scrap metals, paper, and several commodity-grade resins improved, inflation in the economy in general has not been much of a contributing factor. Yet neither can the double-digit price jumps be credited completely to improvements in fundamentals--the investment funds have played a significant but not completely understood role.
Here's a closer look at where 1994's turnaround left the major commodities of concern to recyclers and a synopsis of market prospects for each.
Aluminum
"Dramatic" is the assessment of world aluminum's performance in 1994 offered by George T. Haymaker Jr., chairman and chief executive officer of Kaiser Aluminum Corp. (Houston), echoing the remarks of many in the industry when discussing the metal's market improvement last year. Perhaps the key to this drama can be seen in one significant development: aluminum’s move from a surplus of more than a million metric tons (mt) in 1993 to a statistical deficit of around 800,000 mt in 1994.
On the consumption side of this shift, the world Bureau of Mining Statistics (London) reports that world demand for aluminum rose by just over 8 percent last year compared with 1993. And actual shipments grew at an even faster pace, finishing 10 to 12 percent ahead of the previous year. Western World production, meanwhile, fell by around 400,000 mt.
The U.S. market was at least as hot as these international figures, and hotter in some respects, with mill product and ingot shipments hitting 9.1 million tons, an impressive 14-percent gain over 1993, according to the Aluminum Association (Washington, D.C.). Total domestic aluminum consumption increased 8 percent.
Heavy imports of primary metal and scrap did not appear to have inhibited domestic scrap usage last year, which reached 4 million tons.
Midyear Outlook. Moderation appears to be the underlying theme in most of the midyear aluminum forecasts, dampening the more-bullish projections offered during the fourth quarter of last year. Still, one major player, Reynolds Metals Co. (Richmond, Va.), recently forecast 5.1-percent increase in shipments during 1995, higher than the 3-percent gain it was predicting last fall. An in any case, domestic consumption prospects certainly remain positive, although few expect that this year will match the growth rates posted in 1994.
Western production is just beginning to increase as the so-called memorandum of understanding among world aluminum producers unwinds. While this alone isn’t expected to shake up the market, some fear that as market fundamentals begin to change, derivative traders and investors may seek to rapidly unload their long positions, thereby increasing volatility in the market. Consequently, forecasts for aluminum on the London Metal Exchange (LME) are splayed across an unusually wide range, from lows in the mid-60s cents per pound to highs of around 90 cents.
Copper
Total world copper consumption rose 4.3 percent last year over 1993’s pace to reach 11.678 million mt, according to the International Copper Study Group (London). Western World growth was much higher—at close to 8 percent.
This impressive increase in the West was led by the U.S. market. Domestic brass mill shipments, for example, jumped over the 1993 level by more than 12 percent, according to the Copper Development Association (New York City). Overall, apparent domestic consumption was up by 12.2 percent to more than 4 million tons for the first time ever, according to ISM data.
Although domestic brass, wire, and tube mills ran flat-out for most of last year, overall scrap consumption did not keep pace with refined usage. According to preliminary ReMA data, domestic scrap consumption totaled just under 1.5 million tons, thus dropping scrap's share of the market by about 2 percentage points to only 37 percent. Copper scrap exports, however, rebounded sharply last year, climbing 38 percent over the 1993 level.
Midyear Outlook. Positive sentiment continues to underpin Western World copper consumption prospects. James J. Ken; vice president of Asarco Inc. (New York City), projects additional growth of 3.9 percent in 1995, followed by a 3.6-percent increase in 1996. While some other forecasters are less optimistic, virtually all expect that supply tightness will dominate price considerations through the first half of 1995.
Higher production is also expected this year, though most analysts say that its impact on prices will not be felt until midyear as the world market moves closer into balance. But some fear that a steep price correction could follow late in the year as the market shifts into surplus. The latest price forecasts put average 1995 LME cash copper anywhere from less than $1.20 per pound to more than $1.40.
Iron & Steel
As good a year as 1993 proved to be, last year was even better from a steel producing and ferrous scrap processing point of view. Domestic mill shipments reflected the industry's best showing since 1979, reaching 95.3 million tons, up 7.1 percent over 1993, according to the American Iron and Steel Institute (AISI (Washington, D.C.). Furthermore, raw steel production hit 97.9 million tons as producers operated at 90-plus percent of capacity in 1994. Ironically, U.S. imports also set records last year.
Not surprisingly, scrap consumption was also up, though scrap's share of apparent steel consumption merely held steady at about 50 percent. Firm domestic demand and relatively high prices kept more on shore, and export shipments fell 13 percent.
World steel output lagged the United States, dropping marginally (less than 1 percent) below the 1993 figure to 723.3 million mt, according to the International Iron and Steel Institute (Brussels, Belgium).
Midyear Outlook. Although the first quarter has seen some easing in the domestic market for both hot- and cold-rolled sheet, most other markets remain firm. Consequently, steel analysts expect domestic mills will continue to run at capacity rates in the upper-80s-percent range for the balance of 1995. In addition, most expect steel imports to decline as a result of increasing worldwide demand, thus helping sustain domestic production at high levels.
With new domestic electric-arc furnace capacity due on-stream this year, the question of scrap availability and its effect on scrap prices remains in the air. Although many price forecasts to date have proved to be on the high side, regional supply tightness may be a factor later in the year, so many still see scrap prices trending higher as the year progresses.
Lead
Western World lead consumption rose a healthy 5.5 percent last year over 1993, hitting 4.7 million mt, according to preliminary data from the International Lead Zinc Study Group (ILZSG) (London). Refined lead production, meanwhile, was held in check by a shortfall of clean concentrates, increasing by only 1 percent. Thus, the year ended with a modest supply deficit, even after net exports from the former Eastern Bloc countries and U.S. government stockpile sales were factored in.
Overall domestic demand, paced by strong automotive and industrial battery sales, rose 10 percent, making 1994 a record year for consumption, according to Jeffrey Zelms, president of Doe Run CO. (St. Louis). Actual battery shipments totaled 95.8 million units last year compared with 84.9 million in 1993.
U.S. scrap demand was strong through most of last year and supplies were reported to be adequate. The year also featured record-setting imports of refined lead as well as stock drawdowns, which took some pressure off scrap prices--and the secondary smelting industry. Overall scrap usage increased 5 percent, accounting for approximately half of total U.S. apparent lead consumption.
Midyear Outlook. In the wake of two years of especially strong domestic consumption, few expect that 1995 battery shipments will be able to show similar growth, especially in light of the relatively mild 1994-1995 winter. Hence, lead consumption will likely show a reduced year-on-year increase.
But new supplies of refined metal will be unable to match the demand forecast, so larger supply deficit is expected for 1995. Hence, price prospects remain very encouraging. In fact, the LME cash average should easily surpass 1994's 25 cents per pound, and many feel a 30-cent average attainable.
Nickel & Stainless
After several years of nickel oversupply, 1994 finally saw the world market move into a more balanced state. The main reason? Western nickel demand last year was up 9 percent over 1993, according to nickel producer Eramet-SLN (Paris). Western World production was up also, but less—approximately 6 percent over 1993—while net exports from the former Eastern Bloc showed little change at around 150,000 mt.
The strength in nickel last year can be traced to growth in stainless steel. The U.S. market was exceptionally strong in 1994 consuming a record 2.73 million tons of stainless and specialty steels, according to AISI. Domestic shipments of stainless, meanwhile, totaled 1.72 million tons, up 12 percent for the year.
U.S. stainless steel scrap consumption was also slightly higher, although scrap’s share of the market apparently slipped last year. Scrap exports, meanwhile were up sharply.
Midyear Outlook. “A worldwide boom in stainless steel demand” is upon us, according to Jim Lennon, commodities strategist for Macquarie Bank Group (London). As a result, he and others are projecting additional increases in Western World nickel consumption this year.
Domestic stainless steel producers are optimistic about 1995 consumption too and are projecting production increases. To meet the increased demand for stainless steel, nickel production is also expected to rise, but at a lower rate than demand.
Price prospects, therefore, remain very encouraging for both primary nickel and 18-8 stainless steel scrap. Prudential Securities (New York City) recently offered a forecast of $4 per pound for the 1995 LME cash average, a figure that makes projections offered late last year appear conservative in comparison.
Paper & Paperboard
The international paper and paperboard industries posted impressive gains last year, as registered in both the volume of total demand and pulp prices following several years of relatively depressed markets. The United States , which produces more than a quarter of the world’s supply of paper products and is the largest generator, consumer, and exporter of recovered paper and paperboard, led the charge.
U.S. fiber recovery for domestic consumption and export rose 11 percent last year to 38.9 million tons, according to the American Forest & Paper Association (Washington, D.C.). Just over a third as much weight in scrap was consumed in new paper production last year as paper was produced overall. Scrap exports, meanwhile, advanced 31 percent over the level recorded in 1993.
Midyear Outlook. The domestic paper and paperboard industry is anticipating another positive sales year, with production expected to outpace general economic growth.Specifically, recent production forecasts call for total paper and paperboard output to top 90 million this year.
U.S. demand for scrap seems destined to increase this year as new deinking capacity is added. Export demand is also expected to grow. Paper packers and brokers forecast scrap supplies will be severely strained in the second half, resulting in upward price pressure on virtually all grades. Virgin pulp prices are also anticipated to rise in the future.
Plastics
The domestic plastic industry posted solid numbers last year: Resin output was up an estimated 8.1 percent and total sales rose 6.9 percent to 38 million tons, according to the Society of the Plastics Industry (Washington, D.C.).
Thanks to improved domestic and overall Western World demand and several untimely supply disruptions, resin prices took off in 1994. Polyethylene values, for instance, climbed more than 40 percent during the second half of the year.
Plastic recycling also made impressive gains, with 12 percent more plastics diverted from the U.S. solid waste stream than in 1993, according to the American Plastics Council (Washington , D.C.), which pegs the total figure at more than a billion pounds. The leading segment of the postconsumer recovery market--bottle recycling--recorded an improvement of nearly 15 percent over 1993.
Midyear Outlook. Strong demand and relatively tight supplies of virgin resin—and certain scrap grades—will remain a concern at least until midyear, according to industry participants. But new ethylene capacity is due on-stream and the resulting supply increase is expected to moderate prices in the United States and Europe .
Domestic recyclers of commodity-grade resins such as PET can expect demand to continue far exceeding the industry's ability to supply feedstock. Some forecasts point to 1996 or beyond as the point when PET supply and demand will move into market balance.
Zinc
Western World zinc consumption recorded a 3.8-percent increase over 1993, according to preliminary ILZSG data. Although Western slab production actually fell last year compared with 1993, net exports from the former Eastern Bloc more than made up the difference, thereby keeping the world market awash in zinc. LME inventories, for example, began the year at 907,000 mt, but ended at 1.185 million mt.
Apparent domestic zinc consumption grew only 1 percent to 1.278 million tons last year, the U.S. Bureau of Mines reports, though strong demand was recorded through all major product lines including oxide.
ISRI estimates that usage of zinc scrap—material mostly derived from reclaimed galvanizers’ drosses and die cast—increased by a much greater rate. As a result, scrap zinc’s market share rose to about 22 percent.
Exports of zinc scrap rebounded, meanwhile, increasing 17 percent over comparable 1993 figures.
Midyear Outlook. Considerable attention has been paid to zinc’s improving short-term fundamentals this year, which are evidenced by LME inventories that have fallen steadily since November. This bolstered by a belief that both domestic and world demand will further increase in 1995, has prompted LME price forecasts consistently in the low-to-mid 50s cents per pound. More-bullish forecasts are being withheld under suspicion that world demand will slow, production will again start to rise, and LME drawdowns will moderate in the second half of this year.
Recyclers finally benefited from improved business conditions in 1994, and the prospects for most major commodities look positive this year.