January/February 1995
Last year turned out to be better than expected for most in the scrap recycling business, with participants holding onto their chairs as commodity markets accelerated—in some case too quickly for comfort. It looks like more of the same could be in store for this year.
By Robert J. Garino
I know no way of judging the future but by the past. –Patrick Henry.
You can never plan the future by the past—Edmund Burke
Henry and Burke were probably both right.
That’s why while Scrap Processing and Recycling’s annual market forecast feature—which has strived to take the pulse of the scrap-related commodity markets on the doorstep of each of the last eight years—relies on past trends as the basis for educated guesses about the future. It’s also why we must always emphasize that the article is really taking a look at what could lie in store for key commodity markets in the year ahead. Still, a look back suggests that more often than not, we’ve correctly identifies the underlying forces that have, in fact, dominated the news and shaped prices.
Looking back to the early 1990’s, for instance, the story line was dominated by the dark shadows of economic recession and the disturbing effects of the 1991 dissolution of the Soviet Union, which resulted in massive exports of many industrial raw materials to the West. Then again, the later event actually proved to be the more devastating factor in for scrap-related markets, and 1991 and 1992 ended up being rougher on affected domestic scrap processors, brokers, and consumers than expected.
We focused on global economic interdependence and its role in world commodity markets in last year’s market forecast. The picture that emerged was that a synchronized global recovery, led by the United States , was in the offing, and that boded well for suppliers of both metallics and nonmetallics.
This forecast was also mostly accurate. With most of the article’s contributing experts predicting that prices for basic industrial commodities would, on average, rise in 1994 compared with 1993 due mainly to improving supply-demand fundamentals, the direction of the projections rang true. But they turned out to be too conservative. None foresaw that scrap and virgin material prices would swing up to levels last seen two to four years ago as the final quarter of 1994 got under way. The anticipated gradual global economic recovery turned into an unexpected boom year for many in the commodities business.
So what’s in store for 1995? Industry officials paused at length while pondering that question in the closing months of 1994, and many voiced reservations about market behavior termed “totally unpredictable” despite the apparently continuing economic recovery in the United States, Europe, and—finally!—Japan. Still, when pressed, most forecast continuing positive trends—with a few caveats.
IMF Offers Rosy Outlook: World Economy to Grow in ‘95
The direction of the world economies in 1995 is one of the ifs affecting this year’s predictions, and forecasts in this area are far more positive than those offered a year ago. In fact, the International Monetary Fund’s (IMF) (Washington, D.C.) World Economic Outlook, released in the fourth quarter of 1994, projects growth in world economic output (as measured by gross domestic product [ GDP ]) to end up at 3.1 percent for 1994 once all the figures are in, and it projects a further 3.6-percent rise in 1995—a rate nearly double the pace posted in the 1990-1993 period.
Growth in the “Group of Seven” leading industrialized countries—the United States, Japan, Germany, France, Great Britain, Canada, and Italy—should average 2.7 percent this year, according to the IMF, while the world’s less-developed economies as a group are expected to advance 5.6 percent.
On regional variations in economic performance, the IMF notes that the economies of Central Europe—such as Hungary, Poland, and the Czech Republic—are beginning to emerge in a positive fashion, while some others, most notably Russia, continue to struggle. Indeed, the IMF estimates that Russia ’s GDP fell 12 percent in 1994 and will stumble similarly in 1995. And, as is already well-demonstrated, economic troubles in Russia can have serious implications for world commodity markets. On a more positive note, data on Russian inflation show the rate has improved from levels in excess of 900 percent suffered during 1994 to a projected 336 percent for 1995.
(The IMF is predicting relatively low inflation rates among the industrialized nations, a scant 2.6 percent on average, with the United States pegged at 3.4 percent, compared with the 2.7 percent projected as a total for 1994.)
China, meanwhile, is one of the world’s fastest growing economies, according to the IMF. Its growth, however, fueled by massive capital inflows over the past several years, has led to double-digit inflation—a feature that will continue to be apparent in 1995, the IMF predicts. Again, this could have important implications for both primary and scrap commodity markets around the globe
U.S. Economy, Commodities Prices Moving Too Fast, Some Say
The U.S. economy surged ahead at an impressive 6.3-percent (annualized) rate in the fourth quarter of 1993, slowed to 3.3 percent in the first quarter of 1994, and again picked up speed to register a 4.1-percent boost in the second. And the latest figures place third-quarter 1994 GDP growth at a surprisingly robust 3.9 percent.
The trend apparently continued in the fourth quarter, with U.S. industry reported to be operating at 84.9 percent of capacity in October—the highest operating rate in nearly 15 years. In fact, the final quarter of 1994 looked rosy overall, showing that most analyses had underestimated the strength of the U.S. economy. As secretary of Commerce Ron Brown put it in October, “The prospects for the U.S. economy are as good as they have been in many years.
Still, some economists are quick to note that the United States has actually been in a recovery for more than 3 ½ years, with the high point—as measured by the rate of growth—reached during the final quarter of 1993.
Does that mean a recession may loom anytime soon? Opinions differ markedly on that topic, but many analysts believe that actions taken by the Federal Reserve in 1994 will ultimately dictate how the U.S. economy responds in 1995. Some fear that the agency was overzealous in hiking up short-term interest rates six times for a total of 2.5 percent between February and November to stifle inflation, an action, they say, that could cause economic growth to stall or even reverse during 1995. Others point out that economic research indicates that in the past, increases of 2 to 3 points have been enough to slow an overheated economy; anything more has resulted in recession.
But that’s not the only concern of metal market watchers in the United States. Many are troubled by the rate if commodity price increases on the London Metal Exchange (LME) and the Commodity Exchange Inc. (Comex) (New York City). This prompted much attention last year to what LME Chairman Raj Bagri dubbed the “Financialization of commodity markets”—the pouring of huge sums of money into metals, coffee, and other commodities futures and their derivative investment fund involvement in the LME last year at $16 billion. Furthermore, LME traders believe that banks control 75 percent of inventories held on the exchange, with as much as 85 percent of its aluminum stocks controlled by just four or five banks.
For buyers and sellers of freely traded industrial commodities, it is one thing to weigh projections of future world supply-demand balances and gauge their influence on price; it is quite another to add to the calculation this relatively new and unknown dimension of the marketplace. As Bagri, among others, has cautioned, the fear is that investment fads could change quickly and the big funds could “easily cause major havoc by [a] sudden loss of interest and withdrawal." In fact, as this feature was going to press, published news analyses were indicating the potential for heavy selling on the LME at the end of 1994, which could force prices sharply lower by the time this is published—perhaps skewing some of the predictions presented.
Fund behavior is uncertain, in part because the funds, as trend followers rather than trend setters, are influenced primarily by interest rate changes and subsequent movement in the value of the U.S. dollar on world markets—not commodity market fundamentals. Thus, loftier questions than those concerning supply, demand, and price come into play—Will U.S. pension plans and commodity funds look to increase their investments in international assets like metal commodities if the dollar remains weak? Will foreign firms look to invest more in the United States, thereby strengthening the U.S. dollar and indirectly affecting the commodity markets? Is keeping domestic inflation rates low in 1995 the key to both domestic economic prosperity and predicting fund behavior this year and next?
Put all of this together, and it appears that market conditions look favorable—or are at least improving—and that economic recovery will continue and expand in 1995. But some global soft spots and the unpredictable effect of the large funds on commodity markets tempered the enthusiasm of some market observers who boldly issued 1995 projections for this forecast.
Aluminum
Most domestic and world aluminum producers remain very bullish about the market's direction—if promised production cutbacks remain in effect through most of the year. (They don't wish to hazard projections on the likelihood of this, however.) Jacques Bougie, chief executive of Alcan Aluminium Ltd. (Montreal), for example, projects that total aluminum demand in the Western World will end up showing a 4-percent increase in 1994 over 1993, and he forecasts demand will continue to grow at nearly 4 percent annually through 2000, thanks in large part to increasing transportation demand for the metal, especially automobile related consumption.
Richard Holder, chairman and chief executive officer of Reynolds Metals Co (Richmond, Va.), expects domestic aluminum shipments to hit 18 billion pounds this year, an estimated 3-percent gain over 1994, which had seen an impressive 10-percent increase over 1993 shipments. Like Bougie, Holder believes the automotive sector will prove to be strongest of all markets, projecting this segment's aluminum use to grow by 17 percent in 1995.
Similar optimistic forecasts abound, whether based on anticipated 1995 world demand, domestic aluminum consumption, and/or shipments. For instance, record-high U.S.alloy shipments were a prominent market feature last year, and sources say this year looks equally promising, which could bode well for the domestic scrap industry. "We plan on being more aggressive buyers of scrap in order to meet the increased demand we see for alloys other than 380," confides one Midwest secondary smelter rep. The downside for the secondaries, however, is that they will see themselves facing increased competition as they vie for higher grades of scrap routinely sought after by sheet mills and extruders.
Officials in other segments of the aluminum recycling industry share a similar view of the scrap situation, suggesting that scrap will generally be available, but keen competition for everything from painted siding to all-aluminum used beverage cans will keep pressure on margins. "Unfortunately," one Midwest minimill spokesman remarks, "higher average transacted prices do not necessarily translate into higher profitability."
Still, recyclers certainly welcomed the better aluminum values recorded last year in comparison to the previous year and generally look forward to the potential for higher prices still this year. As 1994 was coming to a close, LME three-month aluminum prices were at a four-year high. Strong domestic demand, a reduced overhang of world aluminum supplies, and major investment fund involvement were being cited as principal reasons behind recent sharp price increases.
Most market observers contacted believe that, despite the lofty levels, prices have not peaked. Nick Moore, an analyst with Ord Minnet Ltd. (London), for one, predicts an average prime aluminum price of $1,720 per metric ton (mt) for 1995, an increase of 20 percent over the 1994 average. Another prognosticator, Stewart Spector, publisher of the Spector Report (New York City), forecasts aluminum prices to climb to $2,000 per mt by the fourth quarter of 1995.
Copper
In contrast to late 1993, when our market forecast reported differing opinions on the relative strength and direction of red metal markets for the coming year, few were talking down the 1995 copper market in the final months of 1994. Of course, it might have been difficult for them to think bearish at the time, as Comex copper was trading at a five-year high of $1.36 per pound.
Worldwide demand for copper also was up in 1994, with estimates easily placing the year's total above 9 million mt—en route to what many forecasters expect will be a 1995 consumption level of approximately 10 million mt.
For the U.S. market, Commodities Research Unit (London) projects 1995 refined copper consumption of 2 percent above the more than 2 million tons consumed in 1994, while Resource Strategies Inc. (Exton, Pa.) forecasts that consumption could exceed 2.5 million tons. Much of the explanation behind higher consumption in 1994 lies in continued firm demand from the brass and rod mills, and although few expect 1995 to match the double-digit shipment increases seen in those sectors last year, early indications suggest that rod and brass mill activity will continue to pace 1995 domestic copper consumption.
But tempering most 1995 price forecasts are projections of growing copper supply, based on mine expansions around the globe. Bloomsbury Mineral Economics (London) expects Western World output to grow by 500,000 mt this year, approximately 6 percent above the 1994 level. According to Donald Cumming, executive vice president of Rio Algom Ltd., a Toronto-based mining firm, the result will be a "relative market balance in 1995." And 1996 could bring even more copper onto the market, as Billion Metals (London) is projecting mine supply to expand by an additional 900,000 mt that year.
Last year turned out to be better than expected for most in the scrap recycling business, with participants holding onto their chairs as commodity markets accelerated—in some case too quickly for comfort. It looks like more of the same could be in store for this year.