1999 Commodity Markets Wrap-Up—2000 Midyear Outlook

Was 1999 truly a transitional year from the turmoil of 1997 and 1998? Have the major Western World economies finally shaken off the lingering negative effects of the past few years? And, more important, does the outlook for scrap recyclers look tepid or hot?

Based on the statistical evidence, last year was indeed one of recovery for primary base metals as well as metallic and nonmetallic scrap, though all industry segments didn’t participate equally. 

Domestic scrap metal recyclers, for example, saw prices recover from their respective lows as the year progressed. But in many instances scrap consumption continued to lag overall consumption, thus eroding scrap’s market share. For scrap metal recyclers, it was clear that prices—and demand—still have a way to go before full confidence returns to the marketplace.

There were, of course, noteworthy exceptions to the above trend. Stainless steel scrap processors and brokers, for example, saw nickel and scrap prices recover smartly, while recovered paper packers and brokers literally experienced boom markets in the second half of last year.

The United States continues to set the global pace in terms of economic growth and industrial production and output. The U.S. gross domestic product, for instance, powered ahead in the final months of 1999, posting a 7.3-percent annual growth rate—the fastest pace in nearly 16 years and the strongest performance in this current economic expansion that began in March 1991. For all of last year, the U.S. economy grew 4.2 percent compared with 4.3 percent in 1998, while industrial production rose 3.5 percent. Inflation, meanwhile, remained a non-issue as equities soared.

This unprecedented macroeconomic growth, however, continues to beg the questions: Will this trend continue and will scrap metal processors regain the ground they lost? Notably, virtually no one is forecasting that the current U.S. or global economic expansion will end anytime soon. If this view is correct, continued gross domestic product growth and increased industrial output, with some help from inflation, should translate into greater demand for scrap and higher average prices. Scrap recyclers may at last have reason to cheer.

Aluminum

By almost every statistical measure, 1999 was a year of strong global recovery for the light metal compared with 1998. In addition, Western World market fundamentals, building on the positive momentum generated last year, bode well for the industry this year as well.

Central to this positive industry view is the contention that global demand for primary aluminum continues to be understated. According to most estimates, world primary metal consumption was higher than expected at approximately 19,000-plus mt, up around 5 percent compared with 1998, a year that recorded a year-on-year decline. In addition, the huge statistical surplus that emerged in 1998 moderated in 1999 to a more manageable number.

The domestic market recorded several positives as well. Mill product shipments, as recorded by the Aluminum Association (Washington, D.C.), increased 6.5 percent over 1998. Primary production grew 2.3 percent, according to the U.S. Geological Survey (USGS). And last year’s apparent aluminum consumption in the United States posted a 4.8-percent increase over 1998, based on ReMA calculations.

To meet this higher consumption figure, industry participants relied on stepped-up primary production, significantly greater net imports of metal (in all forms), and scrap. Overall scrap consumption, however, was virtually unchanged in 1999, meaning that scrap’s market share dipped to 41 percent, a five-year low. Aluminum UBC recycling, an important contributor to the total scrap recovery figure, was lower due to a reported drop-off in can melting by U.S. can sheet mills. Relatively low transacted prices for UBCs, especially in the first half of last year, reportedly inhibited the flow of material to can manufacturers and tolling operations.

Aluminum prices, as measured on the LME (three-month basis), trended higher last year, averaging 63 cents a pound and posting a two-year high as 1999 ended. For reference, prices were some 30 percent higher than end-1998 tags.

Consolidation continued to be a feature in the aluminum market last year, with two high-profile mergers making headlines. One was the proposed combination of Alcan Aluminium Ltd., Pechiney S.A., and Alusuisse Lonza Group AG. (The deal now involves only Alcan and Alusuisse.) The other was Alcoa Inc.’s acquisition of Reynolds Metals Co. 

Midyear Outlook. At the start of the second quarter, aluminum fundamentals appear solid, despite a wave of technical and hedge-fund selling that has lowered LME prices. Cash prices eased below 67 cents for the first time since late November. 

Industry forecasts maintain that global aluminum consumption will increase around 4 percent this year. Standard Bank (London) forecasts Western World consumption at 19.9 million mt, up 4.1 percent, while Brook Hunt (London) projects U.S. growth at less than 1 percent, owing mostly to lower demand from the interest-sensitive construction sector. Inventories are expected to continue to trend lower.

Price prospects, therefore, remain positive. Analysts are holding to earlier forecasts that call for prime aluminum to average in the mid-70s-cents range this year, with peak prices and premiums occurring in the second quarter.

Copper

Western World copper in 1999 clearly benefited from several well-publicized mine closures and corporate mergers that ultimately ignited recovery following a prolonged period of downward-trending prices. The decline was exacerbated by simply too much high-cost copper production in the market for far too long—as far back as 1996, analysts assert.

As 1999 began, with supply well above demand, exchange prices hovered near 60 cents a pound, close to lows posted more than a decade earlier. The year ended on a strong note, however, with prices trading above 80 cents, the highest since May 1998.

Despite unsettling inventory increases throughout most of last year, increasing world copper consumption allayed many fears about copper’s supply-and-demand fundamentals. According to the International Copper Study Group (Lisbon), consumption of refined copper grew 4.3 percent from 1998, the highest year-on-year increase since 1995, thus helping to reduce the overall market surplus. The group placed the global surplus at 350,000 mt compared with 618,000 mt in 1998.

The domestic copper market was also stronger in 1999 compared with 1998. Shipments by U.S. brass mills rose 5 percent compared with 1.6 percent in 1998, according to preliminary numbers from the Copper Development Association (New York City) and American Bureau of Metal Statistics (Chatham, N.J.). CRU Ltd. (London), meanwhile, placed U.S. refined consumption at 2.8 million mt, up 2.3 percent over 1998.

Overall copper consumption, as measured by ISRI, was also higher by about 2 percent, though key components to that number—primary refined production and recovered scrap—were lower by 11.7 and 6.7 percent, respectively. Scrap recovery, in particular, has felt the combined effects of relatively low prices, the closure of several consuming facilities in the past few years, and a significant increase in refined copper imports. Consequently, scrap’s market share has fallen to 32 percent, nearly 10 percentage points lower than a decade ago.

Following a relatively firm first quarter, copper felt the weight of heavy technical and hedge-fund selling as the second quarter began, driving prices on the LME and Comex to seven-month lows.

Market fundamentals, however, continue to suggest that copper prices will head higher in the months ahead. Evidence includes the contention that Western World refined consumption will increase this year.

This, coupled with assumed production restraint and further stock drawdowns, could result in supply tightness. China is also expected to be an important copper consumer in 2000.

LME price forecasts (three-month basis) for the year see copper exceeding the 83-cent average posted in the first quarter.

Iron & Steel

Though much of the statistical data on the domestic steel industry reveals negative changes compared with 1998, U.S. steelmakers were seeing profitability returning to their industry as the year ended. It has taken nearly two years for product prices to climb back to mid-1998 levels, when a flood of imports lowered list prices 25 percent or more. Imports, which surged to a record 41.5 million tons in 1998, declined almost 14 percent to 35.7 million tons—still considered high based on previous import totals.

Last year was also marked by slightly higher steel production in foreign markets, which increased overall global demand for scrap and scrap complements. According to the International Iron and Steel Institute (Brussels), world steel production reached 770.7 million mt, 1.4-percent more than the previous year. Responding to improving fundamentals, ferrous scrap exports from the United States were up 4 percent from the depressed lows of 1998. For perspective, however, scrap exports are still 50 percent below the 9.4 million mt shipped in 1995.

U.S. output of raw steel, meanwhile, was 1.4 percent lower at 107.2 million net tons compared with 108.8 million tons poured in 1998. This lower U.S. production translated into diminished demand for ferrous scrap. Preliminary numbers from USGS suggest that total purchased scrap may have fallen as much as 12.5 percent compared with 1998. Imports of ferrous scrap were also slightly higher last year, though total scrap, pig iron, and DRI imports were lower compared with 1998.

On a positive note, the prolonged scrap price depression in 1998 gradually gave way to improved demand and prices. Nevertheless, despite trending higher in the second half of last year, ferrous scrap prices were lower, on average, compared with 1998.

Midyear Outlook. The consensus view is that global steel markets are continuing to improve in 2000 and that subsequent higher demand for raw materials will push prices higher for steel products, ferrous scrap, pig iron, and DRI. The U.S. market is also experiencing steady demand across almost all product groups, and industry inventories are said to be consistent with a period of rising prices. Steel imports are also being held in check by trade cases and improved overseas demand.

At the same time, however, first-quarter scrap prices have, in fact, eased lower despite steady demand. Mills are believed to be working down accumulated scrap inventory from domestic and offshore sources and, thus, are expected to resume buying in the months ahead. Scrap prices are expected to react accordingly.

Lead & Zinc

 According to the International Lead and Zinc Study Group (ILZSG) (London), Western World demand for slab zinc exceeded supply by 96,000 mt last year—the fifth consecutive year of a statistical supply shortfall.

Paced by a strong domestic market, total Western World zinc consumption was estimated to be 6.77 million mt, 4.1 percent greater than in 1998. For the first time, global demand exceeded 8 million mt for an increase of 3.8 percent over 1998, ILZSG notes. LME zinc prices, reflecting the constructive fundamentals, trended higher as the year progressed, holding above 50 cents a pound from August through year-end.

ISRI data has total 1999 U.S. zinc consumption at a conservative 1.48 million tons, 5 percent more than the 1.41 million tons consumed the previous year. Ed Schmidt of Big River Zinc Corp. (Sauget, Ill.), however, believes that last year’s zinc consumption was closer to 10 percent greater based on the strength of the sheet and strip galvanizing sectors. Zinc-based scrap recovery was about 248,000 tons, virtually unchanged from 1998, USGS reports. Consequently, should ISRI’s data prove correct, scrap’s share will post a modest decline from 18 to 17 percent of apparent consumption.

While the global and Western World zinc markets can cite any number of positive developments in 1999, lead had little to boast about. According to ILZSG, the Western World lead market had a 102,000-mt surplus last year, up sharply from a more modest surplus of 10,000 mt in 1998. Most of the excess supply can be traced to exports from the former Eastern Bloc countries and China, which remained the major supplier, exporting 450,000 mt last year—200,000 mt more than in 1998.

According to CRU, Western World supply grew 3.7 percent last year, while demand grew slower at 1.8 percent. Not surprisingly, inventories rose (LME stocks increased 69,000 mt) and, as a result, transacted lead prices stayed in a very narrow range. For the year, LME three-month lead averaged 23.1 cents a pound compared with a 24.2-cent average in 1998 and 29-cent average in 1997.

Though the domestic market enjoyed positive demand for refined metal and steady premiums, it faced relatively low prices for refined metal and relatively high prices for scrap batteries. These market conditions took their toll on both primary and secondary lead producers. Primary production increased about 4 percent, while secondary smelter output remained essentially unchanged compared with 1998.

Overall demand was paced by the battery industry, the market segment that accounts for more than 85 percent of lead consumption. Last year, shipments of new and replacement automotive-type batteries reached 100.5 million units, a 6.2-percent increase, surpassing the 1994 record year by 5.2 million units, says Battery Council International (Chicago).

Midyear Outlook. LME zinc prices (three-month basis) showed little inclination to move much above 51 cents a pound in the first quarter of this year. But anticipated higher Western World consumption this year and critically low stocks should help lift prices above last year’s average of 491/2 cents a pound, analysts suggest.

Those less bullish believe that, despite the assumed statistical deficit, scheduled new mine and smelter projects, coupled with higher-than-anticipated exports from China, could make up for any shortfall. The most recent consensus forecast, however, calls for LME zinc to average $1,235 a mt in 2000, or 56 cents a pound. 

In contrast to zinc, the global lead market remained in serious financial trouble at the start of the second quarter, with prices hovering around six-year lows and threatening to go even lower. Doe Run Co. (St. Louis) responded by cutting back concentrate production in January, as did secondary lead producer Exide Corp. (Reading, Pa.). The issue for producers and sellers of lead in 2000 isn’t one of low demand. Rather, there’s simply too much metal that’s refined as a byproduct of zinc and silver production at virtually no cost to producers.

Lead’s fortunes in 2000 will rest with a Western World market coping with oversupply, especially from China, and demand that’s heavily dependent on automotive sales and the level of replacement battery shipments, which are in turn dependent on weather conditions.

According to Michael Deelo of Doe Run, who spoke at the lead/zinc spotlight at ISRI’s convention, lead prices have shown a downward trend since 1996, and “low lead prices will continue for the next few years.” Many independent analysts believe that LME lead will find little sustained support for prices much above 23 cents a pound.

Nickel & Stainless Steel

Nickel’s reversal of fortune has truly been spectacular from the depressed levels of 1998. After suffering acutely in the aftermath of the 1997 Asian financial crises, nickel producers in Canada, Australia, and New Caledonia took steps to curtail production as demand for stainless steel rapidly regained its upward track last year. The bullish sentiment was fed from several fronts, including robust Western World stainless steel production, delays in output from new Australian lateritic mines, and a decline in Russian nickel exports to the West. These events helped move nickel from a 34,000-mt statistical surplus in 1998 to an estimated 25,000-mt deficit. Warehouse stocks, as measured on the LME, were near decade-lows as the year ended.

It’s worth emphasizing that stainless steel, used in construction, household goods, and consumer durables, accounts for more than 60 percent of global nickel consumption and that the booming demand for stainless products is directly linked to strong economic growth. According to QNI Ltd. (London), Western World stainless production hit 17.2 million mt last year, up 5 percent from 1998.

The domestic market for stainless steel was also strong, with shipments rising 4.4 percent to 2.1 million net tons and imports slightly lower at 645,000 tons, reports the American Iron and Steel Institute. Apparent scrap consumption responded to the higher demand for nickel units, increasing more than 7 percent over the prior year. Scrap’s market share gained as a result, though it still lags past years.

Midyear Outlook. The nickel market outperformed all other base metals in 1999, and this upward trend continued into 2000. Buoyed in part by labor disruptions in New Caledonia, nickel prices zoomed higher in the first quarter, visiting levels last seen more than five years ago. LME prices, however, appeared to have stalled as the first quarter ended.

Softer LME prices notwithstanding, nickel’s positive fundamental picture hasn’t changed, though some say its supply picture is less worrisome than at the start of the year. Analysts remain confident that stainless demand will continue to grow this year. Macquarie Equities (London), for example, expects stainless production to rise at “double-digit” rates through midyear, leading to a major increase in primary nickel demand. Most believe that the Western World balance suggests a 25,000-mt deficit this year, assuming no production stoppages related to upcoming labor contract negotiations at Inco (May 31) and Falconbridge (Aug. 1).

As for prices, Standard Bank predicts that LME cash nickel will average $4.31 this year.

Paper & Paperboard

For scrap paper processors and brokers, 1999 brought a near-disastrous first half and a turnaround second half. According to the Paper Stock Report, average scrap paper prices in January were just under $72 a ton, the lowest since May 1996. But by the end of the year, the average was closer to $129, reminiscent of prices seen more than four years ago. The global tightness in market pulp, meanwhile, provided solid underpinnings for all grades of recovered paper.

The market recovery began in the summer as demand for pulp substitutes as well as OCC continued to strengthen, pulling other grades along. Domestic demand for paper and paperboard remained steady for the balance of the year, and the export market gained momentum as well.

U.S. mills set a new record for scrap paper consumption, surpassing 1998 usage by 4 percent to 47.3 million tons, according to the American Forest & Paper Association (Washington, D.C.). This consumption pushed the paper recovery rate, which includes mill consumption plus exports expressed as a percent of purchased paper and paperboard, to 45 percent. Exports of recovered paper, meanwhile, also grew, increasing 2.3 percent compared with 1998 figures.

Midyear Outlook. In contrast to most base metal prices, tags for most recovered paper grades trended higher as the first quarter ended. Domestic demand remained firm along with steady orders from offshore consumers. Bulk grades such as ONP and OCC remained in an upward price track, but not all grades were responding in kind. Higher-grade deinking prices, for example, were feeling the negative effects of an improving supply position and lower-grade product substitution. As a result, prices for several of these grades softened as the second quarter began.

Forecasts by Resource Information Systems Inc. (Bedford, Mass.) call for higher recovered paper prices in the next six months. The firm cites solid domestic containerboard output and robust export demand, which will form the foundation for higher bulk-grade prices in the months ahead. Conceding lower second-quarter deinking prices, the company expects higher market pulp prices and healthy demand for wood-free paper to once again lift high-grade deinking prices. Weaker prices could be in the officing later this year, however, due to a modest decline in world economic growth and seasonally higher cut-ups and collections, the company predicts.

Plastics

The domestic plastic industry endured a difficult 1999. But 2000 held out the promise of recovery, assuming continued growth in industrial production and the U.S. gross domestic product.

Some resins, such as PE, benefited from strong demand and subsequent higher prices last year, while others, such as PET, suffered from overcapacity and weaker prices in spite of double-digit demand growth. The PET recycling rate in 1999 wasn’t expected to match the 24.8-percent rate of 1998. Overall, plastic recycling didn’t show any appreciable improvement in 1999, a trend that has persisted the past few years.

Midyear Outlook. Rising crude oil prices have set the stage for rising petrochemical costs that will likely be passed on to resin consumers and, ultimately, plastic recyclers. Reports conclude that virgin resins such as PE, PVC, and PET are responding to improving market fundamentals as well as price pressures from rising feedstocks. PET recycling is receiving an added boost from a stronger export market.

Higher HDPE prices, meanwhile, are also being attributed to an improved ethylene and prime PE market. The challenge for PET and HDPE plastic container recyclers in the months ahead will be their ability to keep pace with rising raw material costs as well as the expected increases in new supply traced to new products being introduced in the marketplace.