2000 Market Forecast—Year of the Bull

By Robert J. Garino

Robert J. Garino is director of commodities for ISRI.

Having endured another difficult year in terms of prices and margins, it now appears that the new millennium may be a wish come true for the recycling industry.

And that wish is?

Quite simply, it’s for a sustainable macroeconomic and commodity recovery that will improve the bottom line for producers, consumers, manufacturers, scrap processors, and commodity brokers alike.

This may sound like a tall order, but there’s considerably more confidence being expressed about market prospects in 2000 than in the past several years. The consensus is that 1999 was a transitional year—that is, a bottoming out for many commodities. And, without a doubt, last year offered solid evidence that economic recovery is well under way.

In response, optimism and momentum have been quietly building, with many predicting that 2000 will bring synchronous global growth. If that happens, the hoped-for result will be renewed vigor in prices and markets—and, with it, a return to prosperity for the scrap recycling industry.

Remembering 1997

Lest we forget too quickly, it was just over two years ago that the Far Eastern economies were literally melting down. Adding to that drama, Japan was mired in recession, and Russia was defaulting on its debts. At an International Monetary Fund meeting that autumn, President Clinton proclaimed that the world was “facing the greatest economic crisis since the Second World War.” In many circles, pessimism prevailed.

Though the financial contagion that began in Thailand in 1997 spread well beyond Asia, creating global economic anxiety, analysts now conclude that the United States, Britain, and—to some extent—Western Europe weathered the financial storm far better than expected. In fact, the global recession that many feared never really developed, mainly because the U.S. economy continued to expand, fueled by massive infusions of money from abroad.

The United States provided the bulk of the financial energy that helped drive the rest of the world toward recovery and renewed optimism. In the words of Martin Armstrong of Princeton Economics (Princeton, N.J.), the U.S. market has been more than just resilient, “it has become the bug light of global economic prosperity.”

Domestic recyclers, however, weren’t finding anything to cheer about. Despite the sustained growth in the U.S. economy, market conditions for many in the metal, paper, and plastic recycling industries were as bad as they’d ever been. Product imports surged, for example, and raw material prices slumped. Deflation took its toll over the ensuing period, with numerous recyclers looking for ways to exit the industry and a few seeking fresh opportunities to consolidate.

A closer look at the U.S. economy in 1999 shows first-quarter gross domestic product (GDP) growth of 4.3 percent, followed by a surprisingly tepid 1.9-percent second-quarter rate—the weakest three-month period since the second quarter of 1995. But by the third quarter, GDP accelerated as figures showed that the U.S. economy was growing at a faster-than-expected 5.5-percent annual rate. Unemployment was down further, and the stock market was again heading higher. Inflation, meanwhile, was at an unalarming 1.7 percent, lower than the previous quarter, while productivity was increasing at a 4.9-percent annual average.

Interest rate increases by the Federal Reserve Board in June, August, and November were termed “preemptive strikes” to slow the nation’s torrid economic growth. U.S. consumer confidence, as measured by the Conference Board (New York City), rose in November, ending four months of declines. “A booming economy and a strong job market have consumers in a confident, free-spending mode,” said Lynn Franco, director of the Conference Board’s Consumer Research Center.

Revising Forecasts

In light of the strong U.S. economic showing, economists spent the final months of 1999 revising their earlier forecasts. Not surprisingly, virtually all predict higher world growth numbers as well as higher average prices for most nonferrous base metals, paper and paperboard, plastics, and steel.

Merrill Lynch & Co. (New York City), for example, saw 1999 as a “transitional year” coming out of an extremely bearish phase. The firm expects the United States to continue providing a strong demand component, but it maintains that a “meaningful” commodity rally next year will have to be driven from somewhere other than the United States.

The Economic Intelligence Unit (London) says the outlook for the world economy is fast improving, with Asia—not the United States—expected to lead the way in 2000. According to the group, the Asia-Pacific economy would grow 2.3 percent in 1999, accelerating to 2.5 percent this year and 3.5 percent in 2001. It pegs the U.S. growth rate in 2000 at 2.7 percent, a full percentage point lower than its previous estimate of 3.9 percent for the year. A survey of 37 forecasters by the National Association for Business Economics (Washington, D.C.) offered a similar 2.7-percent growth forecast. ED&F Man International Inc. (New York City) predicts that U.S. industrial growth for 2000 will be 3.2 percent, with Western Europe at 3.2 percent and Japan at 2.1 percent.

Though global economic problems still exist and positive growth isn’t assured, these percentages seem to confirm growing optimism. The data suggest that worldwide industrial production—and, hence, economic recovery—is indeed accelerating.

Another forecast released in November by the Organization for Economic Cooperation and Development (Paris) forecast a global GDP growth rate of 3.5 percent for 2000 and 2001. It offered an upgraded outlook for Japan and Europe while remaining cautious about the United States due to worries about the stock market and inflation risks.

Will Commodities Participate?

What do all these forecasts mean for those in the metallic and nonmetallic commodity markets? Will higher global GDP and industrial production projections translate into more commodity consumption and higher average transacted prices?

It sure looks that way, according to the majority of executives contacted in the final months of 1999.

Of course, there are caveats with every commodity forecast. For this year, they range from assumptions about higher crude oil prices and rising domestic inflation rates to the role China will play as a “swing” factor in supply and demand. And let’s not forget the potential aftershocks of the Y2K problem. This list of provisos is by no means large, however, and that in itself is encouraging.

Without further adieu, here’s a closer look, by commodity, at what may be in store in 2000.

Aluminum

Final 1999 world aluminum consumption numbers could show significant gains in second-half economic and industrial production growth rates, thus providing a solid base for positive growth projections this year, according to Macquarie Equities Ltd. (London). 

Sentiment clearly changed for the better throughout 1999. The year began with fears of massive surpluses of refined metal overhanging the world market, a condition that some believed would dog aluminum well into 2000. Forecasts offered in late 1998 predicted an LME average for 1999 in the low-60s-cents-a-pound range. Even by midyear, such predictions were viewed as too optimistic, and several firms lowered their price expectations.

Now, however, many believe that world demand was understated and, consequently, oversupply is not the threat it was assumed to be more than a year ago. Several analysts now contend that demand in 1999 has been well above the most bullish expectations for the United States, South Korea, and China. Despite the lingering belief that “stealth” inventories of unreported stocks remain a potential market depressant, it appears that the widely anticipated surplus has failed to arrive.

Thus, the outlook for aluminum in 2000 appears bright. Improved global demand, lower net exports (especially from Russia), a market shifting to deficit, tightness in alumina supplies, and the proposed mergers of five of the major world producers into two companies are some of the more positive factors. These developments are more than offsetting lingering concerns about potential capacity restarts and unreported inventories.

Standard Bank (London) sees a Western World deficit in 2000, following a 200,000-mt surplus in 1999. Refined consumption is expected to increase 3.7 percent in 2000, while production—constrained by tightness in alumina supply—could increase 1.7 percent. Not surprisingly, the bank’s price forecast is more bullish as well, with an LME cash average of 70.3 cents a pound ($1,550 a mt) this year, followed by a 79.4-cent average in 2001.

Macquarie Equities is even more optimistic, holding out an LME cash average of 76 cents ($1,675 a mt) for 2000 with the chance to “dramatically overshoot” this level in the first half to a potential high of 85 cents.

Offering a more conservative estimate, Morgan Stanley Dean Witter (New York City) expects the LME cash price to average 67 cents in 2000 and 75 cents in 2001. Merrill Lynch, meanwhile, raised its 2000 aluminum outlook 10 percent to a 75-cent average.

Copper

Most of the concern about copper at the start of 1999 was that world oversupply, coupled with lower Asian consumption prospects, would keep prices at bay for the year. And LME inventories did continue to build while Comex and LME prices dipped to 12-year lows.

Despite evidence that world consumption would remain positive, the copper market was perceived to be so out of balance that there was little chance for prices to firm anytime soon. And sure enough, prices were weak through the first six months. As a result, domestic scrap processors and consumers found that scrap couldn’t be drawn into the market. Scrap consumption fell as supplies dwindled and more and more consumers opted for a ready supply of cathode.

This negative trend began to change before midyear—to the surprise of many analysts. Copper prices, which languished around 60 cents a pound, rapidly stabilized during the normally quiet summer months. Exchange inventories also moderated, as did market sentiment.

Turns out that world supply-demand fundamentals weren’t, in fact, what many had assumed, said Paul Dewison, managing director of Metalica Ltd. (Suffolk, England), at ISRI’s copper roundtable in September. First, the 1998 surplus was smaller than most believed, he contended. Also, higher consumption, announced production cutbacks and smelter closures in North America and Australia, and merger plans among domestic copper producers presented a far more favorable view of copper for 1999 and beyond.
While most conceded a statistical surplus was in the cards for 1999, some began talking about a copper deficit for 2000. The International Copper Study Group (Lisbon), for one, forecasts an 82,000-mt deficit in 2000 against a surplus of 238,000 mt in 1999.

Rudolf Wolff & Co. Ltd. (London) agrees that the 1999 production cutbacks have injected new life into copper prices and minimized chances of visiting the lows of last year. Though the company still expects a copper surplus this year, it predicts an LME three-month average of 81.6 cents a pound ($1,800 a mt).

Standard Bank, on the other hand, sees a Western World deficit of 49,000 mt and an average LME cash price of 78.9 cents ($1,740 a mt). Key to its forecast is that world refined output will fall marginally as Western World consumption rises and China imports more copper.

Other forecasts range from 82 cents from AME Mineral Economics (Sydney) to a 90-cent December 2000 “target price” from Goldman Sachs & Co. (New York City). Bloomsbury Minerals Economics (London) expects an 83.9-cent ($1,850 a mt) average, while Merrill Lynch is a tad higher at 85 cents.

Iron and Steel

Domestic steel producers have had little positive news regarding product prices in the past few years. The problem hasn’t been low demand for steel. Rather, domestic producers have been struggling with market and financial depressants such as the 1998 GM strike and, especially, the flood of low-priced steel imports, mostly prompted by the 1997 Asian crash.

In 1999, producers responded to the import threat by initiating a host of antidumping cases. In several instances, the International Trade Commission agreed with industry that dumped and subsidized cold-rolled and flat-rolled steel imports caused material damage to the petitioners. Imports have subsequently slowed. According to Bear Stearns & Co. Inc. (New York City), in fact, imports are back to about 20 percent of net apparent consumption—the same level as before the Asian crisis.

While global economic recovery is gaining momentum, steel recovery is still slow and global overcapacity remains an important issue. Most steel analysts believe that world steel consumption declined in 1999. And even though imports loosened their grip, U.S. steel shipments through the first nine months of 1999 were still about 2 percent below the 102.4 million tons shipped in the comparable 1998 period.

Global steel production is forecast to grow 1.6 percent a year between 1995 and 2005, reports the International Iron and Steel Institute (Brussels). Production is thus expected to reach 719 million mt this year, climbing to 763 million mt by 2005. North America will grow 1.8 percent a year through 2005, with Europe growing slightly slower and Asia slightly faster.

Analysts such as Morgan Stanley Dean Witter, however, don’t see 2000 as a growth year for the U.S. steel industry. Its forecast calls for lower shipments—down 1.1 percent to 95 million mt—but higher prices. Imports, meanwhile, are expected to be 28.4 million mt, unchanged from 1999. In contrast, TXI Chaparral Steel (Midlothian, Texas) remains mildly bullish, predicting shipments of 108 million tons this year.

As for ferrous scrap, the consensus is that modestly higher prices are in the offing and that buying and selling prices won’t return to the depressed levels of late 1998 and early 1999. Most agree that scrap supplies will be more than abundant as a result of another year of relatively low scrap exports, increased scrap imports, and ready supplies of scrap complements such as DRI, HBI, and pig iron.

Scrap price recovery was painfully slow in 1999, with the benchmark No. 1 HMS composite price under $100 a gross ton virtually all year. World Steel Dynamics (Englewood Cliffs, N.J.) says consumers could see No. 1 scrap prices climb $30 to $40 a ton by this summer due to higher demand and the fact that periods of sharp declines for scrap are usually followed by a sizable recovery. Chaparral’s price forecast, offered in November, calls for No.1 HMS to average $110 a ton this year and shredded to average $125 a ton.

Lead and Zinc

To many industry analysts, these sister metals have only their shared geology in common. Their market fundamentals differ considerably, as do their prospects in 2000. In short, most remain optimistic about zinc but are far less hopeful for lead.
Through the first eight months of 1999, zinc consumption rose while commercial stocks of slab zinc fell, according to the International Lead and Zinc Study Group (London). Timely production cutbacks and proposed mine closures also boosted sentiment. Demand last year proved to be far more resilient to the effects of the Asian crisis. And zinc’s supply-demand balance appeared to stay in deficit, thus reversing what many had earlier assumed about zinc supplies from China and that country’s impact on zinc’s statistical balance.

LME three-month zinc prices, which started last year in the low-40s-cents-a-pound range, began to firm as the year progressed. By December, zinc was well-established above 50 cents, while LME inventories had shed around 45,000 mt. LME stocks, in fact, were at a seven-year low by the fourth quarter.

And zinc prices are expected to remain steady, underpinned by low stocks of slab and an improving global economic sentiment. Rudolf Wolff sees consumption growing 3 percent this year, though it says new mine and smelter production plus an increase in net exports (especially from China) will limit the upside. The company forecasts an average LME three-month zinc price of 54 cents a pound in 2000, while Goldman Sachs predicts a 58-cent zinc market by year’s end.

Brook Hunt offers a similar picture, with the Western World zinc market in “rough balance” this year due to increased production and slowing demand growth in the United States. Prudential-Bache International Ltd. (London) proffers a more optimistic LME average of 60 cents for 2000, though it cautions that unusually high zinc exports from China to the West would have a depressing effect on prices.

As for lead, many believed the U.S. market to be “tight” due to steady demand from the battery sector and limited primary lead capacity. In reality, there proved to be more than adequate domestic secondary production available to hold transacted prices in check. A Western World surplus of metal, as well as a lack of investment fund involvement in LME lead, also kept price volatility to a minimum.

Announced primary and secondary cutbacks and closures in the United States and Mexico strengthened domestic premiums for refined lead in 1999 but had no lasting effect on the LME. Domestic secondary smelters, meanwhile, continued to struggle with relatively firm prices for scrap batteries despite an apparent positive year for shipments of replacement batteries.

Rudolf Wolff’s outlook for lead calls for higher lead mine output and smelter production in 2000, along with steady growth in consumption paced by the battery industry. At the same time, it says, higher production and an expected increase in Chinese exports of lead will keep the Western World supply-demand balance in surplus. As for prices, the firm forecasts an average LME three-month lead price of 25 cents a pound this year.

Other forecasts are similar. Most industry officials believe that supply issues will again dominate as demand is expected to record another year-on-year increase. Lead bears, however, believe that visible stocks will remain relatively high, hence limiting the metal’s price prospects. The consensus view calls for LME lead to average in the low-to-mid-20s-cents range this year.

Nickel and Stainless Steel

Virtually everyone connected with nickel and stainless steel sees brighter days ahead.

The nickel market can trace its recovery from the near-collapse in prices that occurred in the final months of 1998. Some of this was prompted by fears of a massive oversupply, traced to slower stainless steel demand and worries about the effect of new, low-cost pressure acid leach projects on the global supply-demand balance. According to CRU Ltd. (London), LME nickel prices declined sharply as the Asian crisis made its full impact on the world market. At the end of 1998, prices were at their lowest level ever in real terms.

Average three-month LME nickel prices started off last year below $2 a pound. By November, they had exceeded $8,000 a mt (about $3.63 a pound)—a level last seen 2-1/2 years before.

As for demand, 1999 Western World nickel consumption in stainless steel was expected to be up 5.1 percent to 660,000 mt and is set to increase 6.3 percent this year to 704,000 mt, according to Brook Hunt (London). It also saw primary nickel consumption reaching 966,000 mt last year, rising to 1 million mt in 2000.

Though the potential for primary nickel oversupply remains a key consideration this year, strong demand from the stainless steel sector, production delays and cutbacks, and the strike at Inco’s Thompson, Manitoba, smelter have markedly changed supply-demand fundamentals. To wit, forecasts of a 20,000-mt Western World surplus last year gradually gave way to an expected shortfall of a similar amount.

For this year, AME Mineral Economics sees strong recovery in economic growth in Western Europe and similar positive growth in North America, which will drive nickel demand this year and next. As a result, the group projects a global increase in stainless steel production of 7.6 percent this year compared with last year’s 4.2-percent growth.

Macquarie Equities expects stainless production to reach 18.3 million mt this year, with nickel consumption at 1.044 million mt. Nickel supply is also expected to increase, as is stainless scrap usage. It’s important to remember, however, that Russian nickel will remain an important swing factor in all supply-demand forecasts.

As for nickel prices this year, AME Mineral Economics predicts $3.45 a pound. Macquarie Equities sees substantial upside potential, looking for the LME to average $3.63, with $4 a pound called “likely” in the first half.

Other projections include an LME three-month price of $3.18 a pound (Rudolf Wolff) to around $3.20 (T. Hoare Canaccord [London]). On the more bullish side is LME broker ScotiaMocatta (London), which sees $4.08 nickel by the end of the first quarter.

Paper

For most in the papermaking and recovered fiber industries, the past several years have been difficult, to say the least. 

As 1999 ended, however, industry participants were far more upbeat due to the strong domestic paper and paperboard market, healthy export orders, and rapidly firming prices for pulp.

Most scrap paper markets entered 1999 on weak footing, following nearly a year of falling prices for most grades. Near record lows for OCC in early 1999 ultimately prompted domestic container mills here and abroad to reverse this trend, and prices began to stabilize. By the third quarter, some bulk grades were fetching prices that were reminiscent of the boom years of 1994 and 1995. The global tightness in pulp, meanwhile, provided a firming base for the higher grades of secondary paper.

Export activity continued to show promise as the year progressed, with demand for mixed and high-grade deinking grades setting the pace. Overall 1999 exports were thus expected to post a modest increase over 1998, while domestic consumption of recovered paper was running several percentage points above the 36.7 million tons recorded in 1998.

According to Resource Information Systems Inc. (Bedford, Mass.), recovered paper markets are in the midst of a strong rally, with high-grade prices recording “major gains” in the final month of 1999. Though it expected continued tightness as last year ended, the firm also said that the upward price pressure wouldn’t be sustained in 2000 due to inventory drawdowns and weaker domestic and overseas paper and paperboard markets. The company thus forecasts OCC to average $71 a ton this year compared with an estimated average of $65 for 1999. Pulp subs show greater promise, with prices estimated to rise 16 to 18 percent over 1999.

Plastics

The plastic industry saw price surges for certain virgin resins from the lows of 1998 as well as double-digit growth rates for other resins. But overall, 1999 wasn’t a stellar year, especially for recyclers of commodity-grade resins such as PET and HDPE. Industry margins for producers and recyclers alike were reportedly under pressure due to rising feedstock costs, despite assumptions that producers were sold out for most of the year. Bottle recycling suffered from this oversupply of virgin resins and correspondingly depressed prices. Margins all but disappeared.

As for 2000, industry officials are calling for PE prices to firm by midyear as domestic demand absorbs new capacity additions. Chemical Associates Inc. (Houston) foresees North American LLDPE demand growing 6.4 percent annually through 2004, with HDPE expected to climb 5.1 percent a year. Should those forecasts prove correct, plastic recyclers should find renewed strength for reclaimed material.

PET is also expected to rebound in 2000, according to Eastman Chemical Co. (Kingsport, Tenn.). Domestic PET demand growth could, in fact, repeat the 18-to-20-percent increase seen in 1999. But even with double-digit growth, the company doesn’t expect prices to match the highs posted in 1995. Oversupply remains an important consideration.

On the demand side, the PET beer bottle market is viewed as having huge potential, which could translate to an “exponential rise” in usage over the next three years. Should this forecast come true, plastic recyclers believe that this new market could provide a much-needed floor for the PET recycling industry in the years ahead. •