May/June 2002
While commodity markets continued to take a beating last year, indicators suggest that the worst could—finally—be over?
By Robert J. Garino
Armed with fresh data and keen hindsight, it’s apparent that the U.S. manufacturing and scrap recycling sectors began their precipitous economic slide around midyear 2000. By virtually all measures—including industrial production in the second half of 2000, U.S. gross domestic product, scrap demand, and overall metal and paper consumption—it became painfully obvious that an economic downturn was imminent, marking the end of the U.S. economy’s decade-long economic expansion as well as any remaining blue-sky optimism.
Thus, the U.S. recycling industry would remember 2000 for its second-half price slides, soaring energy costs, and mushrooming inventories, all of which wreaked havoc on the bottom lines of scrap processors and consumers alike.
Now, another year later, we can look back on 2001 to see how it fared compared with 2000. As it turned out, 2001 was even more challenging financially for buyers and sellers of scrap and primary metals as well as paper. Continuing the negative trends begun in 2000, total apparent consumption and domestic scrap demand fell for all the major nonferrous metals last year. In many cases, key industrial metals faced double-digit declines in demand last year compared with 2000, exacerbated by heavy destocking throughout the supply chain. The iron and steel market suffered a similar—some would say worse—fate, while the U.S. paper and paperboard industries saw overall production decline along with scrap paper recovery, exports, and average prices.
For the year, U.S. industrial production decreased 3.7 percent, while gross domestic product grew at a tepid 1.2 percent rate following a revised (and surprising) fourth-quarter increase of 1.7 percent. The Dow Jones industrial average ended the year down 7 percent at 10,021.56. The tragic Sept. 11 events, compounded by domestic bankruptcies and a weakened international marketplace, only added to the market anxieties and uncertainties as confidence waned in the global business community.
Though there were few business positives to report, preliminary data suggest that scrap consumption in 2001 didn’t slip as much as total metal and paper consumption. Scrap, in fact, increased its market share last year in many sectors, including iron and steel, paper and paperboard, and most of the nonferrous base metals. Also encouraging, exports of scrap aluminum, copper, iron and steel, lead, and zinc grew in 2001, though exports of nickel and stainless scrap as well as recovered fiber were down slightly.
Another positive in 2001—according to many market analysts and observers—was that most of the markets supposedly hit their price lows early in the fourth quarter. Is this evidence of a recovery? Does it suggest modest upward growth this year, with the potential for even brighter skies in 2003? Economic indicators released in the first quarter of 2002 do indeed point to recovery in Western World industrial growth and, with it, increases in scrap demand.
To illustrate where the markets have been—and where they could be going—here’s our annual summary of the major commodity markets.
Aluminum: For domestic primary and secondary producers, last year was defined by energy- and market-related production cuts, aluminum consumption declines, surpluses of refined metal, and lower-trending prices. For the year, primary production fell 28 percent as mill shipments slumped almost 13 percent. Apparent consumption (which measures shipments, net imports, and stock changes) slid around 20 percent while apparent scrap consumption declined 15 percent, thereby increasing scrap’s market share to 41 percent. Though scrap usage fared slightly better on a relative basis, some specific end-use markets—UBCs, for example—recorded significantly lower recycling rates compared with 2000.
Copper: U.S. copper consumption decreased 14 percent in 2000, dipping below the 4-million-ton mark for the first time since 1996, according to ReMA figures. Producers responded by announcing significant production cuts, but that wasn’t enough to alter the fundamental domestic and global picture of declining demand, rising inventories of refined metal, and falling prices. Domestic scrap consumption was down 9 percent, though some recyclers benefited—at least in terms of volume—from the ever-growing Far East appetite for copper units. Bolstered by Chinese buying, copper scrap exports jumped 10 percent last year—the best showing since 1995.
Iron and Steel: The domestic steel industry recorded a host of negatives in 2001, including raw steel production
(-11.5 percent), mill shipments (-8.8 percent), product exports (-5.9 percent), and apparent consumption (-12.8 percent). Ferrous scrap consumption held up, but only because mills continued to consume inventoried scrap as opposed to newly purchased material. Due to this destocking as well as lower product demand, scrap prices (adjusted for inflation) fell to levels last seen in the early 1980s and, before that, the Depression. Additional industry bankruptcies last year brought the total to nearly 30 firms in the past three years. Though the Bush administration sought relief for U.S. steelmakers through a Section 201 case, the issue wasn’t resolved until 2002 and, thus, provided little solace for the industry last year.
Lead: With lead-acid batteries dominating demand for refined lead and scrap, the strength of the U.S. market for replacement and original-equipment batteries is the key measure of the lead industry’s health. In 2001, both of these market segments saw shipments decline, a reflection of lower auto production and the cumulative effect of relatively mild weather. As a result, lead consumption decreased 5 percent last year while scrap demand was down about 2 percent, thus boosting scrap’s market share 2 points to 67 percent. Lead scrap exports climbed noticeably higher, especially in the nonbattery-lead category. Interestingly, lead was the only LME-traded metal to better its annual price average from 2000 to 2001.
Nickel and Stainless: For Western World nickel producers and manufacturers of stainless products, 2001 was marked by a major decline in stainless production, significantly lower primary nickel consumption (but higher nickel production), and ongoing tightness in stainless scrap supplies. LME nickel prices dropped 30 percent. The situation was similar, if not more severe, for U.S. industry participants. Total U.S. stainless shipments were, at 1.8 million net tons, down 14 percent as product prices and demand slumped. Overall scrap consumption showed some resiliency, though mills continued to work down their scrap inventories and, hence, weren’t aggressive scrap buyers last year.
Paper and Paperboard: For most paper, paperboard, and recovered fiber participants, 2001 continued the negative trend that began in mid-2000. According to the American Forest & Paper Association, production of newsprint and printing and writing paper decreased more than 12 percent last year, while paperboard production slipped 4.4 percent and recycled paperboard declined 2.1 percent. Total apparent consumption of paper and paperboard contracted 5.1 percent. Despite these declines, paper recycling rates remained relatively stable, with the overall recovery rate higher last year at 48 percent. Exports of scrap paper, meanwhile, were virtually unchanged.
Zinc: By most measures, zinc fared worse than most other nonferrous metals in 2001. Western World zinc demand declined more than 4 percent as refined production increases sent aboveground stocks ballooning. The International Lead and Zinc Study Group placed the surplus at 292,000 mt, up from 15,000 mt in 2000. Prices responded predictably, though few would have guessed that LME prices would ultimately fall to 14-year lows. U.S. consumption, meanwhile, dropped more than 20 percent, reflecting declines in the galvanizing sector and brass mill consumption of slab zinc. Lower overall demand was also reflected in the diminished recycling of zinc dross, skimmings, and ash, which resulted in a slightly lower scrap market share in 2001. •
Robert J. Garino is director of commodities for ISRI.
While commodity markets continued to take a beating last year, indicators suggest that the worst could—finally—be over?