January/February 2002
Scrap markets were dealt a bad hand in 2001, but will 2002 be any better? The answer depends on the wild cards of supply and demand, consumer confidence, the worldwide recession, the war in Afghanistan, and more.
By Robert J. Garino
Robert J. Garino is director of commodities for ISRI.
Ten months and counting …
Counting what? The number of months the United States has been in recession, that’s what.
According to the National Bureau of Economic Research (NBER) (Cambridge, Mass.), the U.S. economy “officially” slipped into recession in March 2001.
Is NBER’s date a surprise? Most domestic manufacturers would claim that the recession began before March. Indeed, U.S. industrial production was showing signs of fatigue at the end of 2000, causing not only manufacturers but also scrap metal and paper recyclers to enter 2001 with serious concerns. As it turned out, their concerns were justified—as of last October, U.S. industrial production had declined for 13 consecutive months, having peaked back in June 2000.
In the end, 2000 proved to be a disappointment for many scrap processors and 2001 offered little encouragement. In response, scrap metal and paper analysts began to lower their 2001 consumption and price expectations. Still, though many seemed resigned to an economy of lower and slower growth last year, few used the “R” word.
What Happened?
So, how did 2001 turn out? Based on the U.S. gross domestic product (GDP), the first quarter grew 1.3 percent, followed by a 0.3-percent increase in the second quarter. The third quarter, however, declined 1.1 percent—the poorest showing since the first quarter of 1991. And according to a poll taken in November by the National Association for Business, the fourth quarter was expected to post a 2-percent decrease, thereby meeting the standard definition of a recession—two consecutive quarters of negative GDP growth. Thus, it appears that 2001 will show a year-on-year decline compared with 2000 after all the revisions are completed in early 2002.
The burning questions now are: When will the U.S. economy get back on track? And what does this economic news mean for the scrap recycling industry in 2002?
Regarding the first question, it’s worth remembering that the nine U.S. recessions since World War II lasted an average of 11 months. If the current recession began in March 2001, that would mean it would end in February 2002. Don’t start celebrating yet, however. It’s also important to note that the U.S. recessions in the mid-1970s and early 1980s lasted 16 months.
Also of concern is the depth and breadth of the current economic slowdown. As 2001 ended, the Organization for Economic Cooperation and Development (OECD) (Paris) said that the global economy appears to have slid into a recession “unseen in 20 years.” Fortunately, this fall in output may be short-lived, the group says. While output in OECD nations was expected to contract 0.3 percent in the second half of 2001, it would still show a 1-percent increase for the year and grow the same amount in 2002, ending the year with a “strong rebound” and “paving the way for 3.2 percent growth in 2003,” OECD says.
Other economists see some economic recovery in 2002 while acknowledging potential “land mines” ahead (though they don’t specify what such land mines might be). Last year’s collapse of Enron, for example, was a big issue as 2001 ended. Still, there was almost universal agreement that the economic stimulus offered throughout last year should help bring about recovery in the second half of 2002. Few expect the so-called Enron Effect to be a major impediment to growth. Likewise, the war in Afghanistan isn’t expected to be a major destabilizing factor—as long as it doesn’t involve a large contingent of U.S. ground troops over a protracted period.
The Scrap Situation
Does the scrap industry share these generalizations? Comments by recyclers in November and December hinted at better times ahead, though few offered convincing evidence to support their optimism. With many commodities priced at decade-plus lows at the start of the third quarter, most were convinced that prices had hit bottom at last.
Opinions varied considerably, of course, about the timing and strength of any recovery. Some maintained that metals and paper would only move sideways from October 2001 lows through mid-2002. Others forecast a faster price response in the first half of the year based on an improved fundamental outlook and an end to destocking throughout the supply chain.
A more pessimistic outlook sees 2002 hampered by stagflation, with global industrial production restrained by inflation, an unyielding U.S. dollar, relatively low demand caused by tentative consumer spending patterns, sluggish capital investment, and a return to high energy prices caused by escalating turmoil within and outside the major oil-producing nations. Under this scenario, the U.S. economy would grow, but below trend. Also, Europe could not serve as an engine to move the global economy forward as it struggles with all of the above and its new euro currency. Asia, led by China, looks most promising in comparison, while Japan is expected to suffer yet another sub-par year.
Given this uncertain macroeconomic backdrop, here’s a commodity-by-commodity outlook as analysts and industry participants lay out their cards for 2002.
Aluminum
Primary aluminum producers in the United States, Canada, and Brazil cut more than 1.6 million mt of production—about 8 percent of global capacity—last year. Even with these energy-related cuts, LME aluminum prices slumped from more than 70 cents a pound at the start of 2001 to under 60 cents as the fourth quarter began. Domestic aluminum scrap prices didn’t mirror this decline, thus severely testing secondary smelters’ profitability.
Despite the primary production cuts, forecasts suggest that aluminum prices will have limited upside potential into 2002 because of the sharp decline in demand in the U.S. and other Western economies. This consumption downtrend has more than offset the fact that more capacity has been idled than occurred with the 1994 Memorandum of Understanding. At that time, aluminum was trading closer to 90 cents.
As last year progressed, many sectors experienced weaker demand as a result of the economic slowdowns in the United States, Europe, and Asia. Sadly, few accurately gauged the depth of the decline in consumption. At home, aluminum shipments in the January-September period fell 14.2 percent as consumers destocked and new orders slumped. Morgan Stanley Dean Witter (New York City) said that Western aluminum consumption would slip 5.3 percent in 2001 compared with 2000. Alcan Aluminium Ltd. (Montreal) saw a 4.7-percent decline in Western World demand for 2001—the worst consumption decline in 20 years.
In 2002, Morgan Stanley Dean Witter looks for consumption to recover (albeit to a lower level than previously thought), forecasting an LME cash average of 72 cents a pound. Barclays Capital (London), in contrast, sees “significant upside potential” for aluminum in 2002, with LME aluminum peaking at 81.6 cents in the third quarter as demand improves and production growth remains below trend. ABM Amro (London) is more bearish, asserting that the sluggish economy will suppress offtake in 2002 and that increased shipments from China will drag down any price recovery. As a result, the company forecasts an LME average of 61 cents a pound. BB&T Capital Markets (Richmond, Va.), meanwhile, projects a 71.1-cent LME average this year.
Copper
By most measures, Western World refined copper fundamentals deteriorated as 2001 progressed, as did price expectations for 2001 and 2002. By last October, Comex and LME cash copper were trading in the low-60s-cents-a-pound area—a level last seen 14 years ago. The one bright spot outside the Western World has been the strong Chinese demand for refined copper and copper scrap, with some contending that China carried the market in 2001.
According to Standard Bank (London), Western World copper consumption would show a 3.1-percent decline in 2001—its first decrease since 1985. Lehman Brothers Inc. (New York City) called 2001 copper fundamentals “extremely disappointing,” noting that demand “contracted much worse than expected.” This, the firm said, has resulted in a dramatic increase in copper stocks.
At the beginning of the fourth quarter, CRU Ltd. (London) said that U.S. refined consumption would decline a relatively modest 3.5 percent in 2001. Macquarie Research (London), however, suggested a much steeper decrease in apparent consumption, which it defines as refined production plus net imports minus reported stock increases. According to its calculations, apparent U.S. consumption fell by nearly 500,000 mt, or 22.6 percent, in the first nine months of 2001. For the full year, U.S. consumption could post a 12-percent year-on-year decline, Macquarie said.
Responding to an apparent global copper surplus, several copper producers—led by Phelps Dodge Corp. (Phoenix)—announced production cuts that were soon matched or exceeded by other producers in North America, South America, Australia, and Africa. The net result could be a much smaller Western World copper surplus in 2002. Earlier forecasts that called for a 500,000-mt surplus have been scaled back. Barclays Capital, for example, now sees a global surplus closer to 165,000 mt in 2002 and an LME cash average of 71.7 cents a pound. Macquarie Research predicts a Western World surplus of 111,000 mt, with an LME cash average of 68 cents.
Other forecasters have lowered their assumptions about copper supply for this year but remain cautious about Western World and Chinese demand as well as Comex and LME prices. Last November, Rio Tinto Chairman Sir Robert Wilson stated, “Our working assumption is that we are facing a significant downturn, with little prospect of improvement before the second half of [2002].” Given this kind of market uncertainty, most price forecasts for this year are expecting only a modest increase compared with 2001. Deutsche Bank (London) offers a 72-cent average, Barclays projects 71.6 cents, and Scotia Capital (Toronto) sees the LME three-month contract averaging 80 cents.
Iron and Steel
“The avalanche of bad news surrounding the steel industry continues to grow,” said industry analyst Locker Associates (New York City) as 2001 wound down. Among the key issues affecting the domestic steel industry were inexpensive imports, high legacy costs, and “ineffective government action,” Locker stated.
For the first nine months of 2001, domestic steel production and mill shipments were running about 10 percent behind the record pace of 2000. Imports—often cited as a major threat to domestic producers’ viability—were calculated at an annual rate of 29.5 million net tons compared with 37.96 million in 2000 and 41.52 million in 1998. The lower imports provided little solace, however, to the deeply troubled U.S. steel industry. As the final quarter of 2001 began, Bethlehem Steel Corp. filed for Chapter 11 bankruptcy protection—the 18th domestic steelmaker to file in the last two years. More than 37 million tons of U.S. annual steelmaking capacity was reportedly affected by the bankruptcy filings.
Last June, President Bush asked the International Trade Commission to initiate an investigation into imported steel under Section 201 of the Trade Act of 1974. In October, a panel ruled that the U.S. industry had indeed been harmed—a first step toward establishing protective barriers.
Prices for raw materials such as ferrous scrap, pig iron, and DRI felt the combined weight of the U.S. steel industry’s lower operating rates, struggle for declining product sales, and need to reduce inventories. The benchmark No. 1 HMS composite scrap price fell more than 20 percent in 2001, ending the year with an annual average of $75.04—its lowest since 1986.nSumming up 2001, Bayou Steel President and COO Jerry Pitts asserted that the “sluggish economy and high levels of imports have triggered sharp declines in shipments and selling prices. Record high natural gas and electricity prices compounded an already difficult situation.”
What about 2002? Steel producers as well as scrap processors and brokers assert that capital spending and overall consumer and construction spending are critical elements. Consumer buying and the construction sector posted positive numbers at the start of the fourth quarter, offering some hope. October consumer spending increased a record 2.9 percent while construction of houses, offices, and government projects rose 1.9 percent. These reports, including November’s National Association of Purchasing Management (NAPM) index, suggested that the fourth quarter was less weak than economists predicted it would be after the Sept. 11 terrorist attacks.
Automotive sales forecasts—another key factor for steelmakers—were being revised upward as last year ended based on better-than-expected third-quarter sales, increased consumer buying incentives and greater affordability, plus anticipated tax cuts and positive economic growth. According to Morgan Stanley Dean Witter, North American car and truck production ended 2001 at about 16.8 million units and will slip slightly in 2002 to 16.5 million units.
Given these and other economic considerations, North American crude steel production could reach 124 million mt in 2002 compared with 121 million mt forecast for 2001, says Macquarie Research. In the United States, steel shipments in 2002 could total about 107 million net tons, with lower imports leading to higher apparent consumption compared with 2001. If these numbers prove correct, ferrous scrap prices should benefit, trending higher this year along with rising U.S. steel operating rates.
Lead and Zinc
These geologically linked metals presented two distinct fundamental pictures in 2001 and have two different price scenarios for 2002. Zinc proved to be the weaker metal last year, and its road to recovery this year appears far bumpier and uncertain.
In the second quarter of last year, the International Lead and Zinc Study Group (ILZSG) (London) forecast global lead consumption to rise 1.1 percent to 6.57 million mt in 2001, with Western World usage pegged at 5.66 million mt, an increase of 0.2 percent over 2000. Supply wasn’t expected to grow, mainly as a result of lower North American primary refined production. The net result would be a lead market in deficit, ILZSG said, with its mid-October forecast placing the Western World lead shortfall at 50,000 mt.
It now appears that lead consumption didn’t live up to forecasts, as the slower growth in global industrial production affected demand. Lead did benefit, however, from the constraints on output stemming from tightness in lead concentrates. Thus, it appears that the global and Western World lead markets ended 2001 in deficit for the second consecutive year.
Despite these constructive fundamentals, lead prices didn’t rise. The November LME three-month average of 22 cents a pound was virtually unchanged from the January 2001 average. Throughout the year, prices stayed within a 21/4-cent range.
This year, the supply-and-demand outlook suggests more of the same. Tightness in lead concentrates will limit refined supply from both Western World and Chinese lead producers.
In addition, secondary supply is expected to be static, while steady demand from the automotive battery sector—which is less sensitive to the industrial cycle—will likely lift overall demand. As a result, lead prices are forecast to move slightly higher this year. Barclays Capital predicts an LME cash average of 25.6 cents, while Standard Bank sees cash lead averaging 24.5 cents and Deutsche Bank contemplates 24 cents.
The picture for zinc looks far less positive. Last year, ILZSG predicted lower Western World demand—a first since 1996—against growing global and Western World supply, resulting in a “substantial surplus of refined zinc metal over demand in the Western World in 2001.” Most independent sources placed the anticipated surplus around 300,000 mt. Zinc’s weak fundamental picture was apparent on the LME as prices slumped to 14-year lows last year, with inflation-adjusted quotes equivalent to those of the early 1940s.
As for 2002, it’s difficult to find reasons to be optimistic. Man Financial Ltd. (New York City) notes that zinc continues to be burdened by production increases, with prices expected to continue to weaken into the second quarter of this year. What’s needed, the company says, is “sharp production curtailments in order to spark any kind of recovery.” The firm, however, does expect to see additional mine and smelter cutbacks in 2002, which could help zinc prices to rally to about 41 cents a pound by the end of the year.
Barclays Capital and Standard Bank offer similar zinc price forecasts for 2002, placing LME cash at 40.6 cents with the Western World in surplus (though a smaller surplus than in 2001). Macquarie Research pegs the surplus at 269,000 mt this year based on a number of mine reductions and closures.
Offering other price forecasts, CHR Metals sees 42 cents, while SG Metals (London) offers a 39-cent average based on an assumed surplus. In October, SG Metals stated, “It’s inevitable that the zinc market will remain in large surplus this year unless there are big cutbacks.” Therein, most contend, lies this year’s challenge for the zinc industry.
Nickel and Stainless Steel
Not unlike other base metals in 2001, the fortunes of both nickel and stainless steel suffered as last year progressed. Industry forecasts offered early in 2001 recognized the difficulties associated with the changing economic landscape, tightness in stainless steel scrap availability, and decreasing capacity utilization, among other factors. Back in April, the International Nickel Study Group (The Hague, the Netherlands) was projecting a 2001 global nickel surplus of 35,000 mt. Though the group subsequently lowered its surplus prediction to 17,900 mt, there’s no overlooking that 2001 saw declining Western World nickel consumption and anticipated increases in Western World production.
Nickel usage declined last year due to reduced demand from the stainless steel sector, which accounts for about two-thirds of total nickel demand. According to research firm MEPS (London), Western World stainless output was expected to end 2001 at 17.8 million mt, down about 750,000 mt (or 4 percent) compared with 2000—reportedly the largest year-on-year decrease on record.
U.S. stainless production followed suit last year, running at an annualized rate of 1.876 million net tons based on the first nine months—12 percent behind last year’s total of 2.126 million tons. These dour stainless fundamentals and nickel’s traditional price volatility had a predictable effect on LME nickel tags. The three-month quotation, which averaged $3.03 in January, fell to $2.20 in October before recovering a bit at the end of last year. Nickel prices and demand might have eroded further if it weren’t for tightness in stainless steel scrap supplies.
Stainless steel demand and growth are closely linked to the level of industrial production in the major Western World economies. As noted earlier, most economists predict an increase, albeit a small one, in this year’s industrial production. Accordingly, Prudential-Bache International Ltd. (New York City) expects Western World stainless output to reach 19 million mt in 2002—5.3 percent more than in 2001.
Stronger demand for nickel should boost LME nickel prices in the second half of this year, says Brook Hunt (London), though it warns that surplus nickel stocks—mostly from Russia—could limit price gains. The firm forecasts a 67,000-mt nickel surplus this year, expanding on the estimated 27,000-mt overhang in 2001. This assumed surplus raises the possibility, the company states, that nickel prices could stay below $2 “for a protracted period in 2002.” Tight scrap supplies will be an important feature this year as well, one that could again lend support to LME nickel values. Regarding prices, Brook Hunt calls for cash nickel to average $2.50 a pound for the year.
Others see LME nickel at a higher level, with price recovery dependent on supply cutbacks, increased stainless steel demand, and a smaller global supply surplus. Standard Bank is forecasting an LME cash price of $2.72, while Deutsche Bank predicts $2.64, Barclays Capital offers a similar $2.63, while a more optimistic Scotia Capital looks for a $3 average as well as a balanced market.
Macquarie Research maintains that nickel’s turnaround in 2002 could be “rapid and strong” due to low stocks and a lack of liquidity in the market. Most agree, however, that the big unknowns—besides the level of industrial production this year—are the amount of off-warrant material held by Russia and what its new production will be this year. Nickel supply uncertainties thus loom large in any supply-demand equation and LME price forecast for 2002 and beyond.
Paper and Paperboard
As 2001 began, domestic paper and paperboard executives and paper recyclers knew that market conditions were unfavorable. This reality was apparent well before the United States slipped into recession last March. By that point, most recovered paper markets were already in a slowdown that could be traced to the summer of 2000—about the same time that U.S. industrial production peaked. The containerboard market, for example, was hit especially hard, while newsprint—the one bright spot—was also beginning to see storm clouds on the horizon as worries grew over the U.S. economy, consumer confidence, and rising energy costs. Back then, near-term predictions saw most pulp and paper grades softening further but then stabilizing in the second half of last year as the economy rebounded, aided by continued production cuts.
Such thoughts of recovery faded quickly as the slumping U.S. economy dragged down the paper industry. At midyear, market pulp prices were under renewed pressure due to excess supply, while paper and paperboard output declined. Virtually all grades of scrap paper felt the weight of low demand from domestic and offshore consumers that was exacerbated by a strong U.S. dollar.
Resource Information Systems Inc. (RISI) (Bedford, Mass.) stated that for 2001 “paper and paperboard production and recovered paper will languish.” To be sure, there was little on the horizon to suggest recovery, with the near-term outlook for recovered paper prices described as “gloomy.” As the fourth quarter started, newsprint shipments were 12 percent behind comparable year-earlier numbers, while recycled paperboard production fell 1.6 percent from 11.9 million tons in 2000 to 11.78 million tons in 2001, says the American Forest & Paper Association (Washington, D.C.).
That said, forecasts expect the paper and paperboard industries to be healthier by midyear 2002 aided by a stronger economy, increased consumer buying, and inventory building by paper and paperboard producers. First-half seasonal factors could help, with prices expected to move upward after winter. Thus, the lows suffered by scrap paper processors and brokers are thought to be largely behind them.
In 2002, RISI expects recovered paper consumption to grow 2.4 percent—quite an improvement compared with the estimated 3.5-percent decline last year. Scrap paper exports, meanwhile, could reach a record 11.5 million short tons this year.
As for prices, RISI sees ONP (8) averaging $63 a ton this year compared with the $53 average for 2001, while OCC (11) could average $60 a ton versus last year’s average price of $41. •
Scrap markets were dealt a bad hand in 2001, but will 2002 be any better? The answer depends on the wild cards of supply and demand, consumer confidence, the worldwide recession, the war in Afghanistan, and more.