2003 Market Wrap-Up—Gaining

Most commodities regained some confidence last year after the lows of 2002, with the export market giving many scrap materials a much-needed boost.

By Robert J. Garino

After an extended period of slumber and some false starts, the U.S. economy began to rebound in the middle of 2003. Tax cuts and rebates, low interest rates, plus investment and government spending combined to give the lagging U.S. economy the boost it so desperately needed. After a hot third quarter, U.S. GDP growth moderated, ending the year at 3 percent—still better than the 2.4 percent increase in 2002.

The U.S. manufacturing sector and scrap recycling industry, meanwhile, saw domestic consumption and prices climb from 2002 lows, with export demand underpinning much of scrap’s recovery last year.

New jobs were still missing in the larger economic picture, however. The 2003 jobless rate started the year at 5.8 percent and ended at 5.7 percent, with the full-year rate at 6 percent. In addition, revelations of corporate improprieties, the ongoing war on terrorism, uncertainties over Iraq, and other geo-political tensions all worked against the encouraging economic signs.

Meanwhile, prices (as measured by the 2003 consumer price index) increased just 1.7 percent compared with the 1.6 percent rate in 2002—hence, inflation remained a non-issue. Other important economic benchmarks for 2003 included a 4.8 percent increase in business investment; a 5.1 percent increase in consumer spending; a 3.2 percent increase in personal income; and a troubling trade deficit that passed the $500 billion mark.

Though the recovery in commodities was uneven, there were signs that domestic fundamentals were improving. If the Western and Asian economies expanded as assumed, then several major metals would move from surplus to deficit, some analysts said. If true, the prospects looked good for higher prices in 2004.

Meanwhile, China continued to set the global pace for economic expansion last year as both a major consumer of raw materials and a world-class producer and trading partner.

Given this macroeconomic backdrop, here’s a summary of how seven major commodities fared in 2003.

Aluminum: Aside from LME prices, which trended higher, most aluminum measures were down last year compared with 2002. For instance, North American mill shipments declined 1.4 percent; domestic scrap consumption fell 7.7 percent; apparent consumption decreased 1.4 percent; and scrap exports dropped 6 percent. As the year progressed, other data pointed to slow recovery in demand. Still, fears of another year of global aluminum surpluses, along with other market uncertainties such as tightness in scrap supplies, dominated the news and held expectations in check.

Domestic scrap consumption has fallen for the past four years, reflecting less generation as well as the effect of both relatively low prices and strong overseas demand. Recycling rates for all-aluminum cans mirror this larger trend, with the rate this year pegged at 50 percent—quite a change from the 66.5 percent rate seven years ago.

Copper: Though apparent domestic copper consumption declined 9 percent last year, according to ReMA and U.S. Geological Survey (USGS) (Reston, Va.) estimates, the market established a more solid foundation as demand from most industry sectors gradually improved.

Lower primary refined production was a major feature last year, falling 12 percent due to earlier mine, smelter, and refinery cutbacks. Secondary copper output was also lower, thus continuing the trend of less dependence on the recycling sector as a supplier to the domestic industry. To make up for the lower scrap consumption last year, copper consumers drew down stocks of refined metal some 370,000 mt.

In the export market, overseas buyers aggressively sought copper scrap, with U.S. shipments reaching a record 759,000 tons and China purchasing 70 percent of the total. That fact raised concerns about scrap supply and the effect of Chinese buying on the available scrap units for domestic consumers, as well as the prices paid for the material.

Iron and Steel: The domestic steel industry produced 99.7 million net tons last year, 2 percent less than in 2002, while shipments totaled 105.6 million tons—up 6.5 percent. Imports of finished and semifinished steel were 29 percent lower, year-on-year, while exports increased 37 percent. Domestic scrap consumption, meanwhile, declined 6 percent, reflecting the drop-off in output from electric-arc furnaces. Despite last year’s increase in domestic shipments, overall domestic steel consumption (defined as mill shipments plus net imports) decreased about 4 percent.

In the ferrous scrap market, lower domestic usage was partially offset by increases in exports. Though not at a record level, higher exports in 2003 were a welcome change from the lows of three years ago. China was the major buyer, prompting some domestic industry segments to ask whether scrap export controls should be used to restrict supplies to foreign buyers and reduce prices for U.S. consumers.

Lead: Apparent consumption of lead declined 11.3 percent last year, but a greater reliance on lead-based scrap (up 1.8 percent) produced a higher scrap ratio in 2003 (77 percent) compared with recent years. The battery sector drove lead demand last year, with replacement shipments totaling 88.3 million units, slightly lower than 2002. Original-equipment shipments slipped 2.8 percent to 19.6 million units. Growing imports of batteries along with lower demand from the industrial battery sector combined to drive down overall domestic lead consumption.

Nevertheless, lead’s supply-and-demand picture improved last year, mainly because lower primary production offset the more sluggish consumption picture. Western market fundamentals mirrored the domestic market, underpinned by a lack of ore and concentrates. As a result, the market shifted into a deficit position and transacted prices responded accordingly.

Nickel and Stainless: For the second year in a row, nickel prices outperformed the rest of the LME complex, rising sharply on both speculative and fundamental buying. And for the fifth consecutive year, primary nickel posted an apparent shortfall, with 2003 demand outstripping supply by more than 40,000 mt.

Nickel’s strength is derived from the stainless steel sector, which last year saw global production reach a record 22.8 million mt. Asia accounted for almost half of the total output, with Japan still the largest producer in that region at 4.1 million mt. That said, China’s year-on-year growth of 56 percent was unmatched anywhere in the world. U.S. shipments of stainless steel, meanwhile, reached roughly 2 million net tons. 

To meet that higher level of stainless production and end-use consumption, producers relied on primary nickel and relatively scarce supplies of nickel-containing scrap, thus boosting the demand for primary units. Domestic mills shipped more stainless steel last year but consumed less scrap in the process. U.S. stainless scrap exports, meanwhile, exceeded 500,000 tons, 34 percent above 2002. 

Paper and Paperboard: By most accounts, 2003 brought little improvement in pricing or demand for paper and paperboard products. Instead, those products continued to face extended mill downtime and financial restructuring, which have been dominant features in the industry for the past three years. Total fiber consumption at U.S. paper and paperboard mills declined 1 percent last year, with overall paper and paperboard capacity sliding 0.4 percent. This decrease follows capacity reductions of 1.9 percent in 2001 and 1.3 percent in 2002. Recovered paper consumption also fell 2.7 percent last year to 33.7 million net tons, reflecting relatively weak domestic production and the permanent closure of several recycling mills in the past two years. 

Export demand was the bright spot for scrap paper players, with a record 13.8 million tons of furnish shipped last year. China was the biggest buyer, taking 43 percent of the total. Thanks to increased export demand, the amount of scrap paper recovered last year hit 49.3 million tons, setting a record recovery rate of 50.3 percent.

Zinc: In 2003, the U.S. zinc market felt the combined weight of cutbacks in automotive output and a slowdown in investment in nonresidential construction. Despite the Section 201 tariffs, U.S. production of galvanized steel declined last year, reducing zinc consumption 2.8 percent (according to USGS data) to 6 percent (according to the London-based International Lead and Zinc Study Group). 

Most accounts characterized the domestic zinc market as being in supply surplus. That surplus, combined with tepid demand, kept prices and domestic premiums at bay for most of last year. •

Robert J. Garino is director of commodities for ISRI.