January/February 2004
This year could bring boom times like the scrap industry hasn’t seen for 10 years. While China will be the main economic engine, some experts see synchronized growth around the world.
By Robert J. Garino
Things are going great,
And they’re only getting better…
The future’s so bright,
I gotta wear shades.
—Timbuk3
This mid-1980s pop hit came to mind while I was writing this annual market forecast. Why? Because the future does seem bright—at least based on a number of positive market developments and economic signals in the final months of 2003.
This upturn follows what can only be described as a long, hard struggle for scrap processors, brokers, and consumers since November 2001. That month supposedly marked the “official” end of the U.S. recession and, hence, the beginning of economic expansion. The recession had lasted eight months—slightly less than average for all recessions since World War II, according to the National Bureau of Economic Research (Cambridge, Mass.). Even so, few in the scrap industry expected better times to be just around the corner.
As it turned out, 2002 and most of 2003 were defined by a series of “shocks”—economic, financial, health, and geopolitical—that yielded uneven and uncertain economic climates in the United States and Western Europe. At the same time, China asserted itself as a major influence on the scrap commodity markets. Its growing demand partially offset the more tepid market response elsewhere. Still, the early optimistic predictions for 2003 had to be scaled back as the year began.
Late in 2002, the National Association for Business Economics (NABE) (Washington, D.C.) predicted that U.S. gross domestic product (GDP) would grow at a 2.8 percent annual rate in 2003, a lower rate than the previous three years. Others were more optimistic. Virtually all, however, were conservative in their respective outlooks, especially regarding industrial production and job growth. As of this past November, NABE estimated that U.S. GDP growth would end 2003 at 3 percent, up slightly from 2.4 percent in 2002.
For most in the recycling industry, it was only as 2003 wound down that market recovery—mostly in the form of higher commodity prices rather than higher demand—was felt throughout the supply chain. Recyclers were hesitant to assume that this signified the start of a longer-term upward trend that would encompass the broader economy. Those closest to the manufacturing sector had particular reason to be cautious, having experienced several “false starts” since November 2001.
Well, after almost two years of waiting for significant recovery to kick in (remember our two previous market forecast stories titled “Waiting for Recovery” and “Is Recovery in the Cards?”?), it looks as if market momentum finally took hold in the second half of 2003—driven in large part by Chinese economic growth and subsequent demand for raw materials. Not surprisingly, China is expected to be the main engine behind global economic growth in 2004, with projected GDP growth of 9.5 percent this year, according to Goldman Sachs Group Inc. (New York City). Western economies, meanwhile, should show at least moderate growth.
The latest data from Europe, for example, indicate that Germany—which has Europe’s biggest economy—had recovered from its second recession in two years in the third quarter of 2003 (up 0.2 percent) while the French economy, which narrowly avoided recession in the first half, grew 0.4 percent in the third quarter. For the entire eurozone, projections call for annual growth at a conservative 1.8 percent. Japan is also poised to pull out of the doldrums, with growth pegged at 2.7 percent in 2003 and 1.8 percent this year, reports the Organization for Economic Cooperation and Development (Paris).
U.S. GDP, meanwhile, could grow around 4 percent in 2004, thanks to an accommodative monetary policy, a weaker dollar, the strengthening of foreign economies, and higher stock prices, says Lynn Reaser, chief economist and senior market strategist for Banc of America Capital Management (St. Louis).
The Wall Street Journal’s economic forecasting survey in November supported this view, projecting U.S. GDP growth of 4.1 percent in the first quarter—up from the 3.9-percent projection in the October survey. The survey also provided the first glimpse at forecasts for the second half of 2004, with economists expecting U.S. GDP growth to be 3.9 percent in the third and fourth quarters. NABE is even more optimistic, projecting 2004 GDP growth of 4.5 percent and an annual increase in business spending of 10 percent.
Similarly, analysts responding to the Federal Reserve Bank of Philadelphia’s quarterly Survey of Professional Forecasters said in November that they expect the U.S. economy to expand 4.3 percent in 2004, up from their 3.7-percent estimate in the third quarter of 2003. Such growth rates would be fast enough to create jobs and elevate corporate profits.
Thus, as Goldman Sachs JB Were Pty Ltd. (London) asserts, prospects appear good for so-called synchronized cyclical global growth in 2004, paving the way for what they (and others) believe to be “a sustained period of firm prices.” Some nonferrous base metals, many concede, will probably fare better than others in 2004, but all should post annual averages that will exceed the final 2003 averages.
If there are weak links in all this—and there are—one can be found in U.S. employment figures. The November unemployment rate of 5.9 percent was an encouraging improvement, representing an eight-month low. Still, job growth remains key. Until that trend is firmly established, a nagging doubt remains whether a robust consumer- and capital spending-led economic recovery is truly at hand.
Other concerns and issues that could derail the assumed recovery include sharply higher crude oil prices and/or protracted international trade disputes. History shows that major spikes in energy prices beget recessions. A trade war with Europe or China would also be detrimental. In addition, there could be unexpected international financial turmoil or geopolitical events, including escalating terrorist activities in the Middle East and elsewhere.
With this preface in mind, we offer the views of a host of industry experts as they review the prospects for major scrap commodities in 2004. Given the bright, almost overly optimistic forecasts offered above and below, we suggest that appropriate eye protection may be necessary before proceeding.
Aluminum
One can’t examine the world aluminum market without addressing China’s rapidly expanding production and its enormous consumption potential. This contrasts with U.S. aluminum fundamentals, which show only modest consumption and a greatly diminished smelter base.
For some perspective, global primary aluminum production was expected to end 2003 at 27.7 million mt (based on third-quarter 2003 data), with China the largest producer at 5.6 million mt followed by North America at 5.5 million mt and Western Europe at 4.4 million mt. World demand, meanwhile, was forecast to total just over 27 million mt last year, with China accounting for nearly 20 percent of global consumption and production—and its aluminum demand projected to continue growing more than 20 percent a year.
While these numbers suggest a robust aluminum market, the Western World market’s supply of new aluminum far exceeds its ability to consume. The Western statistical surplus was expected to exceed 500,000 mt by the end of 2003, with global aluminum stocks held by producers, the LME, and off-warrant material estimated at 3.5 million and 4.5 million mt. HSBC (London), for one, said the global surplus could exceed 400,000 mt in 2003. Because of this, many see LME aluminum prices lagging behind other LME base metals next year.
As for 2004, Société Générale (London) expects slowing global output as producers—China, in particular—struggle to secure limited alumina resources and power, resulting in a 4.5-percent increase in world production in 2004 compared with last year. Even with an 8-percent increase in global consumption this year, as forecast by Macquarie Research Ltd. (London) and others, many believe the aluminum market will remain in oversupply due to the earlier buildup of market stocks.
Given this fundamental picture, price prospects hint at relatively modest increases compared with 2003. Standard Bank (London) sees this year being “sideways to moderately higher.” Overall, the consensus view is for the LME cash average in 2004 to be between 68 to 76 cents a pound.
Copper
New refined copper production could not keep pace with consumption last year, notes the International Copper Study Group (ICSG) (Lisbon). According to ICSG’s November data, the world copper market had a 256,000-mt deficit in the first eight months of 2003—quite a shift compared with the 127,000-mt market surplus in the first eight months of 2002. This 383,000-mt swing happened thanks to decreases in copper production (especially among secondary refiners) and greater use of copper products. Scotia Capital (Toronto) expected consumption to end 2003 up 2.6 percent over 2002 and refined production to show no change year-on-year. The net result would be a 250,000-mt statistical shortfall for the year—a first since 2000. Others, however, expect the actual deficit to far exceed the various forecasts.
Refined production has not kept pace with demand due largely to a lack of affordable copper concentrates and what some have called remarkable producer restraint in the face of better than expected global fundamentals. Most believe that the improved supply-and-demand picture can be credited to China’s enormous appetite for copper concentrates, refined metal, and scrap, coupled with global mine cuts. Certainly, China’s demand in 2003 more than offset apparent consumption weakness in the Western economies in general and the U.S. market in particular.
What will be different in 2004? There seems to be consensus that the global copper market will again come up short in 2004 due to an almost-acute world shortage of concentrates. Most, in fact, anticipate a larger deficit than in 2003. Macquarie Research, for example, forecasts a 350,000-to-400,000-mt shortfall this year, with consumption growing 6.8 percent and supply increasing 6.4 percent.
As for price, the company noted in November that it sees an LME cash price of 94 cents in 2004. Others have also upped their forecasts, with average price predictions ranging from a low of 85.5 cents to a high of $1.015 a pound from Barclays Capital (London). Goldman Sachs also sees copper averaging above the $1 mark this year.
Iron and Steel
The global steel market continued to capture headlines in 2003. Paced by China, the numbers speak for themselves. World steel production totaled 783.1 million mt in the first 10 months of 2003, 7 percent ahead of 2002, according to the International Iron and Steel Institute (IISI) (Brussels, Belgium). For all of 2003, crude steel production could reach 940 million to 950 million mt, easily surpassing the 2002 production of 903 million mt and setting a new record.
China’s steel output in the first 10 months of 2003 was 179.6 million mt, 22.1 percent higher than the same period in 2002, IISI reports. For the full year, Chinese production was expected to total about 215.5 million mt. China’s capacity to produce steel and consume the related raw materials influenced prices worldwide, with scrap tags reaching unprecedented levels in the global market. In contrast, the U.S. and Western European steel industries continue to lag, with production rates running well below the peak rates of the past three years, observes World Steel Dynamics (Englewood Cliffs, N.J.).
Steel’s story in 2004 will focus largely on China, including its production (which World Steel Dynamics says could “surge” to 250 million mt this year) and its effect on iron ore, coke, scrap, and ocean freight rates.
Still, China is only part of the story. As 2003 wound down, U.S. orders for steel sheet and plate were on the rise, with mill backlogs reportedly extending well into the first quarter. Also, domestic steelmakers expect to achieve higher prices for hot-rolled band in the first quarter. Ferrous scrap prices, meanwhile, were touching record levels, with Midwest factory auto bundles reportedly above $200 a gross ton, delivered.
Thus, by most supply-and-demand measures, the domestic and global steel markets will be off-and-running early this year. It’s uncertain, though, whether the market has the stamina to continue this pace in the second half. The Bush administration’s decision in December to eliminate the Section 201 steel-import tariffs—and, thus, avoid a trade war with Europe—could help maintain the apparent market momentum.
The most optimistic scenario suggests that if the major industrial economies live up to their predictions this year, global steel output could top 1 billion mt. That would make this a truly remarkable year for all associated with this oft-beleaguered industry.
Lead and Zinc
Though these two base metals share a common geology, they have extremely different market situations—especially on the supply side, with lead having a much more balanced picture than zinc.
Despite production increases in Asia, global output of refined lead is expected to post a decline in 2003 and 2004, according to the International Lead and Zinc Study Group (ILZSG) (London). This supply shortfall can be traced to a shortage of lead concentrates that, in turn, has led to a decline in “a significant volume of smelting and refining capacity in Europe, the United States, and Australia,” says ILZSG. In light of modest demand expectations, ILZSG expected a close supply-and-demand balance in the Western World market for 2003. For this year, however, the group forecasts a supply deficit of just over 130,000 mt.
Other analysts concur that this year’s lead balance will again come up short on the supply side. In December, Société Générale noted that it remains “bullish about lead’s fundamentals” through 2005. On the demand side, the company expects Western World consumption to show little year-on-year growth. In 2003, in fact, consumption was expected to post a decline of 0.5 to 1 percent, bringing the cumulative decrease since 2000 to 6 percent, or 5.3 million mt. This year, Western World consumption could total 5.4 million mt (up 1.9 percent), while refined production is forecast to fall 8.4 percent. Adding in China, Société Générale notes that global lead demand could increase around 3 percent, reaching 6.91 million mt, yielding a 90,000-mt statistical supply deficit. Prudential-Bache International Ltd. (London) places the 2004 deficit at 160,000 mt.
As for lead prices, Barclays Capital claims the fundamentals are strong enough to support a 28.5-cent average this year, while the Economist Intelli-gence Unit Ltd. (London) sees an average of 23.8 cents. J.P. Morgan Chase & Co. (New York City) and Prudential-Bache offer more optimistic predictions of 30 and 32.9 cents, respectively, for the year.
As for zinc, supply remains a cause for concern. The current surplus can be traced to a period of overinvestment in the late 1990s that created a large surplus of zinc concentrate, which persisted and negatively influenced zinc’s prices and prospects. As this supply filtered through the Western World at a faster rate than demand, the metal balance shifted sharply from a deficit to a surplus, pressuring prices in the process. According to Teck Cominco Ltd. (Toronto), the Western refined metal surplus was 281,000 mt in 2001 and 321,000 mt in 2002. Adding to the supply problem, zinc stocks at year-end 2002 exceeded 1 million mt.
Though zinc’s supply issues caused its prices to lag other LME-traded metals in 2003, ILZSG sees improvement ahead. In its view, global zinc usage will rise 3.5 percent in 2004, principally due to strong growth in China. U.S. demand, meanwhile, could increase 4.4 percent this year, rebounding from an expected decline for all of 2003.
Supply is also expected to increase, but at a slower rate. After ending 2003 with a surplus “just over 100,000 tons,” ILZSG says, the zinc market could be closely balanced this year or possibly moving toward a deficit.
Zinc price forecasts offered in the closing months of 2003 placed the LME cash range for 2004 from a low of 40.8 cents to a high of 47 cents.
Nickel and Stainless Steel
LME primary nickel prices rose more than 50 percent from January to December last year, with transacted prices trading at a 14-year high in mid-December. Most of the increase can be attributed to speculative and commodity-fund activity, which more than doubled the nickel price from its October 2001 low.
Other factors driving the market included strong global demand for primary nickel, constrained supply (due, in part, to a three-month work stoppage at Inco), relatively low aboveground stocks, and a chronic shortfall of quality nickel-containing scrap. Despite concerns about the release of stockpiled Russian nickel on the world marketplace, this unique mix of supply-and-demand factors has led many to think that nickel has the strongest fundamentals of all the base metals. This same majority believes that the best is yet to come.
The principal driver for nickel consumption is global stainless steel production and demand. China looms large in this, more than offsetting relatively softer demand from the traditionally dominant consuming areas of Europe and the United States. By most measures, stainless production was booming in 2003, increasing more than 9 percent year-on-year in the first half. For the full year, Macquarie Research forecast world stainless production to be 21.4 million mt (up 6.9 percent) with nickel consumption at 1.2 million mt (up 6.2 percent). The International Stainless Steel Forum (ISSF) (Brussels, Belgium) also expected the melting of stainless steel and heat-resisting steels to grow “approximately 6 percent” in 2003, reaching 21.5 million mt for an all-time high.
China will be the growth engine for nickel in 2004 as it looks to fulfill its stainless steel production capacity.
For 2003, CRU Ltd. (London) pegged China’s apparent stainless steel consumption at 3.9 million mt, with a 2004 target of 4.3 million mt. Globally, ISSF expects stainless production to grow an additional 6.5 percent in 2004 to reach 22.9 million mt.
Given these dynamics—high nickel demand from stainless producers, the inability of nickel producers to meet expected consumption, and a chronic shortage of stainless scrap—the global nickel market could record a statistical shortfall in 2004 (and beyond) despite the release of stockpiled material. Primary producer Falconbridge Ltd. (Toronto), for example, expects the world supply shortfall to be 45,000 mt this year. Macquarie Bank projects a similar 46,000-mt shortfall.
As a result, most analysts have revised their nickel price forecasts, with virtually all predicting higher averages. LME cash price forecasts range from a low of $4.14 a pound from the Economist Intelligence Unit to a high of $6.75 from Macquarie Research (offered in December), along with the potential for prices to spike to $10 (or $22,000 a mt). Other forecasts include $5.65 from J.P. Morgan, $4.60 from Mitsui Bussan Commodities Ltd. (London); and $5.56 from Barclays Bank.
Paper
Similar to metals, the paper and paperboard industries have been affected by the slow pace of economic recovery in the United States and beyond. The three-year decline in domestic manufacturing has had a distinct impact on box business and a corresponding negative effect on overall paper volumes and prices. In the first half of 2003, for example, the domestic industry saw prices below year-earlier levels, weak demand overall, low-priced imports, and extended mill downtime.
Domestic paper and paperboard output was expected to end 2003 at about 88.2 million net tons, about 2 percent below 2002. The only positive news could be found in rising North American pulp prices in the first half and the continuing strong export demand for U.S. scrap paper. By September, exports were running 21 percent ahead of comparable 2002 figures, boosted by Chinese demand for OCC and ONP. Though market pulp prices “corrected” in the third quarter, scrap exports appeared likely to maintain their strong pace.
Also similar to metals, paper industry analysts are viewing 2004 as a recovery year, though they’re more reserved in their forecasts. Assuming global GDP growth of 4 to 5 percent this year, there should be a similar increase in worldwide paper and board demand, said Rod Young, an analyst with Resource Information Systems Inc. (RISI) (Bedford, Mass.), speaking at a November conference. In the United States, he noted, consumption will also be up for the first time in four years, but “the increase will be modest by historical standards.” In the newsprint sector, North American mills could ship around 13.8 million mt this year, about the same as in 2003 and 2002, adds Ross Hay-Roe, managing director of Equity Research Associates (Sechelt, British Columbia).
As for recovered fiber, the consensus is that domestic and export prices will be driven by Asia in general and China in particular, as its mills add paper and board capacity. According to RISI, China will add around 3.5 million mt of capacity in 2003 and 2004. Industry estimates place Chinese paper and board production in 2003 at 41.6 million mt, up 10 percent from 37.8 million mt in 2002. In light of China’s burgeoning production and the predicted improvement in the U.S. and world economies, RISI says that world recovered paper use could grow 16 million mt this year.
If the above scenario plays out, paper processors could reasonably expect higher average prices this year in both the domestic and overseas markets. According to a RISI report in the fourth quarter of 2003, OCC and ONP will average slightly above $100 a net ton this year—quite an improvement compared with the U.S. average for OCC prices in November of $70. Judging by the export prices being paid for OCC and ONP in the fourth quarter of 2003—around $100—RISI’s forecasts may prove to be conservative. •
Robert J. Garino is director of commodities for ISRI.
This year could bring boom times like the scrap industry hasn’t seen for 10 years. While China will be the main economic engine, some experts see synchronized growth around the world.