May/June 2006
Though 2005 brought steep energy costs and devastating weather as well as lower shipments and tighter margins for many, most recycling sectors saw higher average prices and ongoing prosperity.
By Robert J. Garino
The red-hot 2004 was a tough act for 2005 to follow. Even so, it became abundantly clear throughout last year that the U.S. and global economies as well as the scrap market were far stronger—and far more resilient—than expected.
By the numbers, U.S. GDP grew a solid 3.5 percent last year, while industrial production increased 3 percent. Those figures prompted The Economic Outlook Group LLC (Princeton Junction, N.J.) to state, “You can’t help but be impressed with the U.S. economic performance in 2005.” Fears of economic stagflation, recession, a plunge
in consumer confidence and spending, and a collapse in the housing market failed to materialize despite significant weather and oil-price shocks. The U.S. economy, in fact, quickly regained its footing following last year’s weak fourth quarter thanks to productivity growth, supportive monetary policy, and the 2003 tax cuts.
The other major industrialized nations also posted impressive GDP growth of 2.7 percent in 2005, and the Western World’s industrial output climbed 1.8 percent. Though the U.S. and other developed economies failed to match their torrid 2004 growth rates, their industrial production and GDPs remained above longer-term trend lines. Overall, the global GDP increased 4.6 percent last year.
China continued to set the pace for growth, with GDP up 9.9 percent—slightly lower than its 2004 rate of 10.1 percent. China’s economy is now the fourth largest in the world, trailing only the United States, Japan, and Germany.
Domestically, primary and secondary consumption couldn’t statistically match the lofty 2004 numbers. Destocking was a major factor that reduced scrap usage by some steel and nonferrous consumers. Certain segments found margins under pressure as the year progressed, while total costs to do business increased substantially.
Though many scrap processors and consumers experienced lower volumes, primary and scrap metal prices generally trended higher. Higher scrap exports of virtually every commodity except copper helped compensate for lags in domestic demand. For many, the various market factors led to improved profits despite higher operating costs and lower shipments.
Nonferrous prices, as expressed on the LME, moved higher throughout 2005. Nonferrous primary and scrap prices, in fact, have risen for four consecutive years. Conversely, ferrous scrap—as measured by the No. 1 HMS composite price—was lower in 2005 than in 2004. Several recovered paper grades also experienced price weakness in 2005, making this scrap market the commodity laggard last year.
In sum, 2005 will likely be remembered as a year of continued prosperity and unique challenges. Here’s a closer look at how some key metals and paper performed last year.
Aluminum: Preliminary apparent consumption in North America (United States and Canada) totaled 10.4 million mt in 2005, virtually unchanged from 2004, with North American aluminum shipments (domestic production plus imports) placed at 11.6 million mt, up 1.7 percent, according to the Aluminum Association (Washington, D.C.). Independent sources estimate Western World aluminum consumption last year at 23.1 million mt, an increase of 2.4 percent over 2004.
Last year U.S. primary aluminum production totaled about 2.5 million mt, down 1.4 percent, while domestic apparent consumption also decreased 1 percent, to 6.5 million mt, based on U.S. Geological Survey (Reston, Va.) data and ReMA estimates. Domestic scrap consumption was also marginally lower, though scrap exports soared to 1.1 million mt, a level not seen since the 1990s. The lion’s share of U.S. aluminum scrap exports—592,000 mt, or 54 percent—went to China (including Hong Kong).
Aluminum’s price picture was equally positive, posting an LME cash average of 86 cents a pound compared with 78 cents in 2004. The Platts Metals Week domestic transacted price averaged 92 cents, up 8.4 percent from 2004. Many scrap grades also saw higher average prices last year, with cast at 58 cents and old sheet at 57 cents, Platts reports.
Copper: Last year, the red metal faced global supply disruptions and overall consumption that, at about 17 million mt, showed little or slightly negative year-on-year change, offsetting higher Chinese consumption.
Domestically, copper consumption declined about 10 percent in 2005, says USGS and the American Bureau of Metal Statistics (Chatham, N.J.). Also, refined copper consumption at alloy and wire rod mills fell 5.6 percent, shipments of copper and copper alloy mill products decreased 2.6 percent, and imports rose 39 percent, ABMS reports.
Tightness in copper scrap supply was a major theme throughout the year, forcing some consumers to turn to cathode. Pressure on scrap margins was an ongoing feature despite rising Comex prices. The spot contract averaged $1.68 compared with $1.29 in 2004, while the average discount for No.2 copper inched down from 191/2 cents in 2004 to around 17 cents last year.
On the recycling side, the quantity of old and new copper scrap recycled last year decreased 5 percent. Reasons included lower generation of new scrap and less obsolete and prompt material available for recycling due to the higher average prices in recent years and the significant increase in scrap exports. Though U.S. copper scrap exports declined 8 percent last year to 658,000 mt, that total was still well above the average of 481,000 mt shipped over the previous nine years.
Iron and Steel: World crude steel production increased 5.9 percent last year to a record 1.1 billion mt, with China accounting for the largest portion at 349 million mt, reports the International Iron and Steel Institute (Brussels).
U.S. crude steel output declined almost 6 percent to 94 million mt, IISI notes. Lower shipments—down about8 percent, says the American Iron and Steel Institute (Washington, D.C.)—and lower net imports yielded an apparent U.S. steel consumption figure of 114.5 million mt, 9.8 percent lower than 2004. Scrap consumption also decreased 1.5 percent, to 65.5 million mt, in line with the decrease in EAF production last year. Ferrous scrap exports, however, increased 13 percent to 10.8 million mt.
Flat-rolled steel prices declined an average of 9 percent last year, with hot-rolled coil falling 11 percent. According to Purchasing, the average HRC price was $541 a short ton—still well above historic averages of $250 to $400 a ton. Prime scrap grades such as auto bundles and No. 1 HMS declined 22 percent and 9 percent, respectively, while iron ore prices rose about 71 percent.
Summing up the North American steel market last year, IISI said that “a consolidated North American steel industry was able to reduce production in line with demand through 2005, while the high inventories built-up in the marketplace during 2004 were liquidated.” The industry is considered to be well-positioned for a positive 2006 based on continued supply discipline.
Lead: Global refined lead consumption rose 7 percent last year to about 7.7 million mt, with China accounting for virtually all the growth, says the International Lead and Zinc Study Group (London). Chinese lead demand increased 38 percent in 2005, making China the world’s largest lead consumer. China also is the largest lead producer, accounting for 30 percent of global refined production. The year ended with a worldwide deficit of about 290,000 mt, with the Western World statistical shortfall pegged at 250,000 mt.
On the demand side, most independent researchers say Western World lead consumption was either flat or slightly lower compared with 2004. ILZSG, for one, placed Western World lead usage at 5.4 million mt, down 0.8 percent. U.S. lead consumption increased 3.5 percent to just under 1.5 million mt, paced by the battery market. North American lead-related battery demand, led by the United States, totaled more than 117 million units, up 0.5 percent. Consequently, secondary lead smelters had plentiful supplies of scrap batteries last year and, in fact, they saw margins for open-market purchases of batteries widen to unprecedented levels.
Overall, the quantity of lead recycled increased last year, spurred by higher demand for refined metal and higher average lead prices. LME lead prices were uncharacteristically volatile last year, ranging from a July low of $824 a mt to a December high of $1,156 a mt.
Nickel and Stainless: World stainless steel production declined 1 percent last year to 24.3 million mt—the first decrease since 2001, the International Stainless Steel Forum (Brussels) reports. Production in the Americas decreased 8 percent to 2.7 million mt, while output in Western Europe/Africa slipped about 6 percent to 8.8 million mt, ISSF says. Asian stainless production—paced by China and India—grew 5 percent to 12.5 million mt, with China alone boosting its output 34 percent to 3.2 million mt. The decrease in stainless production was due to “dramatically reduced demand” in the second half of 2005 as well as “significant stock reductions” in the market, ISSF says.
The lower stainless production reduced global nickel consumption in the Western World some 3 to 4 percent. Despite firm nickel demand in non-stainless markets and higher Chinese nickel consumption, overall nickel demand declined in 2005. Matching global demand against new production, the nickel market ended the year in surplus.
In the U.S. market, total stainless steel shipments plunged 8.2 percent, according to AISI data. Even so, total primary and secondary nickel consumption totaled 221,000 mt, an increase of 4.2 percent over 2004, based on preliminary USGS estimates.
Nickel prices remained volatile last year, with LME cash nickel posting monthly averages from a high of $7.68 in May to a low of $5.50 in November. Stainless steel scrap prices mirrored this volatility, with the published 18/8 tag hitting $1,710 a gross ton in April, only to fall to $1,175 to $1,200 in December. U.S. stainless scrap exports, meanwhile, rose 22 percent to 585,000 mt.
Paper and Recovered Fiber: According to most measures—and in contrast to most metal markets—domestic paper, paperboard, and scrap paper participants endured a difficult year in 2005. Overall paper and paperboard demand grew less than U.S. GDP, with analysts figuring domestic growth below 2 percent.
Faced with lackluster domestic markets, paper and paperboard producers responded by reducing capacity 0.8 percent to 99.3 million short tons, continuing a downward trend that began in 2001. In addition, pulp and scrap paper prices reflected the market anxiety caused by mill closures, rising operating costs, and ongoing freight issues. List prices for pulp began last year at $650 a mt, rose to $680 in the first quarter, then trended lower before staging a modest recovery to $640 in the fourth quarter. OCC prices weren’t as fortunate, nearing a three-year low at the end of 2005.
On a positive note, the amount of paper recovered for recycling in the United States increased to 51.3 million tons in 2005, yielding a record recovery rate of 51.5 percent, reports the American Forest & Paper Association (Washington, D.C.). Though overall domestic paper and paperboard demand was down 2.3 percent, higher scrap paper exports boosted the U.S. paper recovery total.
Zinc: Global consumption of refined zinc grew less than 1 percent last year. For the second consecutive year, though, global and Western World demand for refined zinc outpaced supply, resulting in refined metal deficits of 317,000 mt and 319,000 mt, respectively, ILZSG says. Even greater supply shortfalls are expected this year.
As it was with lead, China was the driver behind global zinc supply and demand. Refined usage in China was 2.95 million mt last year, an increase of 18.4 percent, far surpassing U.S. consumption of 1.1 million mt, ILZSG reports. USGS figures peg total domestic consumption of zinc (refined plus all other forms) at about 1.4 million mt,
2.1 percent lower than 2004. Zinc recovered from both old and new scrap was also lower last year, reflecting a decline in domestic galvanized steel production. At the same time, export demand for U.S. zinc scrap increased 18 percent to 47,000 mt compared with 2004.
Regarding prices, LME cash zinc trended higher last year, averaging 63 cents vs. 471/2 cents in 2004. Throughout the year, zinc prices ranged from a low of 53 cents in July to a high of 86 cents at the end of the year.
Robert J. Garino is director of commodities for ISRI.
Though 2005 brought steep energy costs and devastating weather as well as lower shipments and tighter margins for many, most recycling sectors saw higher average prices and ongoing prosperity.