MAY/JUNE 2007
With substantially higher prices, greater margins, and growth in scrap usage, 2006 turned out to be a banner year for the U.S. scrap processing industry.
BY ROBERT J. GARINO
The domestic scrap processing industry should have few complaints about 2006. Scrap usage, which supports and sustains the global industrial base, expanded both domestically and internationally as transacted prices raced to all-time highs and margins subsequently expanded. Just these two visible measures—increasing prices and spreads—virtually ensured that 2006 would be profitable and memorable for most metal and paper recyclers.
For the commodities that are nearest and dearest to most ReMA members, last year was nothing short of phenomenal. The year also faked out just about anyone who had the courage to predict average prices for industrial materials—and that included primary nonferrous base metals, ferrous scrap, and nonmetallics such as scrap paper. In retrospect, most of the credit for the run-up in commodity prices goes to unexpected global supply tightness for certain metals, but higher-than-expected industrial demand, a weaker U.S. dollar, and the emergence and influence of commodity and index-based investment funds all played a role.
For some perspective on this, start by looking at last year’s global economy. Gross domestic product of nations worldwide grew at a vigorous 5.4-percent rate, the best in 30 years, according to an April 2007 report by the International Monetary Fund (Washington, D.C.). This compares with a 4.9-percent increase in 2005. This year, the IMF is forecasting global growth at 4.9 percent, with U.S. growth pegged at 2.2 percent.
The so-called BRIC economies (Brazil, Russia, India, and China) led last year’s reported growth, adding evidence that the growth momentum has somewhat shifted to those countries and away from mature, industrial economies such as the United States.
In the last five years, for example, the BRIC economies have grown 17 percent, 10 times as fast as the 1.7-percent growth rate of non-BRIC economies. Overall economic expansion remained on solid footing, though, with global industrial production estimated to have grown 20 percent over the past four years and global world trade up more than 40 percent, economists reported. As the engine of global growth, China again proved dominant.
U.S. GDP, meanwhile, also grew at a healthy 3.3-percent rate last year, slightly better than 2005 (3.2 percent), but not matching 2004’s 3.9-percent growth. Even with fast-rising energy prices last year, inflation remained in check, as measured by the consumer price index, which increased 2.5 percent for the full year. That’s better than 2005, when prices rose 3.4 percent.
In fact, the U.S. has enjoyed a fairly steady economic expansion for more than a decade, with one brief recession in 2001 and the so-called “growth recession” of 1995. Some believe the U.S. economy has become self-stabilizing, with recessions replaced by periods of slower growth—evidenced by GDP growth slipping below 3 percent in the last nine months of 2006, for example. Others say that, after 17 rate hikes by the Federal Reserve between mid-2004 and mid-2006, a slowdown in U.S. economic activity should be no surprise. What was, and is, a surprise is that the U.S. economy has remained resilient and continued to grow despite numerous shocks to its very foundations.
Not all segments of the U.S. economy performed uniformly or above trend last year, however. Commodity brokers, for example, faced record-high prices, which significantly increased their business costs. Other metalworking industries also suffered, as end-use demand faltered in the second half while material costs remained relatively high.
The major economic downers of 2006 included the well-publicized downturn in the housing market, along with last year’s disappointing results from the nation’s Big Three automakers. Both negatively affected consumers of primary and secondary materials as well as manufacturers of basic items for home and automotive applications.
Estimates are that housing, in particular, pulled overall real GDP growth down to a 2.3-percent annualized rate in the past three quarters. On the other hand, the nonhousing economy grew 3.5 percent over the same time period, the unemployment rate fell to 4.4 percent, and the dollar remained weak. Housing starts last year totaled about 1.8 million units, down 12.9 percent from 2005—the biggest annual decline in 15 years. Residential construction fell throughout most of last year but, as the weakest link in the economy, it did not drag down the rest of the economy as a consequence.
On the automotive front, General Motors reported an 8.7-percent sales drop last year compared with 2005, while Ford sales fell 7.9 percent and Chrysler sales slid 5 percent. Toyota and Honda reported record annual sales, however, thereby somewhat diminishing the net negative effect of the Big Three’s sales on the U.S. economy.
On a positive note, Wall Street enjoyed a banner year. Equities continued to show strength in the fourth quarter of 2006 despite some early warnings of an impending economic slowdown. In the final month of trading, the Dow Jones Industrial Average rose above 12,500 for the first time ever, then it fell slightly below that landmark at the end of December. All the major indices advanced onto higher ground, however, capping off a superb year for U.S. equities across the board.
Based on preliminary year-end estimates, here’s a summary of how the major metal commodities and paper wrapped up 2006.
Aluminum: By most measures, global aluminum consumption and production grew last year, with the former outpacing the latter, leaving the 2006 world market with a statistical deficit. China accounted for more than 25 percent of global usage, with the U.S. closer to 20 percent.
Global aluminum prices reacted positively to the fundamentals as well as to institutional investors. For the full year, the LME three-month average was $1.18, 37 percent above its 2005 average.
Preliminary U.S. Geological Survey data and estimates from the Aluminum Association and ReMA indicate apparent domestic aluminum consumption increased around 1.5 percent, bringing the total to 6.59 million mt. Domestic scrap consumption, at 3.02 million mt, was up 1 percent year-on-year. It is likely, however, that the USGS has understated both apparent aluminum consumption and scrap usage.
Scrap exports, paced by aggressive Chinese demand, soared to a record 1.5 million mt last year, for an increase of 36 percent over 2005.
Copper: The red metal enjoyed another positive year despite global primary and secondary production growing much faster than the rate of global consumption, according to the International Copper Study Group (Lisbon, Portugal).
After consecutive years of global copper deficits, ICSG data for 2006 place the world copper surplus at 344,000 mt. Note, however, that ICSG data do not make any allowances for releases of copper from China’s strategic reserves, thus they most likely understate China’s actual copper consumption. Independent analysts have placed that specific number at around 250,000 mt and, in contrast, they reckon that the global market was closer to being balanced or even statistically short.
Exchange prices, meanwhile, set all-time highs in the second quarter of 2006, briefly eclipsing $4 a pound. For all of 2006, the LME averaged $3.02, an impressive 90-percent increase over the 2005 average.
According to preliminary USGS data on scrap consumption, scrap usage was greater, but—as with aluminum—an upward revision is all but assured: Analysts believe higher cathode prices led the brass mill sector to use more scrap. Estimates are that overall copper consumption increased less than 2 percent last year, reflecting the decline in housing and the slower pace of industrial production in the second half of 2006.
Scrap exports set a fresh record last year, with more than 803,000 mt shipped abroad. China again was the dominant buyer, accounting for 65 percent of the total.
Iron and Steel: The global and domestic steel industries posted above-trend production and shipment levels last year. World finished steel output reached 1.1 billion mt, up 8.5 percent year-on-year. U.S. steel producers poured just under 98.6 million mt, for a gain of 5.7 percent over 2005. Factors transforming the world steel industry in recent years include the emergence of China as the dominant producer; strong growth from Eastern Europe, Latin America, and India; and ongoing rationalization of the domestic steel industry.
Apparent U.S. consumption of steel, aided by record-setting imports (41 million mt), was up 14.6 percent last year. Domestic mill shipments totaled 98.5 million mt, a 5 percent yearly increase.
Processed ferrous scrap also enjoyed a banner year. The entire domestic steel-scrap-consuming market required approximately 70 million mt of scrap last year, and another 11 million mt was exported. Average ferrous scrap prices rose 13.2 percent last year.
Nickel & Stainless Steel: The global nickel and stainless steel sectors saw limited new supplies of primary metal coming into the marketplace and a resurgence in the stainless steel sector following 2005’s drop in production and massive destocking.
Estimates of total stainless production surpassed 28 million mt last year, up 17 percent, according to market research. Asian production, paced by China with 5.3 million mt, grew 21 percent, accounting for more than half of all stainless steel in the world.
With stainless steel claiming the lion’s share of overall nickel demand (around 65 percent), nickel consumption raced ahead of production. World production grew less than 5 percent last year, with consumption growth estimated at close to 12 percent. Last year’s global supply/demand balance placed the world nickel market in a deficit position by around 40,000 mt.
In the United States, stainless steel shipments grew just over 9 percent last year, outpacing preliminary USGS data on nickel recycled and primary and secondary nickel consumed. With nickel prices skyrocketing through most of last year, briefly pausing in the final months, domestic mills eagerly sought scrap, which suggests much greater secondary nickel recovery than estimates have shown, despite research reports to the contrary.
According to U.S. Census data, stainless scrap exports saw an extraordinary 132-percent increase over 2005. ReMA and others have challenged the data and expect to see downward revisions to the 2006 export figures.
Lead & Zinc: The International Lead and Zinc Study Group (Lisbon, Portugal) reported global demand for refined zinc exceeded supply last year, resulting in a statistical deficit of around 330,000 mt, an improvement over 2005’s shortfall. Growth was mainly due to strong Chinese production, which offset a widening deficit in the Western World. Lead’s global supply/demand balance, meanwhile, also came up modestly short, again due to Chinese production increases and moderation in the lead deficit in the Western World.
Greater production of zinc-coated steels in 2006 helped boost last year’s domestic consumption of zinc to 1.35 million mt, a nearly 10-percent increase. Old and new scrap zinc recycling also grew in 2006, contributing 28 percent to total consumption. Scrap zinc exports soared last year, reaching just under 84,000 mt. China was the principal destination, taking in 82 percent of total exports.
Lead-acid battery demand dominates overall North American lead-consuming markets. Last year saw uncharacteristic declines in original equipment and replacement shipments to the continent, the Battery Council International (Chicago) reported. Consequently, preliminary USGS and ReMA estimates show U.S. lead consumption grew less than 2 percent last year, with scrap consumption subsequently increasing 5.3 percent. A major factor inhibiting domestic lead consumption is increased Chinese imports of automotive-type and industrial batteries. Overall lead scrap supply increased, however, based upon domestic product imports and increased scrap export activity.
Responding to the supportive global supply/demand picture for the past two years, coupled with 2006’s fresh institutional buying, zinc prices outperformed the other LME-traded contracts by a wide margin. Lead prices also averaged significantly higher last year.
Paper: By most measures, the domestic paper industry enjoyed an up year in terms of product shipments and prices despite ongoing industry rationalization. Paper recycling also increased last year. According to the American Forest & Paper Association (Washington, D.C.), the United States recovered for recycling a record 53.4 percent of the paper consumed.
At least 16 paper mills closed last year, reducing U.S. industry capacity to 97.7 million tons. The decline marked the sixth consecutive annual contraction in paper and paperboard capacity. Nevertheless, total domestic paper and paperboard output last year, at 50.4 million mt and 41.4 million mt, respectively, totaled 91.8 million mt, an increase of 0.7 percent from 2005. Paper production posted a 0.1-percent decline, while paperboard rose 1.4 percent. Newsprint production trended lower last year, with production down 3.1 percent year-on-year, and corrugated box shipments remained in positive territory for the second straight year.
On the raw material side, pulp prices, as measured by northern bleached softwood kraft, firmed as the year progressed, with list prices moving from $640 a mt in January to $770 at year’s end.
Recovered paper values also trended higher over the January-to-December period. Published sources revealed that the multigrade mill buying national average price increased from around $135 a net ton in January to December’s $150-plus.
Scrap paper exports set another all-time record last year, with 17.5 million tons shipped abroad. Exports to China, at more than 10 million tons, were up 19 percent, while exports to other markets were down 1.2 percent. China, Canada, Mexico, Korea, and India accounted for 87 percent of all U.S. scrap paper exported.
Robert J. Garino is director of commodities for ISRI.