May/June 2008
Despite a soft fourth quarter and economic turmoil at home and abroad, scrap commodity markets set fresh records last year, riding the surging-and seemingly unending-wave of demand for raw materials.
By Robert J. Garino
In mid-2007, most business leaders acknowledged that the United States was in a serious domestic financial upheaval that also had global economic implications. By August, virtually all of them agreed with that assessment. The market turbulence, which began with concerns about domestic subprime mortgages, touched not only homeowners but also well-established financial institutions in the United States, Asia, and Europe. Last August, for example, American Home Mortgage, the 10th-largest lender in the United States, ceased operations and filed for Chapter 11 bankruptcy protection, and other companies would follow. By October, the subprime mess had worsened, as leading investment banks and mortgage lenders announced massive portfolio write-offs and fired their high-profile CEOs.
The subprime mortgage crisis was, without a doubt, the story that most defined last year, easily overshadowing other national and international headlines such as the Iraq war, $90-plus crude oil prices, the French elections, unusual weather patterns, metals theft, and even Britney Spears' tabloid exploits. Terms like "liquidity puts," "collateralized debt obligations," and "credit default swaps" entered the general lexicon to explain the mechanics—and the financial implications—of the mortgage problem. The gravity of the situation sent the equity market reeling. At the end of the fourth quarter, the U.S. stock market posted its first quarterly loss in 10 years, crude oil prices surged, and the dollar continued to lose value in the world marketplace.
As investor confidence plummeted, the European Central Bank, Japan, and the U.S. Federal Reserve poured billions into the banking system to boost liquidity. The Fed also began lowering interest rates. By year's end, the federal funds rate was 4.45 percent, down 50 basis points from September and 100 basis points for the year. Fearful of a full-fledged, consumer-led recession, the federal government rushed a $150 billion stimulus package to Congress.
To explain what went wrong with the mortgage market, some economists pointed to the excessively loose U.S. monetary policy from 2002 to 2005. Profligate mortgage lending was clearly an offshoot of the Fed's easy-money policy, which stimulated the creation of complex, unregulated derivative instruments. Those instruments spread out risk, and they, in turn, created a significantly overleveraged market for securities that supposedly were insured and backed by "real" assets.
Testifying before the House Committee on Financial Services this April, Brian Wesbury, chief economist for First Trust Portfolios (Lisle, Ill.), maintained that the Fed held the federal funds rate at 1 percent too long and lifted rates too slowly, stopping short of truly tightening monetary policy. "Interest rates were so low for so long," he said, "that many people started to think they would stay low forever." In retrospect, the idea of eternally low interest rates was an illusion, and bubbles inevitably lead to bursts, which lead to panic.
Recent estimates peg the losses the subprime mortgage crisis incurred at around $300 billion. Though that figure is huge in absolute terms, Wesbury and other economists believe a loss of that magnitude isn't enough to derail the U.S. economy, which is valued at $14 trillion a year with more than $100 trillion in assets. That belief gives little comfort, however, to the thousands of homeowners who didn't comprehend their debt obligations and who have subsequently defaulted on their mortgages.
While the subprime debacle preoccupied the media, the financial sector, and policy-makers, the commodity and scrap markets mostly powered ahead last year. Factors that drove the markets included steady, if not stellar, domestic demand and rising scrap prices, higher export consumption of secondary raw materials, and ongoing concerns that metal scrap supplies were too thin to meet both domestic and international demand.
Few recyclers and scrap consumers worried about an economic downturn, though rising cost pressures sparked inflation and recession concerns throughout the country in the final months of 2007. Dire warnings and predictions from the financial sector intensified as last year wound down, reflecting the nation's anemic GDP growth of less than 1 percent in the fourth quarter. For all of 2007, U.S. GDP grew 2.2 percent compared with 2.9 percent in 2006 and 3.1 percent in 2005, according to the International Monetary Fund (Washington, D.C.). Global growth, meanwhile, was 4.9 percent—well above trend for the fourth consecutive year, IMF reports. Emerging economies made a particularly good showing in 2007, with a collective growth rate of 7.9 percent. The BRIC nations also fared well economically: Brazil's economy grew 5.4 percent; China, 11.4 percent; India, 9.2 percent; and Russia, 8.1 percent.
Returning to the domestic market, here's a closer look at seven major commodities and how they performed last year. Most of the data in the charts accompanying this article came from preliminary reports by the U.S. Geological Survey (Reston, Va.), thus some of the data—especially the 2007 apparent consumption figures—likely will be revised in the coming months.
Aluminum: Total U.S. and Canadian aluminum shipments declined 4 percent in 2007, with mill products sliding 8 percent even as ingot demand increased 6 percent, reports the Aluminum Association (Arlington, Va.). Domestic shipments alone dropped
6 percent, based on preliminary figures. The consensus view blamed consumer destocking and the weak housing and automotive markets for hurting the U.S. aluminum business last year. On the supply side, U.S. producers poured 2.56 million mt of primary aluminum, 12.2 percent more than in 2006.
Though apparent domestic aluminum consumption declined modestly last year, consumption of aluminum scrap increased 11 percent to claim a 57-percent market share, according to USGS and Aluminum Association data. Exports of aluminum scrap grew 4 percent, with China—the main beneficiary—buying 55 percent of last year's total. Overall, the combined demand from domestic primary mills, secondary smelters, and international consumers made for tight competition for aluminum scrap.
Aluminum's price performance last year is best described as relatively firm with a slight downward bias in the second half in response to the global market, which moved from a statistical deficit in 2006 to a surplus in 2007. The LME three-month contract averaged $1.24 a pound in January, peaked early in the second quarter, and ended the year at $1.11.
Copper: Last year's global copper supply/demand balance came up short by 42,000 mt, according to the International Copper Study Group (Lisbon, Portugal). For the year, refined production rose to a record 18.16 million mt while consumption reached a high of 18.2 million mt, yielding the aforementioned statistical shortfall.
In 2007, domestic copper refineries shipped 1.33 million mt of copper cathode and shapes, 7.1 percent more than in 2006 and the highest total since 2002, the American Bureau of Metal Statistics (Chatham, N.J.) reports. In addition, apparent domestic consumption of refined copper totaled 2.15 million mt in 2007, up 2.5 percent from 2006. Wire-rod mills spurred the positive demand, though demand from brass mills remained weak, ABMS says. Imports of refined cathode and shapes, meanwhile, totaled 832,000 mt, almost 23 percent below 2006 levels.
Based on current data, overall apparent U.S. copper consumption grew last year while scrap earmarked for domestic consumption slipped
2.3 percent, lowering scrap's market share to 41 percent. Copper scrap exports surged, however, growing 13 percent year-on-year. Once again, China was the principal buyer, taking 620,085 mt, or 68 percent of the total.
Iron and Steel: Last year brought yet another record for world crude steel production at 1.34 billion mt, the International Iron and Steel Institute (Brussels) reports. China led the industrialized nations with 489 million mt of production, while U.S. output was 106.1 million short tons, according to the American Iron and Steel Institute (Washington, D.C.).
Last year's apparent domestic consumption decreased 11 percent and was reflected in slightly lower shipment numbers (down 2.3 percent), significantly lower imports (down
27 percent), and rising exports (up 15 percent). Domestic ferrous scrap consumption reflected this downtrend as well, with the USGS figuring scrap usage at 68 million mt, down 3 percent from the previous year.
The U.S. steel industry felt the weight of a slowing macro economy, especially in the construction and automotive markets, and of destocking by the nation's service centers. U.S. sheet prices slipped below international levels last year, with the benchmark hot-rolled coil averaging $527 a net ton, down 9 percent from the $580 average in 2006. In contrast, ferrous scrap exports bested the previous year by 23 percent, reaching
a record 13.7 million mt. On the price front, the No. 1 HMS composite price averaged $253.75 a gross ton, up 17 percent from the 2006 average of $217.10.
Nickel and Stainless Steel: After nickel prices soared to record highs in the first half of last year, the global market for stainless steel, outside of Asia, underwent a massive corrective phase in the second half. For the full year, global stainless production declined 2.9 percent, to 27.6 million mt, the International Stainless Steel Forum (Brussels) says. This decline was particularly notable given that world stainless production increased 17 percent the previous year. Domestic stainless steel production, meanwhile, dropped 9.8 percent, to 1.88 million short tons, AISI reports.
With stainless steel accounting for two-thirds of nickel consumption, the decline in world stainless production, coupled with a shift away from nickel-containing stainless, led to a statistical oversupply of nickel and rising LME inventories, which only exacerbated the reportedly large non-LME stocks. Exchange inventories of nickel ended last year at 47,946 mt. After touching a new high in the second quarter, LME nickel prices trended lower in the second half of the year but still averaged a record $16.42 a pound for the full year.
Though U.S. shipments of stainless declined in 2007, USGS data reveal that domestic collections of nickel-containing scrap increased 10 percent. This higher recovery is a result of the higher nickel prices and the demand for more nickel-containing scrap in the first six months of 2007. U.S. exports of stainless steel scrap also rose last year, though the precise total is uncertain—and, many believe, overstated—due to significant reporting errors.
Lead and Zinc: Global demand for refined lead grew 2.2 percent last year, with China once again setting the consumption pace, the International Lead and Zinc Study Group (Lisbon) reports. China's lead consumption jumped 17.4 percent last year to an estimated 2.6 million mt, making it the world's largest lead consumer by far. Bolstered by such strong demand, the world lead market posted a supply shortfall for the fifth consecutive year.
In the United States, however, refined lead demand declined 3.4 percent in 2007, according to ILZSG, though USGS data put U.S. apparent lead consumption up 3.2 percent last year. On the scrap side, U.S. smelters recycled 1.16 million tons of secondary lead last year—unchanged from 2006—giving scrap a market share of 71 percent, the USGS says. Exports of lead scrap set a record at 128,836 mt, up 7 percent year-on-year, with Canada, India, and South Korea the major consumers.
Zinc—lead's geological sister—saw global demand increase 3.7 percent
in 2007, to 11.4 million mt, ILZSG reports. With mine production growing 9.2 percent and refined output rising 7 percent, zinc narrowed its supply deficit from 352,000 mt in 2006 to 15,000 mt last year, according to ILZSG. In the United States, apparent zinc consumption dropped 13 percent, though zinc scrap recovery reportedly increased to a record 420,000 mt, increasing scrap's market share to 36 percent of apparent consumption, based on USGS data.
Lead and zinc prices exhibited contrasting patterns last year. Lead enjoyed a positive price run for most of the year, only to suffer a significant correction in the final months, dropping about 30 percent from peak to trough. Zinc's price path held relatively steady for most of last year before easing in the final months, ending with an average price that was essentially unchanged from its $1.48 average in 2006.
Paper and Recovered Fiber: U.S. domestic production of paper and paperboard totaled 91.2 million short tons in 2007, down 1.1 percent from the previous year, with paper output declining 2.5 percent and paperboard rising 0.1 percent, the American Forest & Paper Association (Washington, D.C.) reports. The overall decline in production comes primarily from the printing and writing, tissue, and newsprint sectors, which decreased 5.1 percent, to 7.1 million tons, last year, AF&PA says. Newsprint consumption by U.S. daily papers and commercial printers has fallen steadily from its 1989 peak due to a combination of falling circulation, declining advertising, smaller publication sizes, and lighter-weight newsprint.
The volume of recovered paper increased last year to a record 54.3 million tons—about 360 pounds recovered for every person in the United States, AF&PA says. U.S. exports of scrap paper also reached a new high, with more than 19.9 million tons shipped at a value of $2.8 billion. China, including Hong Kong, was the main buyer, claiming 76 percent of total U.S. recovered fiber exports.
Despite some price weakness in the second quarter, recovered paper prices generally trended higher last year, ending with an average price for the top seven bulk and high grades around $200 a ton, picked up, compared with $160 a ton at the start of the year. •
Robert J. Garino is director of commodities for ISRI.
Despite a soft fourth quarter and economic turmoil at home and abroad, scrap commodity markets set fresh records last year, riding the surging-and seemingly unending-wave of demand for raw materials.