May/June 2013
Under the burden of a global economic slowdown, prices for many scrap commodities softened in 2012, making conditions more challenging for the U.S. scrap industry.
By Joe Pickard and Tom Crane
After two consecutive years of gains, commodity prices came under renewed pressure in 2012 despite extremely accommodative monetary policy, continued rapid growth in emerging and developing economies, and gradually improving U.S. economic output. For recyclers, sustained periods of falling prices, squeezed margins, and heightened competition for scrap made it a challenging year. The U.S. scrap industry contracted 10 percent in 2012, to a value of about $90 billion, as prices for ferrous, nonferrous, and paper scrap declined 12 percent, according to ReMA data.
With the U.S. economy and industrial output continuing to grow, the unemployment rate declining, and inflation remaining under control, why wasn’t 2012 better for the U.S. scrap industry? Part of the answer lies in the global nature of today’s scrap market. Though faster growth overseas can offset periods of softer scrap demand at home, the domestic industry also feels the pinch when global demand deteriorates. World economic growth slipped to 3.2 percent last year, down from 4 percent growth in 2011 and 5.2 percent in 2010, according to the International Monetary Fund (Washington, D.C.). Though emerging and developing markets grew 5.1 percent last year, key overseas markets—including China—cooled off, reducing global trade flows and adding to concerns about commodity demand.
China’s economic growth slowed from 9.3 percent in 2011 to 7.8 percent last year, IMF data show. As a result, total U.S. scrap exports to China plunged 17 percent by value, to $9.5 billion, and 11 percent by volume, to 19.7 million mt, according to the U.S. Census Bureau (Suitland, Md.). Prices for scrap substitutes and virgin raw materials also tend to decline as growth stagnates, compounding the drop in scrap demand. For example, as iron ore prices decreased last year, U.S. exports of ferrous scrap to China fell by more than 2 million mt, despite record Chinese steel production.
Several commodities faced the same challenges last year: rising supplies of primary material and uncertain demand from major consumers. As these market fundamentals began to shift, investors took note. Pension funds and other institutional investors withdrew nearly $10 billion from tradable indexes tied to metals, energy, and other commodities in 2012, Barclays (London) says. Deteriorating conditions along Europe’s periphery and political jitters elsewhere in the world also contributed to the shift in investor sentiment. Eurozone output contracted 0.6 percent last year, while the unemployment rate there rose to 11.8 percent in December, Eurostat (Brussels) reports. Europe’s economic contraction not only weighed on physical demand and trade flows—the United States exported less than half the volume of scrap to the EU-27 in 2012 as it did in 2011, according to Census Bureau figures—but the bad news from Europe continued to reverberate throughout the global equity, commodity, and foreign exchange markets. After exceeding $1.48 in the first half of 2011, the euro fell as low as $1.21 in July 2012. The corresponding appreciation of the dollar further reduced the competitiveness of U.S. scrap abroad.
In contrast to Europe’s economy, the U.S. economy continued growing in 2012, though the recovery was uneven and the gains remained modest. U.S. gross domestic product advanced 2.2 percent last year, up from 1.8 percent growth in 2011, according to the Bureau of Economic Analysis (Washington, D.C.). The U.S. unemployment rate, meanwhile, slipped from 8.5 percent at the end of 2011 to 7.8 percent by the end of 2012, according to the Bureau of Labor Statistics (Washington, D.C.). Although some sectors of the U.S. economy, such as construction and transportation, posted solid growth last year, some business leaders maintained a cautious outlook. U.S. policymakers’ inability to agree on long-term budget solutions added to the economic uncertainty.
With these macroeconomic trends as background, here’s a look at the factors that helped shape individual scrap commodity markets in 2012.
Aluminum. Aluminum was one of the base metals most affected by last year’s economic and political uncertainty. The London Metal Exchange’s official three-month price dropped as low as 83 cents a pound in 2012 and averaged 93 cents for the year, a 15-percent decrease from 2011. Despite the drop in LME prices and more than 5 million mt of aluminum stocks in LME warehouses, figures from the International Aluminium Institute (London) show that world primary aluminum production increased 3 percent last year, to 45.2 million mt, as higher output in China more than offset production declines in the West. According to IAI, China’s primary aluminum output rose 11 percent, to 19.8 million mt, which was a record 44 percent of global production.
In comparison, primary aluminum production in Western Europe and North America fell 10 percent and 2 percent, respectively, IAI says. Despite the slip in North American primary production, domestic aluminum consumption reportedly increased amid rising import levels and scrap use. Domestic aluminum shipments in the United States and Canada rose 7 percent last year, to 8.8 million mt, as the large volume of aluminum stocks tied up in financing deals contributed to elevated physical market premiums, the Aluminum Association (Arlington, Va.) reports. At the same time, aluminum recovered from purchased scrap in the United States increased nearly 10 percent in 2012, to more than 3.4 million mt, according to the U.S. Geological Survey (Reston, Va.). U.S. aluminum scrap exports, in contrast, declined 5 percent by volume and 14 percent by value, reflecting last year’s slower global growth and weaker scrap tags.
Copper. Although global refined copper demand continued to outstrip supply in 2012, the average LME official three-month price fell 10 percent, to $7,945 a mt or $3.60 a pound. The world refined copper deficit grew to 396,000 mt last year as world copper use increased 3.4 percent, to 20.5 million mt, the International Copper Study Group (Lisbon, Portugal) says. A sharp uptick in Chinese refined copper imports and apparent copper use boosted world consumption, driving copper use in Asia 8 percent higher last year. World refined copper production, however, grew only 2.7 percent last year, to 20.1 million mt, including a nearly 3-percent increase in scrap-based refined production, to approximately 3.6 million mt, ICSG figures show.
In the United States, 170,000 mt of the secondary copper supply last year came from obsolete copper scrap, while 650,000 mt of contained copper was purchased new scrap, USGS says. Though domestic copper scrap use edged up in 2012, government figures indicate that overseas demand for U.S. copper scrap softened. U.S. copper and copper alloy scrap exports decreased nearly 4 percent by volume, to just under 1.2 million mt, while copper scrap exports fell nearly 12 percent by value, to $4.4 billion, in 2012, according to Census Bureau data. As the price of refined copper became more attractive, China increasingly substituted cathode for scrap. Though U.S. copper scrap exports to China dropped 6.5 percent last year, to 880,000 mt, U.S. exports of refined copper to China jumped from 4,500 mt in 2011 to more than 100,000 mt last year, a gain of 2,155 percent.
Iron and Steel. Rising global steel and iron ore production at a time of slower global growth weighed on steel, iron ore, and ferrous scrap prices last year. Average composite No. 1 HMS prices in the United States fell 11 percent from 2011 levels, while domestic hot-rolled coil prices slid 12 percent. According to the World Steel Association (Brussels), global crude steel output exceeded 1.55 billion mt in 2012, including a roughly 3-percent increase in Chinese steel production, to 716.5 million mt. World apparent steel use grew 1.2 percent last year, to 1.41 billion mt, worldsteel estimates.
As with copper, the decline in primary raw material (iron ore) prices reduced China’s scrap demand. U.S. exports of ferrous scrap (excluding stainless steel and special alloy scrap) to China, for instance, plunged from nearly 3.7 million mt in 2011 to 1.5 million mt last year, Census Bureau figures show. U.S. ferrous scrap shipments to Turkey, on the other hand, rose 14 percent, to nearly 6.4 million mt. In contrast to some other metal markets, improved domestic demand did not help offset weaker export sales of ferrous scrap last year. According to USGS figures, U.S. consumption of ferrous scrap declined from 63 million mt in 2011 to 57 million mt in 2012, despite a reported increase in domestic raw steel production last year.
Nickel and Stainless Steel. Nickel price volatility continued to keep market participants guessing in 2012. LME official three-month asking prices hit $21,880 a mt in February but fell to $15,260 in August. For all of last year, the average LME official three-month nickel price dropped 23 percent, to $17,589 a mt or $7.98 a pound. As nickel prices slumped, global stainless steel production rose 5 percent in 2012, to nearly 35.4 million mt, with Chinese stainless steel output jumping 14 percent, to more than 16 million mt, the International Stainless Steel Forum (Brussels) reports. Stainless producers in Finland, India, and the United States responded to expectations of rising stainless demand by opening new melt shops or expanding capacity last year, though stainless production in the Americas declined nearly 5 percent in 2012, to less than 2.4 million mt, ISSF data show.
In the United States, production of austenitic stainless steel decreased slightly, to 1.41 million mt, in 2012, USGS reports. At the same time, U.S. recovery of old and new nickel scrap slipped to 95,000 mt in 2012 while receipts of stainless steel scrap from U.S. brokers, dealers, and others came in at 873,000 mt, according to USGS. Overseas, demand for U.S. stainless steel scrap declined 5 percent last year, to 624,000 mt, on weaker Chinese demand, and U.S. nickel scrap exports dropped 17 percent, to 26,000 mt, as higher demand from Canada couldn’t offset lower shipments to Germany, Australia, and others, the Census Bureau says.
Lead and Zinc. Average terminal market prices for both lead and zinc weakened in 2012, with lead the underperformer of the two. Though LME lead inventories declined throughout the year, briefly slipping below 250,000 mt, the average LME official three-month lead price dropped 13 percent, to $2,073 a mt or 94 cents a pound. In comparison, LME zinc stocks surged from about 820,000 mt at the end of 2011 to more than 1.2 million mt at the end of 2012, as the average LME official three-month zinc price fell 11 percent, to $1,963 a mt or 89 cents a pound.
In 2012, as in prior years, the global lead and zinc metal markets remained in surplus. According to the International Lead and Zinc Study Group (Lisbon), the global refined zinc market had a production surplus of 265,000 mt in 2012 as weaker demand in Europe and China led to a 2.8-percent reduction in global demand for refined zinc. Lead posted a 64,000 mt surplus last year, though global use of refined lead increased 1.3 percent, ILZSG says. In the United States, apparent consumption of zinc and lead showed little change, at just over 940,000 and 1.5 million mt, respectively, USGS data show. Although overseas demand for U.S. zinc scrap edged up to 90,000 mt in 2012, U.S. lead scrap exports dropped for the fourth consecutive year, to 26,000 mt, Census Bureau data show.
Paper and Recovered Fiber. Compared with metals prices, recovered paper prices came under even more extreme pressure in 2012. The ReMA Recovered Paper Index dropped 29 percent in 2012, to $95.55 a ton, including a drop in September to $62.50—the lowest level since 2009. Last year’s slide in recovered paper prices reflected weaker overseas demand and contributed to the decline in the U.S. paper and paperboard recovery rate, from roughly 67 percent in 2011 to 65 percent in 2012, according to the American Forest & Paper Association (Washington, D.C.). The United States recovered about 51 million tons of paper last year out of an available supply of nearly 78.5 million tons. At the same time, total U.S. paper and paperboard production decreased 1.3 percent, to 80.9 million tons, in 2012, RISI (Bedford, Mass.) reports.
On the export side, U.S. shipments of recovered fiber dropped by 940,000 tons, as weaker interest in pulp substitutes and other grades more than offset higher exports of old corrugated containers, high-grade deinking material, and old newspapers, according to Census Bureau data. As a result, U.S. scrap paper exports fell 4 percent by volume, to 22.3 million tons, and 9 percent by value, to less than $3.5 billion. Though official Chinese Customs figures show total Chinese recovered paper imports 10 percent higher in 2012, at more than 30 million tons, Census Bureau figures indicate that U.S. recovered paper exports to China slipped 1 percent, to 15.7 million tons.
Joe Pickard is chief economist and director of commodities, and Tom Crane is director of membership for ISRI.
Under the burden of a global economic slowdown, prices for many scrap commodities softened in 2012, making conditions more challenging for the U.S. scrap industry.