May/June 2014
Slower global growth, excess Chinese production capacity, the largest outflow from commodity investments since 2008, and other factors weighed down commodity prices and scrap industry profits in 2013.
By Joe Pickard and Tom Crane
At the start of 2013, several analysts predicted that key commodities such as copper would tip into global production surpluses, which would outstrip gains in demand and weigh on prices amid cooler global economic growth. Although not all such projections panned out, the expectation that market fundamentals would deteriorate contributed to investor flight from commodities into other asset classes, putting ever-greater pressure on commodity and scrap prices. While the U.S. stock market took off in 2013, lifting the Dow Jones industrial average 26.5 percent higher for the year, the Dow Jones-UBS commodity index fell nearly 10 percent for the year as investors headed for the exits. According to Barclays (London), investment in commodities such as precious and industrial metals, energy, and agricultural products contracted $47.1 billion in 2013, the largest outflow since 2008.
Given the relationship among demand for commodities, industrial production, and economic growth, signs of slower output tend to create headwinds for commodities, and 2013 was no exception. According to figures from the International Monetary Fund (Washington, D.C.), global GDP growth slowed from 3.2 percent in 2012 to 3 percent last year. Growth in the advanced economies was particularly sluggish, at 1.3 percent, despite reports of gradually improving conditions in the eurozone and elsewhere. In emerging and developing economies, growth also slowed from 5 percent in 2012 to 4.7 percent in 2013, IMF data indicate. Stagnant Chinese growth in particular had a pronounced effect on market sentiment.
China’s real GDP growth in 2013 was practically unchanged from 2012, at 7.7 percent, but it was far from its 14-percent annual growth rate in 2007. China’s ongoing need for financial market reform and its internal debate about the need to balance growth with better environmental protection amplified concerns about its slower GDP performance. Heightened environmental awareness spawned initiatives such as “Operation Green Fence,” which had a significant impact on the flow of scrap to China. While most exporters adjusted to the new import scrutiny, stagnant Chinese economic growth and lower prices for primary commodities such as iron ore further dampened China’s demand for scrap imports. As a result, total U.S. scrap exports to China declined 8 percent in 2013, to just under $8.8 billion, according to data from the U.S. Census Bureau (Suitland, Md.).
China wasn’t the only source of instability in commodity and scrap markets last year. U.S. scrap exports overall were down 15 percent by value last year, to $23.7 billion, and 10 percent by volume, to 42.8 million mt, Census Bureau data show. U.S. export sales to key trading partners—such as Canada, Turkey, South Korea, Taiwan, and India—all registered double-digit losses in 2013. Weak overseas demand, lower commodity prices, and uneven manufacturing growth at home took a toll on the U.S. scrap industry, which contracted 11 percent in 2013, to $80.2 billion, according to ReMA estimates, despite gradually improving economic conditions at home.
Regarding the U.S. economy, the unemployment rate fell from 7.9 percent in January to 6.7 percent in December, the U.S. Department of Labor (Washington, D.C.) reports. U.S. industrial production advanced 2.9 percent last year, outpacing the U.S. GDP growth rate of 1.9 percent, according to the Federal Reserve, also in Washington. The improving outlook prompted the Fed to start dialing back its quantitative easing at the end of 2013. In December, it announced it would reduce its asset purchases $10 billion a month, raising questions as to when it would raise interest rates and what impact doing so would have on the overall economy and the housing market in particular.
U.S. new home sales were up more than 16 percent in 2013, according to Census Bureau figures, but concerns about the strength of the housing market recovery were starting to surface by the end of the year. Although gains in home and stock prices—as well as the improving labor market—bolstered consumer confidence and supported growth last year, not all segments of the economy benefitted equally from the modest recovery. For the U.S. scrap industry, heightened competition for available feedstock, volatile foreign exchange and shipping freight rates, sluggish overseas demand, and generally softer commodity prices weighed on profitability, making 2013 another challenging year. With that macroeconomic background in mind, here’s a look at what happened in seven key commodity sectors.
Aluminum
Aluminum prices came under pressure in 2013 due to several factors, including excess production capacity in China, slower global economic growth, the expected removal of monetary stimulus in the United States, and shifting investor sentiment. As a result, the London Metal Exchange official three-month aluminum price fell from a high of 98 cents a pound in February to a low of 79 cents in December. With more than 5 million mt of aluminum in LME warehouses, the light metal featured prominently in the debate about financial institutions’ ownership of warehouses and other commodity-related assets. In response to long queues for delivery from its warehouses, the LME developed a series of proposals to reduce delivery times. (Several companies—including major Russian aluminum producer UC Rusal—subsequently challenged the proposals in court.)
While aluminum market participants paid close attention to the proposed LME warehouse reforms and their potential effect in the physical marketplace, the world continued to produce more aluminum. Global primary aluminum production rose 4 percent in 2013, to 49.7 million mt, including nearly 22 million mt of production in China alone, according to the International Aluminium Institute (London). In contrast, U.S. aluminum production declined 6 percent last year, to 1.95 million mt—despite an uptick in domestic demand, particularly in the transportation sector—which kept the light metal in tight supply and led to elevated physical market premiums, Aluminum Association (Arlington, Va.) data show. Given the positive demand and lower U.S. aluminum production, consumers increasingly turned to imports. Domestic demand for aluminum scrap also edged up to 3.48 million mt, U.S. Geological Survey (Reston, Va.) figures indicate. Domestic aluminum scrap market conditions would have been even tighter if not for the 8-percent drop in the volume of U.S. aluminum scrap exports last year.
Copper
The copper market kept analysts and market participants guessing last year. While most expected the global refined copper supply to exceed demand in 2013, the market ended the year with a 272,000 mt deficit, the International Copper Study Group (Lisbon, Portugal) reports. When it includes estimated changes in Chinese bonded warehouse stocks, the deficit was closer to 530,000 mt last year, ICSG says. World copper use, meanwhile, grew 4 percent, to nearly 21.3 million mt, due in part to improved demand in China, the United States, Brazil, and Russia, but some questioned whether refined copper financing deals in China led to inflated demand figures. World secondary refined production (from copper scrap) rose nearly 8 percent last year, to nearly 3.9 million mt, ICSG reports.
Despite gains in copper use, the global production deficit, and the sharp drop in LME copper stocks, red metal prices came under pressure last year as the downturn in investment demand trumped market fundamentals. For the year, the LME official three-month copper price averaged $3.33 a pound, down 8 percent from the 2012 average. The market also saw a decrease in overseas demand for copper scrap. For the second year in a row, the volume of U.S. copper and copper alloy scrap exports contracted, easing to 1.16 million mt, according to Census Bureau figures. In comparison, domestic demand for copper scrap was little changed last year, with old scrap providing 170,000 mt of copper and purchased new scrap yielding 640,000 mt of contained copper, based on USGS figures.
Iron and Steel
China continued to play an outsized role in the global steel marketplace last year, with its crude steel production reaching nearly 780 million mt in 2013, which was nearly half of the 1.58 billion mt of crude steel produced globally last year, the World Steel Association (Brussels) reports. China’s growing steel production once again put downward pressure on global steel prices, but it did not benefit U.S. scrap exports. U.S. ferrous scrap shipments (excluding stainless and alloy steel scrap) to China slipped to just under 1.5 million mt, down 1 percent from the prior year, according to Census Bureau data. Other key export markets registered even sharper declines, including an 18-percent slide in U.S. ferrous scrap shipments to Turkey and an 11-percent drop in shipments to South Korea.
Although U.S. steel output eased to 87 million mt last year, domestic ferrous scrap consumption remained steady at 63 million mt, USGS reports. Following the trend in hot-rolled coil prices, composite prices for No. 1 HMS started the year at $350.83 a gross ton in January, dipped to $325.83 in June, and rebounded to $377.50 in December, according to data from Scrap Price Bulletin (New York). Despite some recovery at year’s end, the average annual No. 1 HMS price was still down 6 percent from 2012, and ferrous scrap processors faced considerable challenges, including diminished export demand and excess scrap processing capacity
at home.
Nickel and Stainless Steel
Nickel prices remained volatile in 2013. After averaging $8.08 a pound in February 2013, the average monthly LME official three-month nickel price dipped as low as $6.26 in November. For the full year, the LME three-month nickel price averaged $6.84 a pound, 14 percent lower than the 2012 average and the worst performance among base metals last year. As nickel prices declined, global production rose, with primary nickel output growing from 1.75 million mt in 2012 to 1.94 million mt in 2013, the International Nickel Study Group (Lisbon) reports. At the same time, primary nickel consumption edged upward last year, to 1.77 million mt, leaving a production surplus of roughly 170,000 mt in 2013, INSG says.
World production of crude stainless and heat-resisting steel also rose last year, jumping 7.8 percent to more than 38 million mt, including nearly 19 million mt from China, the International Stainless Steel Forum (Brussels) says. Although China continued to use nickel pig iron to moderate its demand for stainless steel scrap in 2013, U.S. exports of stainless scrap to China rose 5 percent, to 102,000 mt, the Census Bureau reports. Meanwhile, domestic consumption of stainless scrap exceeded 1.32 million mt last year as U.S. production of austenitic stainless rose 8 percent, according to USGS.
Lead and Zinc
Lead and zinc both saw their use expand in the United States and around the world last year, but their price pictures differed. The average LME official three-month price for lead increased 4 percent last year, to 98 cents a pound, as lead demand exceeded supply for the first time in four years. Global lead demand rose 4.5 percent in 2013, to reach 10.6 million mt, exceeding the 3.7-percent increase in refined lead production, the International Lead and Zinc Study Group (Lisbon) reports. Among major lead users, demand grew 5 percent in China and 16 percent in the United States. Although domestic consumption of lead scrap was little changed last year, at 1.1 million mt, Census Bureau trade data show that U.S. lead scrap exports rose to 35,000 mt, the highest level since 2010.
The average LME official three-month price for zinc was 88 cents a pound in 2013, 1 percent below the 2012 average; however, USGS reports that North American physical market zinc premiums rose from 8 cents a pound at the beginning of the year to around 9.5 cents in October, pointing to regional tightness for zinc. Global demand for zinc increased to nearly 13.2 million mt in 2013, exceeding refined zinc production by 60,000 mt, ILZSG data show. China, the United States, and India drove the rise in global zinc use, increasing their apparent consumption about 14 percent, 5 percent, and 12 percent, respectively. U.S. exports of zinc scrap, meanwhile, slipped 2 percent last year, to 88,000 mt, the Census Bureau says.
Paper and Recovered Fiber
U.S. recovered paper prices were strained last year due to reduced domestic recovery of paper and paperboard, softer overseas demand, and volatile freight rates. Average composite bulk grade prices for recovered paper fell 13 percent year on year in 2013, according to data from The Paper Stock Report (Strongsville, Ohio). U.S. export figures provide some explanation for the lower prices, as overall shipments declined 6 percent last year, to 20.9 million short tons, Census Bureau data show. By grade, U.S. exports of OCC fell 9 percent; mixed paper declined 5 percent; and ONP slid 4 percent. U.S. shipments of recovered fiber to China were off 7 percent by volume in 2013, to 14.7 million tons, and 9 percent by value, to just over $2 billion.
In the United States, the domestic supply of paper and paperboard increased to nearly 79 million tons last year, but the volume of paper recovered dipped to 50.1 million tons, yielding a U.S. paper recovery rate of 63.5 percent—1.6 percentage points lower than the 2012 rate of 65.1 percent, the American Forest & Paper Association (Washington, D.C.) reports. Three major grade categories—OCC, newsprint, and printing/writing paper—all posted lower recovery rates in 2013 at 88.5 percent, 67.6 percent, and 53.1 percent, respectively, according to AF&PA data.
Joe Pickard is chief economist and director of commodities, and Tom Crane is director of membership for ISRI.
Slower global growth, excess Chinese production capacity, the largest outflow from commodity investments since 2008, and other factors weighed down commodity prices and scrap industry profits in 2013.