January/February 2015
Despite a U.S. economy
on the upswing, U.S. recyclers face precipitous challenges in 2015. They are
adapting to changing market conditions by focusing on efficiency, innovation,
and quality.
By Joe Pickard
With
U.S. economic growth and manufacturing output on the rise, labor market
conditions improving, consumer spending rising, and interest rates remaining
low, you might assume the U.S. scrap recycling industry would be enjoying heady
days. After all, scrap is the first link in the supply chain and an essential
raw material for manufacturers. According to the Federal Reserve (Washington,
D.C.), in October 2014, U.S. factory output surpassed its late-2007,
pre-recession peak; output rose 4.8 percent, year on year, in November.
Employment data from the Bureau of Labor Statistics (Washington, D.C.) show the
manufacturing sector has added more than 785,000 jobs since 2010. Manufacturing
segments closely related to scrap—such as automotive, machinery, plastics, and
rubber—all have experienced solid annual growth rates recently.
Real U.S. gross domestic product, meanwhile,
grew 5 percent in the third quarter of 2014, according to the Bureau of
Economic Analysis (Washington, D.C.). That’s the fastest quarterly growth since
2003 and a solid indication that the U.S. economy as a whole is starting to
move. Yet despite the close relationships among economic growth, manufacturing
output, and scrap demand—and even though most U.S. scrap remains in the
country—the U.S. recycling industry is experiencing some of the most
challenging market conditions and tightest profit margins in recent history.
What’s the reason for this disconnect between
U.S. economic conditions and scrap company bottom lines? Industry watchers cite
four major factors:
The
commodities slump.
With scrap recycling a commodities-based business, shifts in commodity markets
have a substantial impact on it. The plunge in crude oil prices in the second
half of 2014 sent a chill through such markets and served as a useful reminder
of how unpredictable commodity prices can be. Making matters worse, recent
decisions major mining companies and oil-producing countries have made indicate
that they consider capturing or regaining market share more important than
profitability at this stage of the cycle, resulting in excess production of
commodities from oil to iron ore. The drop-off in primary commodity prices
directly affects scrap prices and scrap availability. As a result, recycling
companies are getting pinched on both the supply and demand sides, with
overseas demand for U.S. scrap taking a particular turn for the worse.
China’s
dwindling scrap imports. China has been the top foreign market for most U.S. scrap
commodities in recent years. In 2011, China bought $11.5 billion of U.S. scrap,
which was more than 35 percent of total U.S. scrap export sales that year. In
comparison, China purchased less than $6.6 billion of U.S. scrap in the first
11 months of 2014, a 19-percent drop year on year and 38 percent below its
purchases during the same period in 2011, according to data from the U.S.
Census Bureau (Suitland, Md.). Slower Chinese economic growth, falling primary
commodity prices, and greater Chinese domestic scrap generation are
contributing to its lower demand for U.S. scrap. Its shifting environmental
regulations and import certification requirements also are affecting scrap
flows into the country. Despite the Chinese government’s recent efforts to
speed up infrastructure projects and keep investment flowing, worries about the
country’s property market, the health of its financial system, and the Qingdao
port scandal all eroded confidence in future Chinese commodity and scrap
demand.
The
strong dollar.
When the U.S. dollar appreciates sharply against other currencies, it can make
U.S. scrap less competitive in the global marketplace. At the end of 2013, the
dollar was worth about 105 Japanese yen, but at the end of 2014, it was trading
at nearly 120 yen—the highest level since 2007 and a 14-percent increase in one
year. The dollar had a similar appreciation against other major currencies,
making it harder for U.S. traders to sell scrap into key markets such as
Turkey, South Korea, Taiwan, and Germany. What’s more, monetary stimulus
measures in Japan and Europe further weakened their currencies and boosted the
dollar. Amid expectations that the Federal Reserve will be first among the
world’s major central banks to start raising interest rates, analysts say the
dollar could continue appreciating in 2015, causing more headaches for U.S.
scrap exporters.
Transportation
bottlenecks.
Scrap recyclers know the unpredictable nature of truck, barge, and rail
shipping, but transportation problems became an even heavier burden for the
industry in 2014. According to the Association of American Railroads
(Washington, D.C.), increased shipments of grains and petroleum products pushed
total freight rail traffic in 2014 to its highest level since 2007. Shortages
of containers, truck chassis, and drivers, as well as a labor dispute at ports
on the U.S. West Coast, only added to the logistical nightmares. With no sign
of progress between the negotiating parties on the West Coast at the beginning
of 2015, those ports are expected to remain backed up for some time.
In addition to the above challenges, U.S.
recyclers and brokers name a high level of regulatory oversight, excess
processing capacity, difficulties accessing credit, the challenges of finding
and retaining talented personnel, and heightened competition for scrap as contributors
to their compressed profit margins. Those same challenges, however, are forcing
recycling companies to become more efficient and innovative, improving their
prospects for success in the future.
Toward Efficiency,
Innovation, and Quality
Industry
changes that have been under way for some time are shaping scrap recyclers’
recovery from the recession and the most recent downturn in commodities. One
important development is their increased efficiency. According to the Bureau of
Labor Statistics’ index of labor productivity, which measures how effectively
labor is converted into output, productivity in the United States has increased
nearly 11 percent since the start of the recession. Recyclers also continue to
make capital investments to increase efficiency and reduce production costs;
lower energy prices trim the cost of doing business even further.
Another trend for the scrap industry is
innovation. Scrap recyclers are adapting to the rapidly changing global
marketplace by using new technology, expanding the range of scrap commodities
they process, and recognizing the need to open new overseas markets. Despite
the overall negative export trends in 2014, U.S. scrap export sales increased
in Canada and Mexico as well as in several up-and-coming markets and regions,
such as India, Thailand, the Middle East, and Latin America. Trade agreements
in the pipeline and efforts to reduce tariff barriers on environmental goods,
such as scrap commodities and recycling equipment, also could benefit the
recycling industry down the road.
A third trend likely to position the U.S. scrap
industry favorably in the future is the rising emphasis on quality. Scrap
consumers increasingly demand high-quality raw materials, which puts U.S.
processors in a strong position to capture additional market share. Quality
issues likely will become more prominent in China in particular, as it
determines whether its domestic scrap supplies can meet Chinese scrap
consumers’ rising quality requirements. Industry consolidation could continue
so long as excess processing capacity and thin profit margins persist.
Given these dynamics, 2015 is shaping up to be
a year of challenges but also opportunities. Here’s a look at some of the
issues that could affect the major scrap commodity sectors this year.
Aluminum
Last
year’s logistical problems, such as truck and container shortages, kept spot
aluminum in tight supply in North America and pushed the Midwest physical
market premium to record levels—about 24 cents a pound in December. At the same
time, aluminum stocks in London Metal Exchange warehouses declined nearly 1.25
million mt last year. As stocks fell, the average LME official three-month
price for aluminum edged up nearly 4 percent for the year, to $1,894 a mt.
Falling oil prices in the second half of 2014 contributed to that price falling
below $1,860 a mt by year’s end and raised questions about future production
capacity curtailments, especially in China. In the first 11 months of 2014,
however, total reported and estimated Chinese primary aluminum production rose
10 percent, year on year, to more than 25 million mt, according to the
International Aluminium Institute (London). In contrast, North American primary
aluminum production declined 7 percent in the same period, to just beyond 4.2
million mt, IAI says. Aluminum alloys are looking increasingly attractive as
substitute materials for the automotive and aerospace industries, and many
analysts see more favorable demand for the light metal going forward. For 2015,
Natixis Commodity Markets (London) forecasts an increase in the average
aluminum price to $2,054 a mt.
Copper
The
LME official three-month copper price averaged just below $6,828 a mt last
year, down 7 percent compared with the 2013 average. Copper stocks in LME
warehouses declined steadily until August 2014, when the copper price fell
below $7,000 a mt. After that, copper stocks began accumulating once more. By
the end of the year, the LME three-month copper price was below $6,300 a mt,
due in part to the falling crude oil prices, concerns about Chinese copper
demand, and an anticipated global copper market surplus in 2015. According to
the International Copper Study Group (Lisbon, Portugal), global refined copper
supply could exceed demand by 393,000 mt this year. As refined copper prices
face downward pressure, and despite falling export demand, copper and brass
scrap reportedly are still in tight supply. According to Census Bureau data,
U.S. exports of copper and copper alloy scrap through November 2014 were down
nearly 10 percent, to 967,000 mt, compared with the same period in 2013—a drop
attributed to weaker Chinese demand and the stronger dollar. China continues to
set the pace on primary copper prices. Recently weaker Chinese manufacturing
figures, along with the pressing need for Chinese financial market reforms,
have kept investors worried. Deutsche Bank (Frankfurt, Germany) projects
average copper prices of $6,625 a mt in 2015 and $6,388 in 2016.
Iron and Steel
As
with most commodities in 2014, ferrous faced excess global supply,
deteriorating overseas demand for scrap, and challenging domestic market
conditions. Although ferrous scrap tags were less volatile than most nonferrous
prices last year, 2014 ended with a thud, as published sources—including Scrap
Price Bulletin (New York)—noted that domestic ferrous scrap prices generally
dropped $50 a gross ton in the fourth quarter while export scrap prices plunged
even more. The softer year-end prices reflected the continued decline in U.S.
exports of ferrous scrap, as well as falling iron ore prices and the strong
dollar. In the first 11 months of 2014, U.S. ferrous scrap exports (excluding
stainless and alloy steel scrap) totaled 13.29 million mt, down 16 percent
compared with the same period in 2013, based on Census Bureau trade data. The
drop-off in exports to Turkey and China were especially disruptive, with
volumes down nearly 1.4 million and 1 million mt, respectively. The sharp
increase in competitively priced finished and semifinished steel imports added
to domestic market pressure. According to estimates from the American Iron and
Steel Institute (Washington, D.C.), U.S. imports of finished steel rose 35
percent by volume in 2014. While Jefferies (New York) expects U.S. steel
consumption to continue improving next year, it also sees the spread between
ferrous scrap and virgin input prices tightening.
Lead and Zinc
Prices
for sister metals lead and zinc moved in opposite directions in 2014, largely
in line with shifting global market fundamentals. World demand for refined zinc
exceeded supply by 277,000 mt in the first 10 months of 2014, as demand rose
11.6 percent in China, 9.4 percent in South Korea, and 2.8 percent in the
United States, the International Lead and Zinc Study Group (Lisbon) reports.
For all of 2014, the LME average three-month official zinc price rose nearly 12
percent, to $2,167 a mt, compared with 2013. In contrast, ILZSG reports a
modest 15,000 mt global lead surplus in the first 10 months of last year, while
the average LME three-month official lead price slipped 2 percent, to $2,112 a
mt, for 2014 compared with 2013. While the Battery Council International
(Chicago) reports that U.S. shipments of original equipment lead-acid
automotive batteries totaled 17.4 million units from January to October 2014,
up 8 percent year on year, ILZSG figures show total U.S. demand for refined
lead declined 1.1 percent in the same period compared with 2013. The group
projects that global demand for lead and zinc will exceed supply this year,
with zinc running a larger deficit. The World Bank Group (Washington, D.C.)
sees lead and zinc prices rising in 2015, averaging $2,175 and $2,200 a mt,
respectively.
Nickel and Stainless
Steel
Nickel
and stainless steel scrap market participants continued to have a bumpy ride in
2014 due to pronounced nickel price volatility. After hitting a low of $13,425
a mt in January, the LME official three-month nickel asking price climbed as
high as $21,100 in May before settling back around $15,000 by year’s end.
Supply constraints remain a prominent feature in the nickel market, with
Indonesia’s ban on unprocessed nickel ores and the potential for trade
sanctions stemming from the conflict between Russia and Ukraine. For stainless
scrap market participants, 2014 was supposed to be a year of stronger domestic
scrap demand, but U.S. consumption of purchased and home stainless steel scrap
was little changed at 980,000 mt through October 2014, according to figures
from the U.S. Geological Survey (Reston, Va.). Of note, Census Bureau trade
data show that U.S. imports of stainless steel scrap in the first 11 months of
2014 rose 54 percent, year on year, as imports spiked late in the second
quarter. Overseas, bonded and domestic nickel inventories in China fell nearly
10,000 mt in the fourth quarter alone, Macquarie Research (London) reports.
With improving demand for nickel and constrained nickel supply expected this
year, Macquarie has a bullish 2015 average nickel price forecast of $23,750 a
mt.
Paper and Recovered
Fiber
Softer
Chinese demand and transportation-related woes created more challenging market
conditions for U.S. paper packers and brokers last year. According to Census
Bureau trade data, U.S. exports of recovered fiber to China slowed
significantly in the second quarter and were down 3.6 percent through November,
year on year, to just over 13 million tons. By grade, exports of old corrugated
containers and pulp substitutes to China saw the largest percentage declines in
that period, falling 7 and 40 percent, respectively. As Chinese demand cooled,
more OCC became available for an already well supplied domestic market. As a
result, published sources reported regional price declines of about $5 a ton
for OCC late in the fourth quarter. Transportation problems—including rising freight
costs from the United States and backlogs at West Coast ports—didn’t help
matters.
In addition, the Journal of Commerce (Newark,
N.J.) and RISI (Bedford, Mass.) reported that there could be more restrictions
on Chinese recovered paper imports in 2015 if China’s Ministry of Environmental
Protection (Beijing) cancels automatic import licensing for imports of OCC,
pulp substitutes, and mechanical pulp, and if it turns over licensing approval
for recovered paper imports to municipal governments. Despite the heightened
market uncertainty, RISI analysts say global demand for recovered paper will
grow 2.5 percent a year until 2029. Joe Pickard is chief
economist and director of commodities for ISRI.