May/June 2019
By Joe Pickard and Bernie Lee
The U.S. headline economic data could hardly have been more encouraging in 2018. According to the U.S. Bureau of Labor Statistics, the civilian unemployment rate declined to 3.7% in the second half of the year, the lowest unemployment level in nearly 50 years. At the same time, real (adjusted for inflation) gross domestic product grew by 2.9% in 2018, up from 2.2% growth in 2017, according to figures from the Bureau of Economic Analysis. Given the strong correlations between U.S. economic output, industrial production, and scrap demand, 2018 should have been a banner year for the domestic scrap recycling industry. And for some industry participants, market conditions did improve significantly last year. But the gains were not shared uniformly across the recycling space, thanks in part to varying degrees of dependence on Chinese demand, outdated business and investment models, and the rising tide of protectionism that impeded trade flows and depressed prices for a range of commodities.
The trade barriers implemented and expanded in 2018 had a disproportionately large impact on the recycling industry last year. Municipal recycling programs that had become heavily dependent on Chinese demand for their nonmetallic recyclables faced especially difficult market conditions. U.S. exports of plastic scrap to mainland China, for example, plunged 91% in 2018, to just 48,000 mt, compared with the 558,000 mt exported to China in 2017, prompting municipalities to reconsider what plastics they would accept in their collection systems. Additional import restrictions in Malaysia, Vietnam, and other growth markets further complicated scrap exporters’ efforts.
For those recycled commodities that traditionally have been less dependent on overseas demand, trade barriers had unexpected consequences last year. U.S. tariffs on steel imports from Turkey and other countries were widely viewed as supporting domestic steel producers and, by extension, domestic ferrous scrap demand. But Turkish steel production fell in 2018 after the United States imposed higher tariffs on imported Turkish steel, which likely contributed to a 5.6% decline in U.S. ferrous scrap exports to Turkey, the largest overseas market for U.S. ferrous scrap.
The U.S.–China trade dispute contributed to heightened financial market volatility late in 2018, prompting forecasting agencies to reduce their global trade and economic growth forecasts as investors pulled back from commodity markets. Citing rising trade tensions and tariff hikes, the International Monetary Fund estimates global economic growth slowed from 3.8% in the first half of 2018 to 3.2% in the second half of the year. The IMF also estimates that yearly growth in the global trade of goods and services slowed from 5.4% in 2017 to 3.8% in 2018 as China’s economic growth dipped from 6.8% to 6.6% over the corresponding period. As financial markets wobbled, the Federal Reserve pulled back on its guidance for targeted federal funds rate hikes in 2019.
Commodity prices are quite sensitive to real and expected changes in global and Chinese economic growth, monetary policy, and exchange rates. The Bloomberg Commodities Index—a basket of 22 different commodity futures contracts—declined 13% over the course of 2018. As commodity prices came under pressure, investors began heading for the exits, accelerating the downward price trend late in the year. According to Barclays (London), global assets under management in commodities decreased from $310 billion at the end of 2017 to $282 billion at the end of 2018.
Notwithstanding the broad commodity index declines in 2018, certain scrap commodities bucked the downward trend. But even for those commodities that outperformed, scrap tags had a hard time keeping up with primary prices as U.S. import tariffs insulated domestic steel and aluminum producers from import competition. In addition, tight labor market conditions and rising transportation costs continued to present challenges to scrap recyclers last year.
Consolidation in the shipping industry featured prominently in 2018. According to the United Nations Conference on Trade and Development, whereas 15 container lines held approximately 70% of global container shipping capacity at the start of 2018, that changed to just 10 lines over the course of the year. The average number of companies servicing a country fell by 38%. That trend was mirrored in the U.S. rail industry, as evidenced by the closure of hump yards and double-stacked intermodal rail carriers and the regionalization of short-line rail companies. Consolidation within the scrap recycling industry itself continued apace. At the same time, the tighter scrap quality requirements in China and other markets also encouraged domestic and foreign investment in recycling equipment and technology. That investment should help develop new markets and drive efficiency gains. Here’s a recap of how the major scrap commodities performed last year.
Aluminum
Aluminum prices at the London Metal Exchange briefly spiked above $2,700 per mt in April 2018, in part due to the imposition of Section 232 import tariffs and U.S. sanctions against Russian aluminum producer UC Rusal. In response, Rusal CEO Oleg Deripaska warned that the major aluminum producer’s output in 2018 could drop by 30–70%, prompting a wave of cancellations at LME warehouses. Between April and October 2018, closing aluminum stocks in LME warehouses declined by more than 485,000 mt. But China’s retaliatory tariffs on its imports of U.S. aluminum scrap (initially set at 25%, subsequently raised to 50%) contributed to the widening disparity between primary and secondary aluminum prices. U.S. exports of aluminum scrap to China declined 39% by volume in 2018. Although developing markets including Malaysia, India, and Indonesia ramped up their purchases of U.S. aluminum scrap, the domestic market continued to pose challenges. As U.S. aluminum producers switched from producing can sheet to auto sheet, UBC prices plunged from 92 cents per pound in April to 57 cents per pound by the end of 2018, according to Fastmarkets AMM (New York). As the trade dispute between China and the United States heated up, LME aluminum prices were back below $1,900 per mt by the end of the year.
Copper
China’s scrap import restrictions had an especially pronounced impact on global copper scrap flows in 2018. According to trade data from the U.S. Census Bureau, U.S. exports of copper and copper alloy scrap to mainland China declined from 688,000 mt in 2017 to 275,000 mt in 2018, a 60% drop. Unlike with aluminum, other export market gains were insufficient to offset the drop in Chinese demand, resulting in a 9% fall in U.S. copper scrap exports overall. And while the International Copper Study Group (Lisbon) reported global refined copper demand exceeded supply by 448,000 mt in 2018, refined copper prices succumbed to trade pressures and slower Chinese growth in the second half of the year, as did prices for several other commodities. The Caixin Manufacturing Purchasing Managers Index for China fell from 50.2 in November to 49.7 in December, indicating the first contraction in Chinese manufacturing output in 19 months. In response, LME three-month copper futures were back down around $6,000 per mt by the end of the year after having traded above $7,200 per mt in June. U.S. copper scrap prices followed suit, as average No. 2 refiners’ copper scrap prices reportedly fell from $2.79 per pound in January to $2.39 per pound in December.
Iron and Steel
U.S. iron and steel outperformed other commodities last year as domestic steel production ramped up, the Section 232 tariffs dampened import competition, and prices were on the rise. U.S. steel production expanded 6.2% in 2018, to nearly 87 million mt, in turn boosting demand and prices for ferrous scrap. Over the course of 2018, the average price of No. 1 heavy melt rose to more than $333 per gross ton, a 20% increase from 2017. But domestic steel producers saw even more dramatic price swings, as hot-rolled coil index values rose from around $650 per short ton in January to more than $915 in July. Given the increase in output and elevated prices, the U.S. Geological Survey (Reston, Va.) estimates that the value of goods produced by the U.S. iron and steel industry and ferrous foundries rose by $10 billion in 2019, to about $137 billion. For scrap recyclers, the relative lack of dependence on Chinese demand for U.S. ferrous scrap dampened the impact of China’s tighter import restrictions. Overall, U.S. ferrous scrap exports (excluding stainless and alloy steel scrap) were up nearly 14% in 2018, to 15.6 million mt, even as shipments to Turkey declined 5.6%.
Lead and Zinc
Sister metals lead and zinc had the worst price performances among the major base metals at the LME last year, with year-end prices down 25% and 19%, respectively, compared with the end of 2017. The drop-off came despite reports of tight global physical market conditions. According to the International Lead and Zinc Study Group, global demand for refined zinc and lead exceeded supply by 384,000 mt and 98,000 mt, respectively, last year. Accompanying the decline in zinc prices were falling zinc metal stocks at the LME but also reduced refined metal demand from a few key markets. ILZSG reports that zinc metal use declined in China, South Africa, Taiwan, and Turkey last year. As for lead, Fastmarkets Metal Bulletin (London) attributed the price softness to weaker global automotive sales, the escalating trade disputes, and China’s “government initiatives that were deployed to push consumers toward electric vehicles.” In the United States, Johnson Controls International, a major producer of lead-acid batteries and secondary lead, announced the sale of its battery-making component in November. Even so, recovery of U.S. lead and zinc scrap reportedly increased to 1.3 million mt and 72,000 mt in 2018, according to USGS figures.
Nickel and Stainless Steel
Price fluctuations for nickel and other stainless steel raw material inputs continued to shape U.S. stainless scrap sentiment last year. At the LME, three-month nickel prices finished 2018 below $11,000 per mt after having ended 2017 at just over $12,300 per mt. Other key raw material inputs for stainless steel production experienced even greater price volatility. However, rising domestic steel production and capacity utilization rates, along with rising overseas demand for stainless scrap, helped offset some of the volatility in commodity prices. According to figures from the International Stainless Steel Forum, U.S. stainless steel melt shop production increased 2% in 2018, to more than 2.8 million mt. Corporate reporting reflected that increase: According to Outokumpu’s 2018 annual report, the company’s Americas division delivered 762,000 mt of stainless steel last year, up from 742,000 mt in 2017. On the export front, Census Bureau trade data show U.S. stainless steel scrap exports surged 59% higher in 2018, to 778,000 mt, due largely to improved demand from Canada, India, Vietnam, and Mexico.
Paper and Recovered Fiber
Paper and plastics recyclers will remember 2018 by their search for alternative markets, the move to repatriate or improve processing capacity by attracting capital investments, and their efforts to work with municipal governments to establish more resilient recycling systems. Domestically, the American Forest & Paper Association (Washington, D.C.) reports that U.S. paper recovery rates hit a 30-year high of 68.1% in 2018. But the demand void China’s import restrictions created resulted in a major shift toward higher quality bulk grades. This created a glut of high quality OCC that was competing with itself to get into China. Export volumes for corrugated grades and pulp substitutes were up 27% and 49%, respectively, over those volumes in 2017. India, Indonesia, South Korea, Vietnam, Taiwan, and Thailand dramatically increased their demand for U.S. recovered paper. Despite significantly reducing import licenses, China was still the top destination for U.S. exports of news and groundwood grades. However, these substantial shifts in the marketplace also created supply chokepoints that more or less kept prices from seeing the deep fluctuations that occurred in 2016 and 2017.
Joe Pickard is chief economist and director of commodities and Bernie Lee is commodities research analyst for ISRI.