A Partial Rebound

Though 2002 brought some bright spots—such as strong export demand—it was hardly a banner year for most scrap sectors.

By Robert J. Garino

When 2002 began, some expected the year to bring persistent economic stagflation while others forecast a rapid pickup in domestic and offshore scrap demand—and, hence, higher prices. Many also saw China displacing the United States as the main global economic driver.
   Though all 2002 data aren’t in, it appears that there’s compelling evidence to support both the optimistic and pessimistic camps. As for China, it was indeed the one bright constant last year, asserting a massive influence on the scrap markets. 
   On the macroeconomic front, 2002 brought some good news for domestic recyclers. The U.S. gross domestic product (GDP) rose 2.4 percent—much better than the 0.3-percent increase in 2001. Real GDP for private services-producing industries increased 2.8 percent while private goods-producing industries grew 1.3 percent. The manufacturing sector also gained 1.8 percent last year after declining 6 percent in 2001, with durable goods decreasing 0.1 percent but nondurable goods jumping 4.3 percent. The construction industry also inched up 0.1 percent last year. 
   Despite such statistical recovery, the U.S. economy was far from secure as corporate scandals, stock-market turmoil, terrorist worries, and the specter of war in Iraq dampened business. Key indicators like consumer confidence and unemployment were inconsistent at best throughout the year. To stimulate the economy, the Federal Reserve slashed short-term interest rates to a 40-year low in 2002. Still, concerns persisted that the United States was heading toward a “double-dip” recession.
   As 2002 ended, market activity appeared to strengthen, though unemployment and fears of greater job losses left the economy in general and the scrap industry in particular on shaky ground. The stock market, meanwhile, posted its third straight annual decline.
   For scrap commodities, 2002 brought disappointing transacted prices (with some exceptions) and generally tight supplies. Regarding prices, CRU Ltd. (London) states, “2002 was the worst year ever for LME metals.” As for scrap availability, domestic consumers were hard-pressed to find consistent, affordable supplies due to relatively low manufacturing rates, low buying prices, and aggressive export demand. This meant compressed margins and tight competition for material among consumers.
   Here’s a review of how seven major commodities fared last year.

Aluminum: As measured by ISRI, apparent domestic consumption in 2002 changed little from 2001, though the U.S. Geological Survey reports a 2.7-percent increase in total consumption. Domestic shipments, meanwhile, grew 6.2 percent last year, reports the Aluminum Association.
   ISRI’s statistics suggest, however, that overall domestic scrap consumption may have decreased as much as 6 percent last year due to lower scrap generation and collection, downtrending primary prices, and strong export demand. In the UBC market, for example, 4.4 percent fewer cans were collected in 2002, yielding a lower can recycling rate for the fifth consecutive year.
   In contrast, aluminum scrap exports, excluding UBCs and RSI, were up 11 percent at 481,821 mt. 

Copper: Copper was expected to fare better than aluminum in 2002 thanks to its more constructive global and Western World supply-and-demand balance. Though copper’s prices declined year-on-year, its LME cash average didn’t suffer as much as aluminum’s.
   Domestic copper consumption rose over 2001, though copper scrap consumption declined nearly 4 percent and its scrap market share fell below 30 percent—a record low. Apparently, many consumers found it easier to secure refined metal than affordable prompt and obsolete scrap.
   Interestingly, despite the huge overseas demand for domestic copper scrap, U.S. exports decreased 4 percent in 2002. 

Iron and Steel: Last year will be remembered for the imposition of Section 201 import tariffs on imported steel. According to Locker Associates (New York City), “Without doubt, the 201 tariffs stabilized the U.S. market and, as intended, provided much-needed breathing room for many distressed companies.” Even with the tariffs, finished imports totaled 32.7 million net tons, 8.7 percent more than in 2001.
   Last year, U.S. steelmakers poured 101.7 million tons, up 2.4 percent from 2001, with electric-arc furnaces accounting for 50.7 percent of the total. Also, capacity utilization rose to 89.4 percent—the highest rate in years. World crude steel production, meanwhile, increased 6.4 percent over 2001.
   On the demand side, apparent U.S. steel consumption grew 2 percent to nearly 126 million tons. Domestic scrap consumption also increased 9 percent even as U.S. exports of ferrous scrap surged 22 percent thanks to strong international demand, led by China. Scrap prices, as measured by the No. 1 HMS composite, ratcheted up 20 percent throughout 2002.

Lead and Zinc: The Western World market for refined lead remained “close to balance” in 2002, says the International Lead and Zinc Study Group (ILZSG) (London). Yet, despite strong growth in China, world usage declined 1.6 percent, mainly due to further contraction in the U.S. market. This decline was caused by lower demand for industrial batteries used in the telecommunications and information-technology sectors, ILZSG reports, noting that domestic demand has eroded 12.6 percent since 2000.
   ReMA data on reported lead consumption indicate that usage decreased 4 percent while scrap consumption slid 9 percent, thus lowering scrap’s market share 3 percentage points to 66 percent. This decline can be attributed to lower sales of both industrial and automotive batteries due, in part, to what the U.S. Geological Survey called “a lack of sustained temperature extremes,” which would have increased replacement-battery sales and scrap supplies. Capacity cutbacks at primary and secondary smelters were also a factor in 2002.
   In contrast to lead, Western supplies of zinc exceeded demand by 300,000 mt for the second consecutive year, ILZSG estimates. Also, unlike lead, world demand rose 2.1 percent to a record 8.98 million mt. The domestic market participated positively, albeit at a reduced level. According to ISRI, apparent domestic zinc consumption rose 1 percent to 1.268 million tons. Domestic scrap recovery was virtually unchanged from 2001 at 216,000 tons. Exports of zinc scrap, meanwhile, set a new low of 22,000 tons.

Nickel and Stainless: On price alone, nickel was the strongest performer on the LME in 2002. Several international factors bolstered nickel, including solid demand for stainless products, tight scrap supplies, and the decision by Norilsk Nickel to use 60,000 mt of its stocks as collateral, effectively holding material off the market for an extended period. Nickel prices retreated in the third quarter but recovered as 2002 ended. For the year, LME cash nickel prices were up 13.7 percent from 2001.
   Domestic stainless shipments increased 3.1 percent last year, though scrap consumption slipped considerably from the 2001 record, according to preliminary U.S. Geological Survey data. To be sure, stainless scrap was difficult to source, both domestically and internationally. The scrap shortfall boosted demand for primary metal, thus bolstering nickel prices. Scrap tightness also increased domestic mill prices for 18/8 stainless scrap by a third last year.

Paper and Paperboard: For the domestic paper and paperboard industry, 2002 brought little to cheer about. The North American newsprint industry, for example, suffered one its worst years, with prices and demand declining for the third straight year. Printing and writing papers also faced tougher times. Though domestic containerboard and newsprint mills cut production last year, total paper and board production increased just over 1 percent to 98.6 million tons. Collections of scrap paper also increased a similar amount, thus maintaining a 48-percent recovery rate.
   For paper packers, the export market was a major highlight last year. Shipments reached 11.4 million tons in 2002—a new record—thanks mostly to China. Export demand was most pronounced for mixed paper and OCC. The market picked up steam in the summer, driving OCC prices over $100 a ton. Tight supplies drove up the domestic mill buying prices as well. Average scrap paper prices weakened as the year progressed, however. The closure of West Coast ports last September due to a dispute with the longshoreman’s union was a significant development that affected exports of both scrap paper and metal to Asian consumers. •

Robert J. Garino is director of commodities for ISRI.