BIR 50th Anniversary—Fighting the Asian Flu

The Bureau of International Recycling returned to Paris to celebrate its 50th anniversary and review the effects of Asia’s economic crisis on international scrap markets.

By Kent Kiser

Kent Kiser is editor of Scrap.

The two hot topics at the Bureau of International Recycling’s (BIR) (Brussels) May convention in Paris were the group’s 50th anniversary and the potential effects of the Asian economic crisis on international scrap markets.

More than 900 scrap executives from around the world convened in Paris—site of the BIR’s first office—to help the association celebrate its achievements. The group marked its golden milestone in grand fashion with a gala dinner in the Royal Stables of the Castle at Chantilly.

In the event’s commodity sessions, the spotlight was squarely on troubled Asia. The general prediction is that recessions in Asian countries will render the region’s gross domestic product (GDP) flat, reported Nonferrous Division President Larry Sax of Easco Aluminum Corp. (Girard, Ohio). Asia’s recessions, in turn, could slow the world economy despite strength in the United States and Western Europe. Global real gross GDP is expected to rise 2.5 percent in 1998, down from 3.2 percent last year, Sax said. As the Asian flu runs its course, world GDP is expected to rise 2.9 percent in 1999 and 3 percent in 2000.

In the United States, Asia’s weakness could have a “major slowing influence,” Sax said, noting that “this will occur through a significant weakening in the U.S. trade balance, which will then be a drag on total GDP growth rates.” Predictions call for U.S. growth of 2.9 percent in 1998 and 2.5 percent in 1999, compared with 3.8 percent in 1997.

Western Europe won’t be affected as much, with expectations that it will surpass its 1997 growth of 2.5 percent to reach 2.7 percent in 1998 and 2.9 percent in 1999, Sax said.

Ferrous Feels the Asian Effect

Despite the economic and political problems in Asia, the U.S. economy continues—for now—to be “quite healthy,” with low unemployment, a robust stock market, and “good demand for steel products,” said Edward Hollander of Hollander Metals Inc. (Glenview, Ill.) at the ferrous division meeting.

U.S. steelmakers ended 1997 with total production of 105.5 million tons, up 4.6 percent from 1996. Through this April, U.S. mills produced about 40 million tons—a gain of 20 percent compared with the same period in 1997, Hollander reported.

While the market has continued to thrive, there are several concerns, he said. One is that the U.S. economy could be slowed by Asia. Another is that interest rates could rise. And U.S. steelmakers and ferrous scrap processors could face price pressure due to “larger than normal” imports of new steel, pig iron, scrap enhancements, and scrap.

In 1997, steel imports totaled a record 31 million tons. Though imports in the first two months of 1998 were 10 percent behind 1997, they should be “much higher for all of 1998,” Hollander said.

In addition to new steel, U.S. steelmakers have been importing more pig iron—as much as 750,000 mt a year—as well as DRI, HBI, and scrap, with 18 to 20 cargos of scrap already shipped or to be fixed, he asserted.

The ongoing consolidation in the scrap industry is presenting another challenge in that the big consolidators can offer large parcels of scrap to mills at competitive prices, Hollander said.

In Europe, the steel and ferrous scrap markets ended 1997 on a bullish note, with steel production forging ahead and demand for scrap maintaining pressure on supplies, said Alan Crowe of Mayer Parry Recycling Ltd. (Erith, Kent, England) in a report read by Robert Voss of Voss International Ltd. (Harrow, Middlesex, England).

As 1998 began, however, “demand from Europe’s traditional deep-sea export markets evaporated, and despite cheap freight and an increasing demand from the United States, supply outstripped demand and the world price of scrap started to fall,” Crowe said.

The “dramatic” fall in scrap prices led to the “usual reduction in the supply of feed to our processing yards,” with the result being that “1998 is turning into a vastly more challenging climate in which to make money,” he said. This downturn has occurred even as world and European steel production rose in the first quarter.

In the near term, the market will see “the start of a consolidation and rationalization period for European steelmaking,” defined by “the creation of fewer, but larger, steelmaking groups,” Crowe maintained.

Also, the importation of pig iron, DRI, and HBI is becoming a regular feature in the European market, which will likely “create some volatility in demand for European low-residual grades,” he said.

With little hope for increased demand from the Far East, India, or Turkey, the European market should be “relatively flat” through summer, Crowe said.

In the Far East, scrap exporters have seen C&F prices for ferrous scrap slide $30 per mt and overall levels of demand drastically reduced, said Ferrous Division President John Crabb of Simsmetal Ltd. (Sydney, Australia).

This has occurred due to the currency and liquidity crises in Asia, steel production cuts and delays in adding new capacity in the region, and larger shipments of ferrous scrap into Korea and Taiwan from Russia, Eastern Europe, and Asian suppliers such as Japan, he noted.

Korean steelmakers have made substantial production cuts that will make its ferrous scrap imports “significantly lower” in 1998 than the 8 million mt they imported last year, Crabb said.

Malaysian mills, which have made even more severe production cuts than Korea, have also reduced their ferrous scrap imports, instead surviving on local scrap arisings. The situation could improve if the mills complete their previously planned “significant” expansions in electric-arc furnace capacity later this year, he noted.

Similarly, Thailand’s steel producers have cut production and are consuming primarily domestic scrap, though two thin-slab projects representing nearly 3 million mt of capacity have been rescued by foreign capital and could help boost demand for foreign scrap in 1998 and into 1999, Crabb said.

Indonesia is experiencing “economic and social chaos” and its “demand for ferrous scrap cargos has all but ceased,” he stated, adding that “it seems very unlikely that Indonesia will play a meaningful role in international metal markets this year.”

Though Taiwan’s economy isn’t strong, its mills “have continued to import material on a regular basis,” Crabb said.

China, meanwhile, has seen its economic growth slip below 8 percent for the first time in many years, while unemployment is rising as a result of public-sector reforms. Its steel production has remained steady, with “no sign of a significant increase in ferrous scrap import activity this year,” Crabb said. Current low prices could entice Chinese mills to increase their imports, though the big question is whether China will devalue its currency.

In the short term, the Far East region is unlikely to show significant improvement in its scrap demand. In about two to three years, however, the region will have a more structured and regulated financial system, stronger regional economies, and sustainable growth patterns that will help it regain its role as a major force in the global economy, Crabb said.

The Asian financial crisis hit Japan last October, driving the country into its worst economic downturn since World War II, said Hideo Itoh of Nakadaya Corp. (Tokyo). Japanese banks are experiencing record losses, most Japanese industries are suffering record low performances, and the unemployment rate is at an all-time high.

Japanese steelmakers are producing at a 27-year low and plan to cut production 20 percent, Itoh said. They have significantly increased their exports of pig iron—from 212,000 mt for all of 1997 to more than 303,000 mt in first-quarter 1998—and “this level will continue for some time,” he said. Not surprisingly, ferrous scrap prices in Japan have dropped more than 30 percent in the past six months, with H2 fetching $77 to $85 delivered—a six-year low.

In terms of scrap exports, Japan shipped a record 2.2 million mt in 1997, but its first-quarter 1998 total was down 20 percent due to the financial problems in Asian consuming countries, Itoh reported.

The good news is that the Japanese government is implementing a new economic policy, including tax cuts and public spending, that could create demand for up to 2.5 million mt of new steel, Itoh said.

Diminished Demand, Tight Supplies Define Nonferrous

Though the U.S. economy is enjoying “low everything—interest rates, inflation, and unemployment,” U.S. nonferrous scrap processors are suffering from two other lows—prices and volume—despite strength in the U.S. manufacturing sector, said Robert Stein of Louis Padnos Iron & Metal Co. (Holland, Mich.) at the nonferrous division meeting.

These lows can be traced to the malaise in Asia, deflation, and “the continued interference of banks and commodity funds” in the nonferrous markets, he said. The “disruptive and destructive speculative whims” of these players add “an unnecessary level of uncertainty” and volatility to the nonferrous markets and have nothing to do with the market’s fundamentals, Stein asserted.

By market, secondary aluminum scrap grades are expected to continue to suffer “as ingots find their way from Asia to North America, putting pressure on domestic producers and, subsequently, on scrap prices,” he said. UBCs have experienced an erosion in prices due to reduced demand, maintenance shutdowns, and relatively large inventories of scrap.

In the lead market, scrap battery prices have declined due to plentiful supplies, which are expected to remain high as 1994 batteries reach the end of their lives and enter the scrap stream this year, Stein said.

Demand for zinc scrap continues to be steady, with export demand narrowing the discounts under LME values. “There is reported good demand for finished product in most sectors of the industry, and this is expected to lend good support for scrap zinc values in general,” he said.

Scrap copper and brass, meanwhile, are enjoying strong demand. Given the lower overall copper values, “scrap won’t be adequate to satisfy mill requirements,” though export demand is expected to remain intermittent, Stein reported.

Overall, the U.S. nonferrous market “will probably see continued slow business with short interim periods of price increases in most metals,” he concluded.

In Europe, the Asian crisis has cut demand from the Pacific Rim, which has coincided with a shortage of good quality raw material and a downturn in LME prices, said Nonferrous Division Senior Vice President Robert Voss. These factors have put “a dramatic squeeze on margins as more traders are chasing smaller volumes of business,” while also slowing the economic growth of European countries.

European scrap demand and supply are expected to continue to fall, with the result that “margins will continue to be squeezed as competition for smaller quantities of material becomes greater,” Voss said.

For the remainder of 1998, European scrap companies will continue to work under “very small margins,” he said, adding that “as a result of the difficult times, we shall see a number of companies involved in our trade forced into closure.”
  In Asia, the region’s economic troubles have created a market defined by reduced demand for nonferrous scrap and tight supplies since less scrap is being generated, said John Crabb.

Aluminum scrap has seen a general reduction in demand and a subsequent fall in price, exacerbated by an increase in primary aluminum production, Crabb said. “Many secondary aluminum producers are working on a ‘no-profit’ basis, with all producers competing vigorously for sales,” he said. Even so, scrap supplies are relatively tight and prices reasonably strong compared with the LME, thanks to strong demand from the United States and Europe.

A similar situation exists in the copper market. Scrap supplies seem to be less than demand due, in part, to the buoyant U.S. and European markets, which have retained much material formerly shipped to the Pacific Rim, Crabb said. As a result, there’s been a contraction in the scrap discount on certain grades, aided by production cutbacks at some mines. The future course of the market will be affected by the size of LME stocks, Japan’s economic situation, and the “permanently rumored” primary copper production increases, he said.

Lead has been perhaps “the strongest of all metals in terms of demand in the Asia region,” with a shortage of lead scrap traced to Basel Convention trade restrictions and a mild winter in the northern hemisphere, which resulted in fewer batteries being available for recycling, Crabb said.

Stainless Focuses on Long-Term Prospects

World stainless steel production totaled a record 16.5 million mt in 1997, while the scrap melt ratio has increased in both the United States and worldwide, said Thomas Netzer of Nicroloy Co. (Pittsburgh) in a report read by Stainless Steel & Special Alloys Committee Chairman Barry Hunter of Keywell L.L.C. (Elizabeth, N.J.).

In terms of stainless scrap exports, the United States shipped about 325,000 mt, exceeding the 1996 level of 303,000 mt. Exports have increased, in part, because traders have tapped inland scrap supplies, using barges to bring the material to coastal ports, Netzer noted.

On the production side, excess world supplies of stainless steel are being shipped to the United States. These imports will likely prompt U.S. mills—which recently filed an antidumping petition—to lower production and decrease demand for stainless scrap. In the long term, however, mill demand for stainless scrap will continue to be strong, Netzer said.

The problem will lie in the dwindling supply of scrap due to a drop in C.I.S. scrap and inadequate generation of obsolete scrap. As Netzer explained, “the amount of obsolete scrap coming into the marketplace today is being generated from production levels of 20 years ago, causing a large shortage” in relation to today’s higher production levels.

If this scrap shortage occurs, the scrap melt ratio could decline as much as 5 percent, Netzer concluded. For European stainless producers, demand for product is strong and inventories are slim.

The main problem is scrap availability, with the question being whether there will be sufficient quantities available or whether they’ll have to cut production, said Ruurd Werner of Edelstahl Recycling GmbH (Offenbach, Germany).

In Japan, stainless steel production reached a record 3.3 million mt, but it has declined considerably in 1998 due to diminished domestic demand and lower purchases from Korea, noted Hideo Itoh.

In terms of stainless scrap, Japan has an estimated 1.35 million mt available. Since August 1997, the price for 304 scrap has declined 21 percent to about $577 per mt delivered, Itoh said.

In 1997, Japan exported a negligible 7,000 mt of stainless scrap, while importing 204,000 mt, mostly from Taiwan and Korea. In January, Korea’s currency crisis prompted processors there to sell 7,000-plus mt of stainless scrap to Japan—a record given that Japan usually buys about 10,000 mt annually from Korea, Itoh noted. Japan’s main hope for recovery lies in its government’s new economic policy, he said.

Paper Perks Along

Overall, 1997 was a relatively strong year for U.S. paper recyclers. About 45 million tons of paper was recovered in the United States—2.1 million tons, or 5 percent, more than in 1996, reported Steve Vento of Recycled Fibers International (Sunrise, Fla.). Of that total, OCC accounted for 22.5 million tons, while ONP represented 8.5 million tons, he said.

U.S. consumers recycled 36.5 million tons, or 81 percent, of domestic scrap paper, while the remaining 7.5 million tons was exported—more than 4.8 percent more than 1996 exports, he noted.

Current market conditions, however, “aren’t as strong as we had in 1997 or the first couple of months in 1998,” Vento stated. In early April, the corrugated sector weakened due to significant downtime by linerboard producers, as well as a dropoff in exports to the Far East. In response, buying prices “decreased to the lowest levels we’ve seen in a number of months” and OCC quantities have dwindled, he noted. This situation could turn around soon, however. “When linerboard producers start up, they may find the supply lines have somewhat been depleted and they may have to increase their buying prices to reopen them,” he said.

Demand and prices for mixed paper began weakening in mid-April in response to the effects of the weaker corrugated market, Vento said. Other grades—such as #8 deinking news, wood-free deinking grades, and pulp subs—have generally been moving well this year, he added, although prices have decreased in many cases.

Though overseas container rates are low now, “the strong dollar has hurt sales to European customers and the financial crisis in the Far East has certainly not helped exports,” Vento said, concluding that uncertainty seems to be defining the U.S. market as it enters summer.

U.K. paper recyclers have seen the upward trend of 1997 continue into 1998, with paper and paperboard production increasing 2.9 percent to just over 1 million mt through February and scrap consumption growing 4.2 percent to 780,000 mt in the same period, noted John Cutts of Cutts Bros. Ltd. (Doncaster, Yorkshire, England).

“Most U.K. mills have been busy in the first quarter, resulting in healthy demand for most grades of scrap paper,” while exports to near Europe also remain good, he reported.

Of note, the U.K. chancellor increased the landfill tax in his budget, which is expected to “encourage diversion of recoverable material away from landfill to recovery and recycling routes,” Cutts noted.

Offering a look at the Latin American paper market, Giampiero Magnaghi of Macpresse srl (Milan) noted that the region has about 400 paper mills that produced 12.7 million mt of paper and paperboard in 1996. Brazil was the largest single producer at 5.9 million mt, with Mexico second at 3.2 million mt, and Argentina third at 1.1 million mt.

In terms of recovered paper consumption, Latin American mills used 6.1 million mt in 1996 against domestic collections of 5.1 million mt, Magnaghi said. Mexico was the largest consumer at almost 3 million mt, with Brazil being second at 1.8 million mt, and Argentina third at 499,000 mt. 

On the collection side, Brazil recovered the most scrap paper in 1996—1.8 million mt—while Mexico collected 1.7 million mt, Argentina gathered 485,000 mt, and Venezuela 281,000 mt, Magnaghi reported.

Mexico was by far the largest importer of scrap paper in 1996, buying almost 1.3 million mt, while Venezuela was a distant second at 142,000 mt, he said. 

Five Decades of Steel Changes

In the past 50 years, world steel production has grown fivefold, with the most rapid growth occurring in the “glorious 30” years from 1945 to 1975, noted Marcel Genet of Laplace Conseil (Beaumont-en-Auge, France). When the Asian economic crisis passes, world steel production could enter a new era of rapid growth, he stated.

Globally, the steel industry is becoming more privatized, moving more and more out of government hands and influence. There’s a trend away from “national champion” steelmakers toward megamerger global steel companies, Genet said. In 10 years, he maintained, the top-10 steel firms could account for 400 million mt of production—about half of current world steel production.

Since the 1940s, Asia has grown the fastest in crude steel production, while electric-arc furnaces have been the fastest-growing steelmaking technology, Genet said. The flexibility of the electric-arc process promotes competition among domestic scrap and other raw materials such as pig iron, DRI, and imported scrap, he noted. This competition has shifted much of the economic risk of managing raw materials from steelmakers to processors, prompting Genet to ask: “Is it possible to design a ‘scrap futures’ market to better allocate risk between players?”

Given that scrap is becoming the primary source of iron units in world steel production, scrap processors will continue to serve a major, albeit changing, role in the future. Steelmakers will increasingly question the “value-added” aspect of scrap suppliers, who must respond by expanding their roles to include international trader, environmental agent, technical processor (with a focus on quality and regularity), and service/logistical expert, Genet said.

Successful scrap companies in the future, he asserted, will grow and “internationalize” their operations and assets; consolidate to retain competent staff and diversify skills; balance their trading culture with strong engineering skills; and balance short-term profits and long-term optimization.

Aluminum’s Story

Using two aluminum cans of Coca-Cola as props, Francois Herbulot of Affimet (Compiegne, France) and Guy Cohen of Malco/Trafigura (Paris) offered a condensed history of aluminum, including primary and secondary production and scrap processing. From its discovery in 1807, aluminum has been used in myriad applications, from airplanes to beverage cans to automotive parts to wire, and more.

Primary aluminum, they explained, comes from bauxite ore, which is refined into a concentrate called aluminate, then refined into aluminum with common purity of 99.7 percent, which is alloyed to suit its application, said Herbulot and Cohen. 

In terms of aluminum scrap, there’s new scrap from manufacturing operations and obsolete scrap, which must be melted in secondary smelters to a specific alloy content. Both primary and secondary aluminum are quoted on the LME, giving buyers and sellers the opportunity to hedge their trades and protect themselves against market volatility.

In the future, there will be increasing use of aluminum alloys incorporating such metals as bismuth and antimony, as well as new products using nonmetallic components such as aluminate fibers or silicon carbides, and bimetallic products composed of aluminum and stainless steel rolled together. These will present new challenges for scrap recyclers, Herbulot and Cohen said.

Nickel—Down New, Deficit Later?

How will the Asian crisis affect the stainless steel and nickel markets in 1998 and beyond? That was the question explored by Francois Sauvage of Eramet International (Paris).

The crisis could drive Asian stainless consumption down 4 percent and could limit world consumption growth to 0.5 percent compared with 1997, he said. Similarly, the crisis could hold Western World stainless production flat at around 16.3 million mt and nickel demand at 0 percent growth this year. By area, Japan could show the greatest decline in stainless production, dropping 10 percent in 1998, while U.S. production could slip 2 percent, European production could grow 3 percent, and Asian production could expand 6 percent—a considerable slowdown from its 21-percent production growth in 1997, Sauvage reported.

In the price arena, both stainless and nickel will continue to experience erosion through 1998, Sauvage said.

As for nickel, Western World supply in 1998 could increase only 2 percent to about 719,000 mt due to production cuts and disruptions, he stated. New nickel projects—such as Raglan, Silver Swan, and Fortaleza—will begin to produce, though new integrated projects—including Hartley, Bulong, Cawse, and Murrin-Murrin—will have little or no effect on the market. Cuba will also likely exhibit slower growth, and Russia will continue to be an unknown in terms of production, internal consumption, and destocking, Sauvage said.

On the demand side, Western World apparent nickel consumption could total 933,000 mt this year, virtually unchanged from 1997.

In the long term—from 1999 to 2010—nickel consumption is expected to grow 2.6 percent a year, driven by stainless steel consumption growth of 3.3 percent a year, Sauvage asserted.

There will be a gradual increase in Western World supply, which could create a nickel surplus through 2005. Afterward, the market could slip into deficit, which would mean more nickel projects would be required, he said. Currently, enough nickel resources have been identified to avoid a prolonged shortage.

A World Paper Review

Examining global paper markets, Ilpo Ervasti of Jaakko Poyry Consulting Oy (Vantaa, Finland) noted that world consumption of paper and paperboard totaled 281 million mt in 1996 and is expected to grow 2.8 percent a year to reach about 420 million mt by 2010. North America, Western Europe, and Asia together produce and consume about 90 percent of world paper and paperboard.

Global paper recovery, meanwhile, totaled 120 million mt in 1996 for a world recovery rate of 43 percent, with North America, Western Europe, and Asia collecting more than 75 percent of recovered paper, Ervasti noted. By region, Western Europe had the highest recovery rate of 50 percent in 1996, followed by North America at 45 percent, Asia at 38 percent, Eastern Europe at 36 percent, and Latin America at 33 percent, he said.

Of the paper recovered worldwide, about 18 million mt—or 15 percent—is exported. The United States and Western Europe are and will continue to be the largest exporters of recovered paper, while Asia is and will continue to be the largest importer, Ervasti said.

In terms of general trends, the future will see increasing collection and use of recovered paper. As recovery increases, however, “the quality of recovered paper is likely to go down because more intensive recovery and new sources will inevitably increase the proportion of lower grades,” Ervasti asserted. “This puts great pressure on keeping the quality of recovered stock and collection costs at an acceptable level in the long term.” In particular, there will be “a shortage of quality OCC and the best white grades in the long run” and “an oversupply of low-quality mixed grades,” he said.

A Waste/Nonwaste Distinction

As with most countries, France has grappled with the question of which materials should be viewed as wastes and which should be considered nonwastes.

According to Alain Strebelle of France’s Ministere de l’Amenagement du Territoire et de l’Environnement (Paris), if a material has a “usage value,” it becomes a nonwaste in France.

To have a usage value, the material must meet four conditions:

• There must be a real market for it, with identifiable users and generally accepted conditions for its use and sale.
  
• There must be a written contract between the supplier and the user to ensure that the material is being sold and won’t be abandoned.
  
• There must be clear specifications defined by the user, or other national/international specifications that define the parameters of the material’s sale and use.
  
• There must be a continuous, durable market for the material, not simply a spot market for it.
  

This new practice of distinguishing wastes from nonwastes is “a revolution in terms of the French approach,” Strebelle said.•