May/June 2011
As the economy recovered and commodity prices boomed, 2010 turned out to be a much better year than expected for the U.S. scrap recycling industry, leaving market participants hopeful for further gains in 2011.
By Joe Pickard and Tom Crane
What a difference a year makes. At this time last year, the outlook for commodities in general and the scrap recycling industry in particular was looking up but still far from clear following the economic train wreck of 2008 and 2009. By the end of last year, however, the industry’s growing strength was undeniable, with its revenue rising approximately 40 percent compared with 2009, to just over $77 billion, according to ReMA estimates. That turnaround reflected improved demand for raw materials, thanks to healthier manufacturing activity in the United States and overseas, as well as the surge in commodity prices that drove tags sharply higher for everything from copper to steel to paper.
Underpinning last year’s solid recovery in commodity prices was the continued expansion in the global economy. The International Monetary Fund (Washington, D.C.) reports that the world economy grew just over 5 percent in 2010 after contracting 0.5 percent in 2009. Emerging and developing economies were the driving force behind the economic recovery, growing 7.3 percent in 2010 compared with the developed economies’ more meager 3 percent growth, IMF data note. Among the developing economies, China continued to play an outsized role in terms of economic growth and demand for commodities. The numbers tell the story: In 2010, China imported 165 million mt of coal, more than 30 million mt of bauxite, 25 million mt of nickel concentrate (gross weight), nearly 3 million mt of refined copper, and more than 1.6 million mt of zinc concentrate (metal content), in addition to approximately 4.8 million barrels of crude oil per day, according to figures from Barclays Capital (London) and Reuters (New York). China’s ongoing need for raw materials to fuel its rapidly expanding economy, which the IMF says grew 10.3 percent last year, was perhaps the primary fundamental factor supporting commodity prices.
More surprising last year was the developed economies’ strong showing across manufacturing sectors. In the United States, industrial production rose 5.3 percent, including double-digit gains in the production of machinery (up 16 percent), fabricated metal products (up 14 percent), computer and electronic equipment (up 12 percent), and motor vehicles and parts (up 10 percent), according to figures from the Federal Reserve (Washington, D.C.). In addition to boosting growth overall, the recovery of the U.S. manufacturing sector boosted demand for raw materials, which also helped drive commodity prices higher.
It wasn’t all good news for the U.S. economy last year, however. The labor and housing markets remained two of the biggest drags on recovery. At 9.6 percent, the U.S. unemployment rate reached its highest level since 1982, with the official number of unemployed individuals hovering around 14 million at year’s end. In the housing market, existing home sales declined 5 percent in 2010, the National Association of Realtors (Chicago) reports, while new home sales dropped 14 percent, according to the Bureau of the Census (Washington, D.C.). The fragile state of the U.S. recovery might have indirectly helped boost commodity prices, as ultra-low interest rates at home and abroad pumped fresh liquidity into the markets, and a weaker dollar in the second half of the year made dollar-denominated commodities more attractive overseas.
The improved fundamental scenario and liquidity conditions also attracted greater commodity investment demand. According to Barclays Capital, total institutional and retail commodity assets under management increased by $100 billion to reach $376 billion by the end of 2010. The largest commodity investment inflows for the year, Barclays says, went to precious metals ($23.6 billion), energy ($20.4 billion), agriculture ($12.2 billion), and base metals ($6.7 billion). It’s worth noting that, according to bank estimates, inflows into exchange-traded products, or ETPs, exceeded $19 billion last year, bringing ETP commodity assets under management to approximately $155 billion.
Renewed investor demand combined with the global economic recovery and positive fundamental outlook to propel commodity prices higher in 2010. The Dow Jones UBS Commodity Index, which tracks exchange-traded futures on 19 physical commodities, surged 17 percent in 2010. Scrap prices benefited as well. The ReMA index of ferrous scrap, nonferrous scrap, and recovered paper prices rose 43 percent last year, as the total annual volume of scrap commodities processed in the United States exceeded 130 million mt, ReMA data show.
That’s the big picture. Here’s a closer look at the performance of the major recycled commodities last year.
Aluminum: Aluminum prices were more stable than other base metal prices last year, yet the light metal still managed to post impressive gains. LME three-month aluminum averaged $1 a pound in 2010, a 30-percent increase compared with 2009, as LME inventories remained large but declined about 350,000 mt, to just under 4.3 million mt by year’s end. In response to improving market conditions, global primary aluminum production increased 11 percent, to more than 40.4 million mt, as China’s output exceeded 16.1 million mt, according to figures from the International Aluminium Institute (London).
In North America, improving demand from the aerospace, automotive, and industrial sectors and better pricing boosted the aluminum industry’s financial performance, but primary aluminum output stagnated. The Aluminum Association (Arlington, Va.) estimates that U.S. primary aluminum production basically held steady at 1.73 million mt, while Canadian output dropped to 2.96 million mt, resulting in a 1-percent decrease in North American primary aluminum production last year.
For the U.S. aluminum scrap industry, 2010 presented a welcome change. Though aluminum recovered from purchased scrap in the United States declined from 3 million mt in 2009 to 2.7 million mt last year, according to data from the U.S. Geological Survey (Reston, Va.), average secondary aluminum scrap prices generally improved 30 percent to 45 percent last year, and export demand picked up as well. The 15-percent increase in overseas aluminum scrap shipments (including all-aluminum used beverage cans and remelt scrap ingot) boosted export volume to 1.9 million mt, Census Bureau figures indicate.
Copper: The ramp-up in global refined copper production was unable to meet the surge in global apparent refined copper usage in 2010, giving the market its first global deficit since 2007, reports the International Copper Study Group (Lisbon, Portugal). According to ICSG, the global copper deficit in 2010 exceeded 250,000 mt on the back of stronger demand in the European Union, Japan, and the United States. Even though total refined copper production improved 4 percent, to more than 19 million mt, last year (including a 20-percent jump in production from copper scrap, to 3.4 million mt), apparent usage surged more than 1.2 million mt to hit 19.3 million mt, ICSG says.
As demand improved, inventories declined and prices shot up. Throughout the year, combined stocks at the LME, Comex, and Shanghai Futures Exchange decreased more than 20 percent, settling around 495,000 mt at the end of 2010. At the same time, the LME three-month average copper price advanced 46 percent for the year, to $3.43 a pound. As refined copper prices rose, China’s imports of refined metal fell 22 percent, to 2.9 million mt, but its imports of copper scrap reportedly increased 9 percent, to 4.4 million mt.
In the United States, demand for copper scrap also improved. U.S. copper scrap consumption rose to 830,000 mt in 2010, including 160,000 mt of old scrap and 670,000 mt of purchased new scrap, according to USGS figures. The rise in overseas demand for scrap and accompanying surge in prices yielded sharp improvement in copper scrap export sales.
According to Census Bureau data, the volume of U.S. copper scrap exports grew 22 percent last year, to 1.03 million mt, and export sales revenue spiked 77 percent, to more than $3.5 billion.
Iron and Steel: After seesawing for much of 2010, ferrous scrap prices ended the year on a high note, as demand improved and scrap collection rates in the United States slipped due to dismal winter weather. For the year, the U.S. average composite No. 1 HMS price jumped 60 percent higher, to around $332 a gross ton, according to Scrap Price Bulletin. Steel prices followed a similar trajectory thanks to improved demand, with spot hot-rolled coil prices ending the year around $700 a short ton, up about $150 a ton compared with 2009.
As steel prices recovered, world crude steel output set a record, surging 15 percent in 2010, to more than 1.4 billion mt, the World Steel Association (Brussels) reports. That figure includes major increases in all the key steelproducing countries, with China up
9 percent, to 627 million mt; Japan up 25 percent, to 110 million mt; and the United States up 38.5 percent, to 80.6 million mt. Worldsteel also reports that global apparent steel consumption increased 13 percent in 2010.
In the United States, the steel industry posted a healthy recovery in 2010, with production and capacity utilization rates increasing significantly. In addition, USGS reports that U.S. apparent steel consumption (defined as steel shipments + imports - exports + adjustments for industry stock changes - semifinished steel product imports) increased 30 percent in 2010, to 82 million mt, well below pre-recession levels but a sharp improvement compared with 2009. Total U.S. ferrous scrap consumption declined 3.8 percent, according to USGS. Even though ferrous scrap exports declined 8 percent, to 19.6 million mt, the value of those export shipments climbed 17 percent, to $7.4 billion, with Turkey and China remaining the leading destinations, the Census Bureau says.
Nickel and Stainless Steel: Global stainless steel production also set a record in 2010, expanding 25 percent, to roughly 30.7 million mt, according to the International Stainless Steel Forum (Brussels). China was the key driver of this growth, as its stainless steel production jumped 27.8 percent last year, to 11.3 million mt, accounting for more than one-third of global production.
The surge in stainless steel output had positive repercussions for global nickel demand, which rose from 1.24 million mt in 2009 to 1.47 million mt in 2010, reports the International Nickel Study Group (Lisbon). At the same time, primary nickel production increased from 1.33 million mt to 1.44 million mt last year. The improved demand for nickel and stainless steel products boosted prices for stainless steel, stainless scrap, and nickel. LME three-month nickel prices, though volatile, increased nearly 50 percent last year to average $9.92 a pound, or approximately $21,870 a mt. That rise in nickel prices helped work down LME inventories, which contracted 13 percent in 2010, ending the year at just under 137,000 mt.
In the United States, nickel scrap’s share of domestic nickel consumption increased to 44 percent. U.S. stainless scrap exports fell 17 percent, to 937,000 mt, but their value grew 20 percent, to more than $935 million, as improved sales to Taiwan and Japan more than offset lower shipments to China and India.
Lead and Zinc: Even though the surplus in the global zinc market exceeded the marginal surplus in the refined lead market in 2010, zinc managed to outperform her sister metal on pricing last year. Recent figures from the International Lead and Zinc Study Group (Lisbon) indicate that the 7-percent increase in refined lead production basically kept pace with the growth in demand, which exceeded 9.4 million mt, leaving a minor37,000 mt production surplus. In contrast, world refined zinc production outpaced usage by more than 258,000 mt, although the surplus represents just about 2 percent of annual global demand and was smaller than the reported production surplus in 2009.
As a result, though both LME three-month lead and three-month zinc prices averaged approximately 99 cents a pound in 2010, that represented a 30-percent increase for zinc compared with a 25-percent increase for lead. LME inventories for both lead and zinc increased by a similar amount—43 percent—last year, with lead stocks growing to nearly 209,000 mt and zinc inventories expanding to more than 701,000 mt by the end of 2010.
China again dominated the use of both metals among global consumers. ILZSG reports that Chinese consumption of refined lead increased 9 percent in 2010, to more than 4.2 million mt, while its refined zinc use grew 13 percent, to roughly 5.4 million mt, despite lower imports of both metals.
On the scrap export front, U.S. shipments of lead scrap plunged nearly 70 percent in 2010, to just 44,000 mt, due to reduced demand from Canada, South Korea, India, and China. U.S. zinc scrap exports, in contrast, grew in both volume and value, jumping 65 percent in volume, to 78,000 mt, and 57 percent in value, to $85 million, according to Census Bureau figures.
Paper and Recovered Fiber: After a disastrous year in 2009, recovered paper prices rebounded sharply in 2010, outperforming metal price gains. ISRI’s Recovered Paper Index—a composite of prices for Residential Mixed Paper (No. 1), Special News, De-ink Quality (No. 8), and Corrugated Containers (No. 11)—rose 90 percent in 2010, to approximately $111 a short ton. The improved prices coincided with higher production at U.S. paper and paperboard mills last year, which reflected higher consumer spending. According to RISI (Bedford, Mass.), U.S. paper and paperboard output in 2010 increased 5.3 percent, to 82.5 million tons. Mill capacity
utilization also reversed trend, rising from 83 percent in 2009 to 91 percent last year.
U.S. paper recovery efforts also improved, reaching 51.5 million tons in 2010, up from 50 million tons in 2009, and yielding a slightly higher recovery rate of 63.5 percent, according to the American Forest & Paper Association (Washington, D.C.). On the export side, the volume of U.S. scrap paper exports declined 1 percent, to 20.8 million tons, but the value of those shipments rose 27 percent, to more than $3.3 billion. The leading destinations included China, up 14 percent, to $1.8 billion; Mexico, up 72 percent, to $355 million; India, up 21 percent, to $241 million; and South Korea, up 69 percent, to $204 million. U.S. recovered paper prices remained firm as 2010 ended thanks to expectations of continued healthy demand at home and abroad.
Joe Pickard is chief economist and director of commodities and Tom Crane is director of membership for ISRI.
As the economy recovered and commodity prices boomed, 2010 turned out to be a much better year than expected for the U.S. scrap recycling industry, leaving market participants hopeful for further gains in 2011.