January/February 1997
Slower economic growth and the Sumitomo scandal were two of a handful of factors that blurred the market picture for many commodities last year. Though 1997 enters with uncertainty, it also brings the promise of greater market focus and, possibly, renewed momentum for some commodities.
By Robert J. Garino
Robert J. Garino is director of commodities for ISRI.
Most scrap recyclers will probably recall 1996 as a year that disappointed. A slow- to-moderating world economy, led by the United States, did little to rev up world business confidence. And though “fund involvement” on both the buy and sell sides had less of an effect on base metal prices last year than in 1994 and 1995, Sumitomo’s copper trading debacle on the LME last summer put a major dent in business confidence and took away whatever steam was building in nonferrous metals.
As in the final months of 1995 (déjà vu all over again?), recyclers of metallic and nonmetallic scrap commodities were struggling with reduced volumes, lower transacted prices, and thinner profit margins as 1996 wound down. And while some noted that these business conditions are typical for the fourth quarter, others asserted that the final lackluster months of 1996, on top of a less-than-robust first half, were a harbinger of slower times ahead.
But when asked whether an economic recession was likely in 1997, virtually no one was willing to go that far. The focus—or the conviction—was simply not clear or certain enough. Nevertheless, perhaps as a means to hedge this fuzzy view, the term “growth recession” was used on more than one occasion to describe the uncertain 1997 economic climate.
Reports show that U.S. economic growth did indeed slow in the summer months of 1996. Following what economists termed a “sizzling” 4.7-percent second-quarter annual growth rate, the nation’s gross domestic product (GDP) tapered off to a more tepid 2-percent rate in the third quarter. Consumer spending, which makes up two-thirds of the overall economy, was at its weakest level in five years.
Most economists attributed the second-half slowdown to a sizable buildup in inventories of finished goods in the first half of 1996 (a buildup reflected in the third-quarter GDP figures), thereby suggesting that destocking will have to occur before significant growth can resume. Scrap processors and consumers echoed this sentiment, partially blaming the abundant inventories for their diminished business activity in the final months of last year.
Yet most economists were not unduly alarmed by the mid-1996 slowdown. Donald Straszheim, chief economist for Merrill Lynch (New York City), remarked in September that “nearly everything about the U.S. economy appears almost perfect: moderate growth, low inflation, ongoing job creation. What could possibly go wrong?”
What indeed.
As economists and industry participants look ahead, they wonder whether destocking will actually happen and, if so, whether the U.S. economy will continue to post quarter-on-quarter GDP increases. While some say yes, others remain skeptical. “We haven’t seen a negative quarter since early 1991,” notes one metals analyst, asserting, “It can’t go on forever.”
Or can it?
According to an August 1996 survey by the Federal Reserve Bank of Philadelphia, the U.S. economy will grow slower in 1997—but still grow—with real GDP increasing at an annual rate of 1.9 percent through the first three quarters and 2.2 percent for the whole year. Despite this deceleration, the group did not expect the economy to experience a negative quarter.
On the other hand, a minority of analysts holds that the North American economy is far from tired from its almost six-year expansionary run. For one, Stephen Roach, chief economist for Morgan Stanley (New York City), remarked last November that 1996’s third-quarter weakness was “transitory” and predicted that the final quarter of 1996 would show 4-percent growth.
Outside the United States, Canada’s economy is expected to grow 2.7 percent in 1997, according to the Conference Board of Canada (Ottawa), while Merrill Lynch sees a 4-percent growth rate for the major industrialized countries this year.
What does all this mean for the scrap industry in 1997? Will creeping inflation coupled with “growth recession” characterize the year? Or are the United States, Europe, and the Pacific Rim on the brink of renewed economic vigor?
Interestingly, the predictions offered by recyclers for 1997 echoed the views they expressed for 1996. The consensus for the new year, as for last year, seemed to center on modest growth and, importantly, no recession. ReMA President James A. Fisher of Fisher Steel and Supply Co. (Muskegon, Mich.), for one, was in general agreement with that macroeconomic assessment.
But when it came to price predictions, however, recyclers were much less optimistic for 1997 than they were for 1996. Also, Fisher saw the potential for increased regional competition from larger scrap processors as a bigger challenge than commodity prices.
In addition, some recyclers expressed concerns over the anticipated level of consumer spending, noting that rising long-term interest rates would temper borrowing and spending and that there is higher potential for inflation based on world oil markets failing to reach expected production forecasts.
Long out of the news, world oil prices could prove to be especially volatile this year, assuming a cold winter, resumed Western World economic growth, and the potential for supply disruption in the Middle East. The Centre for Global Energy Studies (London), in fact, asserts that oil prices in 1997 will prove “very, very difficult to predict.” Almost as proof, the group’s own prediction reveals a $12 gap between its lowest and highest estimates—$12 vs. $24 a barrel—for oil by year’s end.
Thus, with uncertainty firmly planted, scrap recyclers, brokers, and consumers were asked to share their opinions about market prospects for 1997. Here’s what they had to say.
Aluminum
The 1994-1996 period proved to be a roller coaster ride for both the world and domestic aluminum industries. Looking back, the now-famous memorandum of understanding that was forged among primary aluminum producers in February 1994, clearly helped curb the then-growing supply of aluminum, thereby reducing world stocks. This decrease in supply coupled with increasing demand pushed LME aluminum prices higher through 1994 and into 1995.
This uptrend, however, changed direction midway through 1995 and continued downward last year. By early October 1996, in fact, LME values were around $1,315 per mt (591/2 cents per pound)—the lowest level in 21/2 years. The explanation was that fresh demand for the light metal around the globe could not absorb the combined supplies of Western production and Russian exports. Even though Western World producer stocks declined last year, the focus was more on the growing LME-held stocks that reportedly had a depressing effect on prices.
Closer to home, ED&F Man (New York City) described last year’s U.S. aluminum market as “depressed by weak sentiment, speculative selling, and stock increases,” while domestic producer Alumax Inc. (Norcross, Ga.) predicted that U.S. aluminum consumption would decline from 5.25 million tons in 1995 to 5.1 million tons in 1996.
Looking toward 1997, industry participants were hardly enthusiastic or particularly bullish. “It won’t be a runaway year,” says one eastern processor/trader. Most 1997 price predictions offered earlier last year were toned down as the year progressed. ED&F Man, for one, saw LME aluminum bottoming out last year at 58 cents per pound, touching a 79-cent high this year, but averaging only 69 cents for all of 1997. JP Morgan & Co. (New York City) and Rudolf Wolff & Co. Ltd. (London) were more optimistic, predicting a 1997 LME three-month average of 76 and 79 cents per pound, respectively. ING Barings (Amsterdam) also forecast a higher world aluminum price of $1,650 per mt—about 75 cents a pound—or about 6 percent higher than its 1996 estimate.
As for scrap, many cautioned that the expected reduction of Russian-origin aluminum imports into the United States this year could pressure scrap processors and consumers. In particular, sheet mills could be significantly more dependent on scrap this year because less off-grade Russian aluminum could be available to domestic consumers. “Scrap will be in greater demand,” agrees a Midwest secondary smelter, who predicts rising secondary ingot prices thanks to firm demand from the automotive sector and increased competition for aluminum scrap.
Copper
No discussion of the world copper market would be complete without understanding last summer’s multibillion-dollar copper trading scandal involving Sumitomo and the LME. This debacle not only rocked the foundation of the LME, but also unsettled domestic copper trading on Comex.
The initial exposure last May of the huge speculative and unauthorized trades made by Sumitomo’s chief copper trader created a selling frenzy that toppled LME copper values from $2,715 per mt, or $1.23 per pound, to a low of $1,736 per mt, or 79 cents per pound, in a matter of weeks. Far from being limited to copper, market fallout from the scandal also pulled down other LME-traded metals, and its effects reverberated throughout the rest of 1996.
Prior to the scandal, market watchers were preoccupied with whether copper’s fundamental picture was shifting from one of deficit to surplus, with most forecasts offered early in 1996 predicting a potential surplus and, hence, lower prices.
As 1996 wound down, optimism in the red metal gradually returned as buyers and sellers reassessed copper’s underlying strength. Demand was holding, and by mid-November LME stocks had fallen to more than a six-year low. Consumption, many pointed out, was being underestimated while potential new supply was being overestimated. Conflicting reports appeared, with some analysts placing the world market in surplus and others saying it was in deficit.
Rudolf Wolff was in the surplus camp, estimating that 1996 world copper output of about 10.5 million mt would exceed consumption by as much as 250,000 mt. Similarly, Brandeis (Brokers) Ltd., another London-based firm, projected that Western World copper supply would outstrip demand by 100,000 mt in 1996 and 240,000 mt in 1997. And in November, Richard de J. Osborne, president and CEO of Asarco Inc. (New York City), forecast a small statistical surplus of 68,000 mt this year.
Conflicting forecasts and lower average second-half 1996 prices notwithstanding, not all were discouraged with the copper market. Paced by the United States, Western World demand proved resilient and supplies have, in fact, not overwhelmed the market. One Midwest scrap processor says he expected last year to be a down year all around but found it to be “beyond all expectations.” The major depressant, he notes, was the difficulty in securing copper scrap, which—more than price—caused market anxiety among processors.
Recent 1997 copper price forecasts reflect general uncertainty and are predominantly conservative and cautious. The Economist Intelligence Unit (London), for example, predicts an 85-cent-per-pound average this year and 77-1/2-cent average for 1998, while Rudolf Wolff places the LME three-month average lower at 79.4 cents for 1997. A more optimistic Billiton Metals (London) projects the cash copper average at 90 cents in 1997 based on a relatively small copper surplus of 75,000 tons.
With copper, it seems, there is never a dull moment—and seldom is there ever a correct price forecast.
Iron and Steel
Last year, the U.S. steel industry racked up another year of impressive shipment numbers despite some first-half market disruptions in the domestic economy, including a strike at General Motors, difficult winter weather, and—to a lesser extent—a partial federal government shutdown. Even with these setbacks, domestic shipments through the first nine months of 1996 were running 3.1 percent ahead of comparable 1995 numbers, according to the American Iron and Steel Institute (Washington, D.C.). And it was expected that shipments would exceed 98 million tons for all of 1996, which would place them above the 1995 total of 97.5 million tons.
This growth in shipments was attributed to marked growth in the output of capital goods last year, increased use of steel in automobiles and nonresidential construction, and greater export opportunities.
Despite these impressive domestic shipment and consumption numbers, mills were quick to note that weakness was evident in prices for finished products, which resulted in disappointing profits for many steelmakers at mid-year. Sheet steel price hikes announced last year were only partially successful, and a slower U.S. economy coupled with noteworthy imports reportedly limited the upside.
Most steel forecasters, however, remained upbeat as 1996 wound down. In 1997, they conjecture, domestic demand will be paced by new car and light-duty truck sales, which are expected to be around the 15.2-million mark. If correct, 1997 would be the fourth consecutive year in which auto sales topped 15 million.
Though the International Iron and Steel Institute (IISI) (Brussels) predicts that U.S. steel usage will decline slightly in 1997 to 110 million tons compared with 1996, a domestic steelmaker predicts that domestic consumption will grow 2 percent this year, though he expressed concern about a buildup of finished steel inventories. In addition, an analyst with JP Morgan warned that imports will negatively affect carbon steel prices this year.
Internationally, 1996 world steel consumption was expected to total about 724 million tons, with 1997 global consumption forecast to climb to about 748 million tons, up 3.4 percent over 1996, says IISI.
In the ferrous scrap arena, the domestic market took several hits in September and October, as the published composite price for No.1 HMS fell more than $20 per gross ton. Part of the problem was that the anticipated expansion of electric-arc furnace capacity did not create a scramble for ferrous scrap.
In 1997, however, electric furnace expansion is expected to exert upward pressure on scrap and create strong merchant demand for scrap alternatives such as DRI, HBI, and iron carbide. Optimistic analysts note that more than 10 million tons of new or expanded hot-rolled minimill steelmaking capacity is expected to come on-stream between 1997 and 1998. And by 2000, there will be 20.8 million tons of new steel and plate production from the minimills, according to an analyst at UBS Securities (New York City).
Lead
Among the nonferrous base metals, lead came closest to the forecasts presented the year before. And not only were the numbers close, but the reasons that backed up the forecasts were, in fact, the very reasons why lead performed as it did—at least through the first half of the year. Admittedly, the expectations for 1996 were rather modest in that most saw lead averaging in the low-to-mid-30s-cent-per-pound range, making their predictions at a time (November 1995) when lead was hovering right around the 30-cent level.
Underpinning the 1996 lead market on both sides of the Atlantic was the belief that refined lead supplies would fall short of expected demand from the battery sector. If this shortfall occurred, then relatively low lead inventories would be called on to fill the gap, thus providing upward price momentum.
This basic scenario proved correct through May of last year, with LME lead briefly posting a 51/2-year high of 37 cents per pound. This would prove to be the high water mark for the year for, by mid-November, lead had slumped to a 10-month low of 31 cents and LME lead stocks were on an uptrend.
Apparently, industry participants didn’t count on a relatively cool summer, which held back automotive battery replacement demand, or on the quantity of Chinese lead that found its way onto the world market. The 1996 lead deficit that some said would easily exceed 100,000 mt was revised to a more modest figure.
Lead forecasters received more eye-opening news last October when the International Lead Zinc Study Group (ILZSG) (London) predicted that world lead production will exceed consumption this year, with both the global and Western World statistical balances in modest surplus in 1997. If realized, it would be the first such surplus since 1994. Bud DeSart, director of purchasing for GNB Technologies Inc. (Atlanta), concurs with this prediction, asserting, “I wouldn’t have guessed last January that supplies would catch up with, much less surpass, consumption by the fourth quarter. But it seems true.”
Yet not all agree with this bearish view. Exide Corp. (Reading, Pa.), for one, expects a 74,000-mt deficit in Western World supplies this year and, with it, an LME average price of 38 cents per pound. Giving credence to this more optimistic outlook, Rudolf Wolff projects a similar average lead price around 37.2 cents, while Brook Hunt (London) looks for an even more upbeat 39-cent average for the year.
Nickel and Stainless Steel
Nickel and stainless market watchers entered 1996 with lofty expectations, with several forecasts offered in late 1995 calling for LME nickel to trade above $4 per pound throughout last year. One optimistic producer even considered world market fundamentals to be bullish enough to support a price spike to $6 per pound.
As it turned out, nickel has underperformed even the most conservative estimates. After peaking last February at a monthly average high of $3.77 per pound, LME nickel has trended inexorably lower. By mid-November, the three-month price fell to $3.02, the lowest level since October 1994. While traders were quick to assert that the drop was “technically inspired,” the general sentiment was far from bullish based on perceived depressed business conditions.
Domestic prices for 18-8 stainless steel scrap, meanwhile, also trailed off to more than a two-year low, touching $740 per gross ton, delivered.
Nickel prices were largely held back by the stainless steel industry, which continued to work off excess inventories. As a result, fresh Western World nickel consumption was running below the previous record-setting year, while Western World nickel production was approaching a record level. The net result, from a supply-demand perspective, was that the 50,000-mt deficit assumed for 1996 turned into a near-balanced market by the third quarter. According to John G. Reid, executive director of Queensland Nickel Industries Ltd. (Townsville, Australia), Western World nickel supplies were expected to total 876,000 mt in 1996, leaving a statistical deficit of only 9,000 mt compared with projected consumption of 885,000 mt.
Despite nickel’s underachievement, however, analysts assert that the metal’s fundamentals remain constructive for 1997 and, thus, the lows seen in 1996 are expected to be short-lived. With stainless steel production projected to reach a record 16.7 million mt this year, according to Sammi Resources (Weland, Ontario), and stainless demand expected to continue growing, demand for nickel could exceed 1 million mt in 1997, says Inco Ltd. (Toronto).
As for nickel prices, projections range from the bearish to the bullish. On the low side, Billiton Metals places its 1997 LME price forecast at $3.30 per pound, while the Economist Intelligence Unit expects the world market to return to surplus this year, bringing with it a cash LME average of $3.64 per pound.
In the middle, Rudolf Wolff predicts a $3.76-per-pound average for the year, while Brandeis (Brokers) sees a $3.90-per-pound average.
On the high side, Roskill Consulting Group (London) pegs the LME cash average at $9,500 per mt, or $4.31 per pound, for 1997, noting that increased world nickel supplies, especially from Russia’s huge Norilsk complex, is far from assured. And topping the list, Merrill Lynch views a $4.50-per-pound nickel price within reach this year.
Paper and Plastics
As positive as many in the metalworking industries were about their expectations for last year, secondary paper and paperboard executives were far more tempered in their enthusiasm. And for good reason. Most recall how swiftly their markets changed from boom to bust beginning around mid-1995. They also know that, as recent history indicates, the paper market tends to recover more slowly than most metal markets.
Through mid-1996, prices for most grades of scrap paper continued a downward drift, with some recovery reported for OCC. In comparison, pulp substitutes were said to be in better shape, while the deinking grades were believed to be benefiting from announcements of mill capacity increases.
But by the fourth quarter, reports circulated that OCC was peaking and that there was simply not enough fresh business to support higher scrap prices. A slowing economy was being felt as processors cited mill downtimes, ample scrap inventories, a poor export market, and expected increases in scrap generation. These factors, brokers reported, would negatively influence both the high and bulk grades of scrap paper in the closing months.
Newsprint was particularly hard-hit last year. Publishers who were paying $740 per ton in early 1996 were seeing numbers closer to $500 in the final months of 1996, according to Bear Sterns (New York City). ONP prices, meanwhile, fell more than 20 percent as demand moderated and collections increased.
So, following the huge price gains in 1995 that were followed by even bigger losses in 1996, are paper markets set to recover in 1997?
Virtually no one believes that will happen. “Prices corrected, perhaps overcorrected, and will likely reflect historical trends in ’97,” opines one eastern processor, adding that paper and paperboard demand won’t surge in 1997 because the U.S. economy is expected to show only modest growth. Exports, meanwhile, should show recovery, but that will not significantly boost the market, he notes. Another Midwest processor echoed this basic sentiment but pointed out that planned new capacity additions will underpin OCC. This grade, which accounts for the highest amount of recovered furnish, is undervalued, according to several industry participants.
Plastics. While plastic industry recycling professionals were also disappointed with 1996’s performance, they were confident that, given the depressed state of PET and most other commodity-grade resins, prices have nowhere to go but up.
Downward price pressure, which first developed in 1995, continued through 1996, dropping PET by an additional 25 percent in the first half of the year. Capacity increases in virgin resin production coupled with falling export demand (principally Chinese) created a glut of “wide-spec” PET virgin material, which competed with processed plastic scrap. Recyclers believe this situation will remain a feature well into 1997.
Other recycled resins are expected to see consumption increases but generally stable prices. This assumption, however, is dependent on energy prices not making significant upward movement. Should crude oil prices firm dramatically in 1997, monomer prices will follow suit, analysts predict. At the same time, even with increasing raw material costs, others assert that intermaterial competition will limit upward price pressure.
Zinc
Over the past several years, the overwhelming negative influence on the world zinc market has been the level of slab zinc held by producers, consumers, merchants, and the LME. According to Cominco Ltd. (Vancouver, British Columbia), Western World zinc inventories peaked around August 1994 at 1.716 million mt.
By the fourth quarter of 1996, however, these stocks had fallen below 1 million mt. A closer look also shows that last year’s highly visible LME inventories dropped by more than 130,000 mt in the January-through-November period. Expressed in terms of weeks of consumption, zinc was at or near eight weeks’ worth in the fourth quarter of 1996 compared with more than 10 weeks in 1994.
It was, and is, because of these inventories that zinc prices have held within a narrow range in recent years, with the only change being the premiums paid for metal delivered to consumers.
Global zinc consumption, meanwhile, has recorded solid year-on-year increases in the past few years, but the market did not post a statistical deficit until 1995, according to ILZSG data. And the market has shown a shortfall ever since, with one estimate pegging the 1996 deficit at 175,000 mt. This shortfall was attributed to lower-than-expected Western World slab zinc production that, in turn, was attributed to lower-than-expected mine output, reports Billiton Metals. Yet, despite the persistent supply deficit, zinc prices have failed to react due to the relatively large overhang of metal built up earlier.
As for this year, world zinc consumption is again expected to outstrip production, with ILZSG projecting that supplies will reach 7.33 million mt, 3.9 percent greater than 1996, but be outstripped by demand, which will increase 2.8 percent to 7.77 million mt compared with 6.3 million mt in 1996. Other sources predict an even larger statistical shortfall.
On the domestic front, zinc executives are generally upbeat about the metal’s potential in 1997. Consumption prospects look encouraging, as demand from the automotive, building, and construction industries is expected to remain positive, according to galvanizers and zinc alloyers. Galvanizers, in fact, report some concern that they may not be able to meet their metal requirements as easily as before. Zinc premiums, they believe, will not move significantly lower than the 6-cent level, which prevailed in the fourth quarter.
Despite these rather bullish fundamentals, price forecasts are not overly optimistic. RTZ-CRA Plc (London), for instance, expects LME zinc to trade between $1,100 and $1,200 per mt, or 50 to 54 cents per pound, this year. In the same ballpark, Edward J. Schmidt, vice president of sales and marketing for Big River Minerals Corp. (Sauget, Ill.), sees zinc trading around $1,150 per mt, or 52 cents per pound, and Billiton predicts a 1997 zinc average of 53 cents per pound—an improvement over its 1996 estimate of 46.6 cents.
On the more bullish side, Metal Bulletin Research (London) foresees a $1,320-per-mt price, or 60 cents per pound, by year’s end. The major assumption behind many of these price predictions is that zinc stocks will continue to fall to around six weeks of consumption. •
Slower economic growth and the Sumitomo scandal were two of a handful of factors that blurred the market picture for many commodities last year. Though 1997 enters with uncertainty, it also brings the promise of greater market focus and, possibly, renewed momentum for some commodities.