May/June 1998
Asia’s financial woes didn’t stop 1997 from being an upper overall. But will the ripple effects slow world economies and hold down commodity markets in 1998 and beyond? Read on for some insights.
By Robert J. Garino
Robert J. Garino is director of Commodities for ISRI
From a purely financial perspective, 1997 may be remembered as a year that both surprised and delighted most everyone. After robust stock market performances in both 1995 and 1996, many investors and equity analysts expected the market to cool down, if for no other reason than to consolidate its record gains.
Not so. Wall Street roared ahead seemingly nonstop until the summer when the Southeast Asian nations of Indonesia, Thailand, Malaysia, South Korea, Taiwan, Philippines, and Singapore experienced financial crises large enough to potentially derail growth in the major industrial countries. Following a near-panic stock selloff in October, however, the Dow Jones Industrial Average regrouped, ending the year at 7908.25, a 22.6-percent increase over an equally impressive 1996.
The U.S. economy, as measured by the total value of goods and services produced, will also be remembered as one that surprised and delighted. The annual report of the president’s Council of Economic Advisers reported that “the past year saw the nation’s economy turn in its best performance in a generation.” Unemployment fell to a 24-year low while inflation declined to its lowest level since the mid-1960s. For all of last year, the economy grew at an inflation-adjusted 3.8-percent rate, its fastest since 1988. (It’s worth remembering that the economy has been expanding since March 1991, when the last recession ended.)
The U.S. economy’s juggernaut growth begs the question: Did the financial turmoil in Asia matter? Of course. But its effect on the U.S. economy probably won’t take effect until mid-1998. Even so, events in Asia aren’t expected to have a devastating effect on U.S. economic health. Most economists now believe that declining interest rates and low inflation expectations will outweigh the impact of America’s worsening trade position, as it becomes more of a net importer.
A word of caution: An economic slowdown is certainly possible, and it could drop the U.S. gross domestic product back to its long-run growth rate in the 2-to-2.5-percent range. The International Monetary Fund (Washington, D.C.) expects the U.S. economy to grow 2.9 percent this year and slow to 2.2 percent in 1999. Similarly, Asia’s economic upheaval is expected to diminish world growth from earlier estimates of 4.1 percent to a lower 3.1 percent in 1998, the group predicts.
Scrap Recyclers Surprised, Not All Delighted
For the scrap recycling industry, Asia’s financial travails last year were clearly a surprise, and certainly not greeted with universal delight. The crisis only added to the uncertainty already prevalent among buyers and sellers on the world commodity exchanges. Relatively stable prices for most nonferrous metals ultimately gave way to falling values in second-half 1997 and rapidly thinning margins that carried into 1998. Asia’s problems only exacerbated and magnified the changing fundamentals.
Domestic processors were also adjusting to a record number of consolidations that have been redefining the industry in the past two years. And this year is expected to be another significant year for scrap mergers and acquisitions.
Just how did the various commodity markets fare through all of the tumult in 1997, and what are their prospects midway through 1998? Here are some answers.
Aluminum
The domestic aluminum industry racked up many positives in 1997. According to the U.S. Geological Survey (Reston, Va.) and the Aluminum Association (Washington, D.C.), integrated producers poured only slightly more metal than in 1996 (up 0.7 percent) but shipped an estimated 22.6 billion pounds, 7 percent greater than in 1996. Of those shipments, the domestic market received 19.6 billion pounds, with exports absorbing the difference. Total apparent consumption of aluminum, as calculated by ISRI, rose 6 percent to 10.5 million tons last year.
Higher scrap consumption was also an important feature, with domestic processors and melters consuming 4.87 million tons of purchased old and new scrap—a 13-percent increase over 1996 that boosted scrap’s share of the market to a record 47 percent. Consumption of UBCs, which account for around 25 percent of total aluminum scrap consumed annually, also rose. Approximately 2.1 billion UBCs were melted last year, resulting in a recycling rate of 66.5 percent compared with 63.5 percent in 1996, according to the annual UBC survey of the Aluminum Association, Can Manufacturers Institute (Washington, D.C.), and ISRI. Aluminum scrap exports also increased last year, up 5 percent compared with 1996 but still well below the volumes exported a decade ago.
With the global aluminum market essentially in balance and prices tempered by the events in Asia last year, transacted prices exhibited modest volatility. Those closest to the industry believed that aluminum was, in fact, undervalued for most of last year. Average LME three-month prices ranged from a high of 79.6 cents a pound to a low of 68.8 cents. For the full year, the LME three-month average was 73.5 cents, 5.4 percent higher than 1996. Domestic alloy prices were about 12 percent higher, while UBCs averaged 60.3 cents last year, or 10.4 percent more than in 1996.
Midyear Outlook. The aluminum market is forecast to remain in balance until mid-to-late 1998 with a bias toward deficit or, at worst, a slight surplus on a global scale. Nevertheless, a number of analysts have lowered their 1998 price and consumption expectations from their forecasts offered earlier this year, mostly due to the Asian financial crises. Billiton Metals Ltd. (London) is forecasting cash LME to fall to an average of 65 cents a pound compared with 73 cents last year. Bear Stearns & Co. (New York City) also sees weaker average prices, with LME cash now at 68 cents—down from its earlier estimate of 80 cents.
Most contend that slower economic growth in Japan and East Asia, relatively low North American consumption prospects, Russian exports, and the potential for restarting idled capacity will keep a tight lid on aluminum prices for the balance of this year. George Haymaker, chairman and CEO of Kaiser Aluminum & Chemical Corp. (Oakland, Calif.), however, said that he believes LME aluminum is undervalued by 10 to 12 cents a pound based on current 1998 fundamentals, which he described as “strong.”
Copper
By most statistical measures, domestic and world copper industry participants enjoyed a banner year, at least from a consumption point of view. The International Copper Study Group (Lisbon) placed 1997 world copper consumption at 13.149 million mt, up 4.3 percent from 1996.
Consumption of refined metal in the United States, meanwhile, increased 2.5 percent from 1996 to 3 million mt—a record high, according to CRU Ltd. (London). Shipments of copper sheet and strip, and especially copper rod, recorded double-digit growth. Most brass mill products also fared well compared with 1996. The Copper Development Association (New York City) estimates that the nation’s brass mills consumed 1.98 million tons of copper while wire mills used 1.81 million tons, with both posting a 5.3-percent increase last year.
ISRI’s measure of apparent copper consumption, which includes scrap, net imports, and stock changes, shows total U.S. copper usage rose 4.6 percent to 4.26 million tons—also a record.
To meet this consumption figure, consumers purchased 1.57 million tons of scrap, increasing scrap’s share of the market to 37 percent, up from 1996’s 35 percent. Lower export demand for copper scrap last year added to the domestic scrap pool, with the U.S. Bureau of the Census reporting a 3-percent decline in scrap exports in 1997. Still, sourcing copper scrap was widely reported to be difficult for processors and consumers alike.
Despite the demand positives last year, average Comex and LME copper prices were lower compared with the averages recorded in pre-Hamanaka 1996. Spot Comex, for example, averaged $1.06 a pound, 2.2 percent lower than the previous year. From a mid-year high of $1.22 in June, prices trended down for the balance of the year, hitting a low of 76.6 cents. Not surprisingly, scrap values and supply also fell. No. 2 averaged 85 cents for the year, 1.4 percent lower than in 1996.
Midyear Outlook. Higher U.S. copper consumption is expected in 1998, with several analysts betting on demand increasing 3 to 3.5 percent. At the same time, Western World consumption prospects have been scaled back due to the financial crises in East Asia and Japan, which have affected all base metals.
Salomon Smith Barney (San Francisco) sees Western World refined consumption growing a respectable 2.5 percent this year, but shows supply increasing at the much faster rate of 4.3 percent. This suggests that copper surpluses will again be a feature in 1998, according to the firm—and many others. Several sources, in fact, expect that supply will exceed demand by several hundred thousand metric tons this year, thus keeping downward price pressure on refined metal and copper scrap.
Most price forecasts for this year are calling for lower averages compared with 1997. Several independent forecasts place copper’s range in the low-to-mid-80s-cent level as an average for spot refined metal. ED&F Man (New York City) agrees with that average, projecting that cash Comex could range between an expected high of 95 cents and a low of 65 cents.
Asarco Inc. (New York City) offers a more bullish view, however. While conceding lower Asian demand, the firm asserts that Chinese consumption, mine shutdowns and smelter cutbacks, and the relatively tight scrap market should keep refined copper consumption higher than expected. Its view, in fact, suggests that a Western World deficit of 81,000 tons may be in the offing this year.
Iron & Steel
As 1997 ended, virtually all steel industry participants were admitting that the domestic steel industry was in its best shape in two decades. Apparent U.S. steel consumption, as measured by ISRI, has averaged 119 million tons a year for the past five years—24 percent more than the 1988-1992 average of 96 million tons a year. U.S. steel shipments last year totaled 105.5 million tons, up 4.6 percent for the year and a 23-year high. Despite new steelmaking capacity, strong demand also led to a surge in imports, with 1997 touching a record 31 million tons, up nearly 7 percent.
The industry downside was in steel pricing for the year. Low-cost production, coupled with imports, held finished steel prices in check. The published average spot prices for carbon steel products rose a scant 3.4 percent last year.
Total purchased ferrous scrap usage by U.S. mills and foundries increased 4.5 percent in 1997 to 59.6 million tons, according to conservative ReMA estimates. The steel can recycling rate bettered its 1996 total of 58.2 percent to touch 60.7 percent last year, with more than 1.7 million tons recycled, notes the Steel Recycling Institute (Pittsburgh). Scrap’s share of the market, however, remained unchanged at 46 percent. In addition to the domestic market, processors also prepared an additional 8.4 million tons for export, or 2 percent more than in 1996.
Scrap prices (No. 1 HMS composite) started last year at $120.75 per gross ton, rose to $134.67 in the fourth quarter, and finished the year at $134.40. The yearly composite average, $127.82, was essentially unchanged from 1996’s $128.05.
Midyear Outlook. With an assumed expanding U.S. economy as a backdrop for 1998, most industry analysts believe that domestic steel mills will produce more, not less, steel than in 1997. In contrast, world steel demand is expected to be lower by 1 percent compared with 1997’s 794.5 million mt.
Goldman Sachs & Co. (New York City) is forecasting higher domestic steel demand this year, with shipments reaching 107 million tons. Nucor Corp. (Charlotte, N.C.) expects to ship more than 10 million tons this year, exceeding its shipments of 9.7 million tons last year. In addition, the American Foundrymen’s Society (Des Plaines, Ill.) is anticipating 12.2 million tons of iron and steel castings to be shipped this year. On the low side, Bethlehem Steel Corp. (Bethlehem, Pa.) is expecting domestic steelmakers to ship about 101 million tons this year.
As for pricing, there’s far less optimism expressed compared with anticipated production. Carbon sheet, as well as scrap prices, aren’t expected to show significant upward movement. New minimill capacity, steel imports, increased scrap generation, availability of low-cost pig iron, and lower scrap exports will help moderate all steel market prices—from the collection of prompt and obsolete scrap to the sale of many finished products. J.P. Morgan Securities (New York City) expects flat-rolled prices to drop 3 to 5 percent this year.
Lead
According to preliminary figures from the U.S. Geological Survey, apparent 1997 U.S. lead consumption was essentially unchanged at 1.754 million tons compared with 1.749 million tons in 1996. Domestic scrap consumption, on the other hand, appears to have posted a small decrease of 11,000 tons despite the industry assumption that secondary lead production, which accounts for about 77 percent of total lead output, increased compared with 1996. Lead scrap’s market share, meanwhile, remained unchanged at 69 percent of consumption in 1997, ReMA reports.
Significantly, lead-acid batteries used for starting, lighting, and ignition purposes—lead’s most important end-use market—recorded a year-on-year decline. Figures from the Battery Council International (Chicago) show that total shipments of replacement and original equipment (OE) batteries decreased 4.3 percent compared with 1996. Replacements, which account for more than 80 percent of the total, fell 5.5 percent while OEs increased 1.8 percent. Mild weather was blamed for the drop-off in replacement demand.
Also on the negative side, Western World lead consumption decreased by less than 1 percent to 5.2 million mt in 1997, according to the International Lead and Zinc Study Group (London). By most measures, the industry experienced a difficult year, marked by refined supplies outpacing consumption. The market was assumed to be in surplus as 1997 ended.
Lead prices were also lower last year. The LME cash price averaged 28.3 cents a pound, 19.4 percent lower than the 1996 average of 35.1 cents. Lead posted its high in January but trended lower as the year progressed, with the December average being 23.8 cents. Thus, relatively low prices, coupled with a reduced supply of scrap batteries, virtually eliminated any profit from the buying and recycling of lead-acid batteries in North America.
Midyear Outlook. As difficult as 1997 was for most in this industry, few are forecasting a quick turnaround to higher prices for refined lead or lower prices for scrap batteries. Replacement battery shipments are, however, expected to show an increase this year. If so, that would help alleviate the tightness in scrap experienced for most of last year.
At the same time, Western World supplies of primary and secondary metal are again forecast to exceed anticipated consumption. Billiton Metals places the potential surplus at 45,000 mt, based on Western World primary and secondary production of 5.06 million mt. Lake Engineering Inc. (Dumont, N.J.) is also forecasting a “growing but modest” lead surplus in the next few years due to new mine and smelter capacity. The market is expected to return to a more balanced state within a few years, at which time LME lead could again visit 30 cents a pound.
At ISRI’s annual convention in March, Exide Corp. (Reading, Pa.) offered a less sanguine forecast for 1998 that suggested a 209,000-mt surplus this year compared with 53,000 mt last year.
As for price prospects, a consensus forecast that appeared in the Financial Times earlier this year sees LME cash averaging 25.67 cents a pound in 1998—more than 21/2 cents lower than last year.
Nickel & Stainless
By most accounts, both world and Western World nickel markets ended last year essentially in balance. Macquarie Bank Group (London) data indicate that primary nickel consumption in the West last year increased 8 percent from 1996 to reach 923,000 mt, while supply rose 7.7 percent to 936,000 mt. Despite production problems at Western producers in the first half of last year, there was more than enough metal to meet demand. Russian exports, in particular, were an important feature last year, increasing a third over 1996 levels to 222,000 mt.
As a component of nickel demand, stainless steel markets account for approximately two-thirds of total annual nickel consumption. In the United States, which accounts for around 17 percent of Western World nickel consumption, stainless steel mills enjoyed another positive year in terms of production, with total shipments hitting 2.1 million tons, 7.6 percent more than 1996. Preliminary numbers suggest, however, that scrap consumption didn’t keep pace with shipments, thus lowering scrap’s share of the market to 53 percent from the record 57 percent in 1996.
Although nickel and stainless steel experienced higher demand last year, nickel prices suffered from a changing world nickel supply-demand balance that some trace to the unexpected overabundance of stainless steel scrap in the marketplace. Other factors that also affected mill profitability included stainless steel imports, which totaled 624,000 tons, lower Asian product consumption due to the financial crises in East Asia, and lower Japanese industrial production. Consequently, LME cash nickel trended lower last year, averaging $3.14 a pound, 7.6 percent lower than the 1996 average. Mill buying of stainless steel scrap, such as 18/8, reflected this dour trend last year.
Midyear Outlook. Though nickel demand is again expected to show growth, world production is forecast to exceed consumption, thus leading to an assumed buildup in primary stocks and, hence, potentially lower prices. Slower economic growth in Southeast Asia, which accounts for approximately 40 percent of world nickel consumption, could exacerbate the expected surplus. Nevertheless, most see stainless steel output increasing this year, albeit at rates lower than in 1996. Macquarie Bank Group is forecasting 3-percent growth in nickel demand this year along with a 2.5-percent increase in stainless steel production.
Nickel price forecasts have been scaled back from those offered at the start of this year. Bear Stearns sees the LME three-month average at $2.75 a pound based on a modest world nickel surplus and positive metal consumption overall, predicting that U.S. stainless steel consumption will grow 4 percent compared with 1997. The case for higher average prices depends on assumed lower Russian exports, reduced scrap supplies, Western World primary nickel supply problems, and higher-than-expected production and consumption of stainless steel products.
Paper & Paperboard
U.S. paper and paperboard production recorded impressive gains in 1997, with paper production rising 5.5 percent to 44.8 million tons and paperboard production increasing 5.4 percent to 50.3 million tons, reports the American Forest & Paper Association (AFPA) (Washington, D.C.). For perspective, those increases are more than twice the 2.5-percent average annual growth recorded in the past 10 years. In addition, U.S. exports of paper and paperboard products also rose last year, increasing 8.1 percent compared with 1997.
By category, newsprint shipments were up 4.7 percent, printing and writing paper increased 7.9 percent, tissue production grew 2.2 percent, and containerboard production increased 5.5 percent, according to AFPA. Production of recycled paperboard more than kept pace, posting a 4.5-percent increase to 15.5 million tons.
On the recycling side, 45 million tons of paper was recovered last year—up from 42.9 million tons in 1996—equating to a recycling rate of more than 45 percent, AFPA says. Domestic mill consumption of secondary fiber increased 7.3 percent in 1997 to a record 36.7 million tons, while U.S. exports of scrap paper rose 5 percent to 7.5 million tons.
Despite these production increases, many scrap paper grades experienced uneven pricing and inconsistent buying, exacerbated in part by Asia’s problems. OCC prices, for example, showed strength in the first half of last year but trended lower after a strong summer. Still, most grades were characterized as “uneventful but stable” in 1997, especially the higher grades as opposed to the bulk grades.
Midyear Outlook. Increases in world production capacity, coupled with the currency crises in Asia, weighed heavily on pulp prices last year, but several analysts are forecasting higher averages for 1998. A survey of pulp analysts by Dow Jones conducted late last year placed the average price for northern bleached softwood kraft at about $590 per mt compared with last year’s average in the $560-to-$570-range.
Despite export uncertainties and weak first-quarter prices for OCC, domestic mills and paper processors expect to see overall recovery rates increase over a relatively strong 1997. Paper prices, therefore, are likely to benefit from a growing domestic economy and the anticipated return of Asian buyers in the second half. Longer-term forecasts predict continued growth in recovered paper consumption, with AFPA projecting a rate of 2.1 percent annually for the next three years—nearly double the rate for wood pulp consumption.
Plastics
For suppliers and consumers of most large-volume resins, 1997 will be remembered for relatively stable prices, higher consumption, and global capacity expansions that could result in price declines for key resins this year. Overall consumption of the top-seven commodity-grade resins (LDPE, LLDPE, HDPE, PVC, PS, PP, and PET) grew 3.4 percent compared with 1996, reaching 66.234 billion pounds.
On the recycling side, PET rebounded last year, with demand and prices at long last showing steady gains from before midyear and into 1998. Apparently, the large supplies of so-called wide-spec virgin resin—which competed with recycled resin and held prices at bay since mid-1995—have been sufficiently worked down. Nevertheless, industry officials expect that the PET recycling rate fell below 26 percent in 1997. If so, that marks the third consecutive yearly decline.
In contrast to PET’s brightening prospects, values for recycled HDPE eroded in the second half of last year, primarily due to an excess of material and stiff competition from virgin supplies.
Midyear Outlook. Assuming moderate economic growth, most resin producers expect a year defined by an oversupply of ethylene monomer—more than enough to exceed the expected demand for PE resins, which is forecast to grow 3 to 4 percent compared with 1997. This, coupled with new LLDP and HDPE capacity, may add to an already-oversupplied PE market.
PET bottle resin is expecting continued sales growth this year, but suppliers of both virgin and recycled remain conservative about prices, especially after midyear. PET recycling is expected to increase, though the recycling rate isn’t expected to show much change from 1997. HDPE recycling prospects look less encouraging due to excess capacity and the assumed availability of inexpensive off-grade virgin PE.
Zinc
The Western World zinc market contained several surprises last year as sentiment shifted due to swiftly changing supply-demand fundamentals in the third quarter. Earlier, analysts had confidently predicted that zinc demand would continue to outpace new supply for the third consecutive year. The International Lead and Zinc Study Group, for example, assumed a supply deficit of 160,000 mt, while others predicted even greater statistical shortfalls. As the year ended, however, the market was essentially in balance or in slight surplus.
So what happened? For one, Chinese exports to the West were far greater than expected at around 535,000 mt—up 158 percent compared with 1996, says the study group. This set the stage for rising LME inventories and weakening prices as last year wound down. LME averages ended the year about where they began, with the LME cash average at 59.7 cents a pound.
Domestic demand for prime zinc and scrap was steady and strong throughout last year. Total zinc consumption increased 6.7 percent compared with 1996, paced by continuous-line and hot-dip galvanizers. Zinc alloyers and brass mills also reported greater zinc usage in 1997. To meet these increases, domestic scrap consumption increased to 242,000 tons, 8 percent more than comparable 1996 numbers and representing 17 percent of total apparent consumption last year. Zinc scrap exports, meanwhile, were also higher by almost 9 percent in 1997 compared with 1996.
Midyear Outlook. At midyear, there are two schools of thought regarding zinc’s potential in 1998 and beyond. On the plus side, as expressed by Metal Bulletin Research (London), zinc consumption is expected to exceed overall economic growth currently forecast for the major industrialized countries “for the next few years.” The firm also expects Chinese exports to be 30 percent lower and asserts that other planned expansions won’t disrupt its supply assumptions. Then, if stocks fall as expected this year, Billiton Metals says zinc prices could rally to exceed 60 cents a pound in the second half of this year.
The opposing view holds that while a Western World deficit is possible this year, the market is nevertheless heading for surplus and overall consumption will be modest at best due to the events in Asia last year. CRU Ltd., for one, expects a significant zinc surplus to develop in the years ahead, while Brook Hunt (London) sees 1998 heading toward a balanced scenario, with LME prices averaging 53 cents a pound. •