May/June 1999
Last year pummeled the primary and scrap markets as the full effects of the Asian economic crises came home. Have the markets hit bottom? Is the worst over? The consensus seems to be yes.
By Robert J. Garino
Robert J. Garino is director of commodities for ISRI.
A quick look at commodity market statistics for 1998 and remarks by scrap processors tell the story: Last year was a downer for the domestic scrap industry.
The price charts on the following pages speak volumes about the financial difficulties faced by primary metal producers, scrap processors, and brokers alike in 1998. And consumers weren’t spared either. Intense competition from abroad and slower industrial production in this country more than offset the benefits derived from falling raw material prices.
Although the overall gross domestic product posted impressive gains last year, after-tax profits for all U.S. businesses declined 2.2 percent—the first year that company profits fell since 1989, according to government figures.
Domestic Strength, Global Problems
Why did industry in general—and the scrap recycling industry in particular—suffer so last year? Virtually all analysts and economists pointed to Asia’s deteriorating economic picture as the catalyst for financial changes felt around the globe. As the major economies in Southeast Asia (including Japan) stalled, fresh problems arose in Russia along with fears that Latin America was about to go the way of the Pacific Rim. Only the United States economy continued to grow and expand in 1998.
Thus, the United States, enjoying its seventh year of economic expansion in 1998, was viewed by all other world economies as an “oasis of prosperity.” Consequently, imports literally soared, increasing 14 and 11 percent in 1997 and 1998, respectively, while U.S. exports of goods, services, and scrap fell.
Despite the impressive growth of the U.S. economy, some observers felt that the world was, in fact, in recession. The United States couldn’t carry the rest of the world. World gross domestic product growth in 1998 and 1999 is forecast to be the lowest two-year consecutive period of growth for some 30 years. In sum, the strength in the United States was largely negated by the collective weakness in Asia and elsewhere.
What About 1999?
Although doubts linger concerning world economic and commodity growth in 1999, some of the negative sentiment expressed earlier this year has been slowly giving way to a more optimistic view for the second half.
Supporting this view are the beliefs that the supply-demand imbalances in the base metal sector are finally being addressed through announced production cutbacks and that consumption is poised to rebound. William O’Neill, director of futures research at Merrill Lynch & Co. (New York City), recently cited anecdotal evidence of improvement in the economic outlook for both Asia and Europe, asserting that the worst of the demand cycle is over.
Of course, not all agree. Others continue to point to relatively large world surpluses of basic raw materials, while consumption prospects in the United States, Europe, and Asia still appear lukewarm at best. Most recent price forecasts offered for basic industries such as steel, copper, and aluminum continue to reflect only modest positive expectations.
The following summaries show vividly how the domestic recycling industry responded last year to the challenges of an ever-increasing globalization of this industry. Is recovery in the offing for 1999, or will scrap recyclers face more of the same this year? A midyear outlook reviews the prospects for each commodity.
Aluminum
On a positive note, preliminary figures from the Aluminum Association (Washington, D.C.) show that domestic aluminum shipments, including exports, totaled 11.5 million tons, 2.3 percent higher than the 1997 total of 11.3 million tons.
ISRI data also suggest several positives for the domestic industry, including year-on-year increases in primary production, metal and scrap imports, scrap exports, and overall apparent aluminum consumption. Unfortunately, aluminum scrap usage declined last year, the first annual slip since 1987, according to ISRI.
Why the decline in scrap usage? Falling world prices that affected aluminum and other metals.
LME monthly aluminum averages trended lower throughout last year, declining nearly 17 percent between January and December. UBC can collections mirrored this price decline, decreasing 57,000 tons in 1998 compared with 1997, while lower automotive shredder throughput also severely limited the amount of secondary aluminum recovered from the nonferrous fraction. Meanwhile, the record level of imported aluminum came at the expense of the domestic scrap processing industry.
Looking beyond U.S. borders, the Western World market hit record production last year, but most analysts believe that consumption didn’t keep pace. Bear Stearns & Co. Inc. (New York City) placed world primary supply, including East-West trade, at 19.2 million mt and demand at 18.8 million mt (down 1.2 percent), suggesting a market surplus of approximately 400,000 mt. This world oversupply—which is expected to grow in 1999—coupled with lower consumption outside the United States has led to lower world price prospects as well as lower U.S. recycling opportunities.
Midyear Outlook. Against a backdrop of continued world aluminum oversupply in 1999 and only modest conviction that production cutbacks will minimize the imbalance, price prospects for the balance of 1999 aren’t overly optimistic. In a March 1999 report, Brook Hunt (London) stated that LME cash aluminum prices will average 52 cents this year “and remain depressed for much of 2000.”
According to Metal Bulletin Research (London), LME cash aluminum will average 55 cents, while Morgan Stanley Dean Witter (New York City) lowered its projection from 60 to 55 cents. The investment firm further says that LME values may drop to 46 to 48 cents a pound “over the next two to three quarters” as aluminum inventories mount.
These generally pessimistic price forecasts notwithstanding, the domestic market should remain steady, assuming that the more positive macroeconomic indicators change little. Mill shipments are thus expected to increase compared with last year, and secondary smelters are crediting strong demand from the automotive sector for the relatively upbeat ingot market. Securing adequate, affordable scrap will again be the major challenge for processors and consumers alike.
Copper
Western World refined consumption totaled 11.22 million mt in 1997 and 11.41 million mt last year, according to Cominco Ltd. (Toronto). World refined consumption grew 2.4 percent last year to 13.4 million mt, says the International Copper Study Group (Lisbon).
In sum, copper consumption wasn’t as much of an issue last year as the supply of both refined metal and scrap. Quite literally, the world became awash in the red metal as production continued to increase and inventories mounted in Comex and LME warehouses. Though the increase in world refined production was lower last year compared with the previous two years, copper consumption in the major industrialized nations increased at a rate less than half the production increases.
This increased refined supply, coupled with lower Asian demand, had a predictable effect on copper prices. The LME three-month quotation ended last year below 70 cents a pound.
A closer examination of the domestic market in 1998 reveals two eye-opening observations: an exceptionally strong market for refined copper and subsequent lower demand for scrap by manufacturers of copper-containing products, according to preliminary data from the U.S. Geological Survey (Reston, Va.). The data also indicate that higher overall copper consumption was attributed to greater primary refined production (up 4.7 percent from 1997), increased imports of refined metal (up 8 percent), and a drawdown of stocks.
What lagged in 1998 were copper scrap purchases and consumption. Last year’s preliminary increase of 3.4 percent contrasts sharply with the nearly 10-percent increase in recovered scrap in 1997. Offshore demand for scrap slipped as well, falling 22 percent compared with 1997.
As copper prices on Comex and the LME drifted lower throughout last year, collections suffered. Obsolete scrap, in particular, dried up and margins virtually disappeared. Certain prompt grades were being quoted above primary metal even after recoveries were factored in. Other prepared materials, such as No. 2, became less and less available. Cathode availability, meanwhile, increased. Consequently, scrap’s share of the market declined to 34 percent, ReMA reports.
Midyear Outlook. Copper supply fundamentals continued to deteriorate in the second quarter. LME stocks hit a record in April, with even higher numbers expected in the months ahead. Prices, meanwhile, hover close to the 12-year lows visited in the first quarter. Copper price prospects weren’t looking encouraging at the start of the second quarter, with several research and brokerage firms lowering their price forecasts in the past few months.
While copper fundamentals look grim, the metal could rally as high as 75 cents a pound in the second quarter, Deutsch Williamson (London) says. This optimism was conditional, based on assumptions regarding mine cutbacks, seasonal consumption patterns, restocking, Chinese buying, and a decline in LME inventories. Merrill Lynch, however, has taken a more bearish stand, forecasting copper to average 60 cents this year compared with its earlier 75-cent average.
Western World consumption appears to be holding steady, though several industry analysts are anticipating only a modest increase and certainly below recent trend lines. To some, copper demand appears “fragile,” with the U.S. market looking strongest compared with Europe and Asia.
Analysts also believe that relatively weak copper prices will continue to reduce the volume of scrap entering the domestic and world recycling streams, thus providing incentives for fabricators to consume more cathode. Most contend that domestic copper consumption will likely increase again this year, but until world prices head higher, domestic scrap processors can’t expect much margin relief.
Iron and Steel
In the global market, world crude steel output decreased 2.5 percent in 1998 to 779 million mt, while consumption “declined by about the same amount,” reports the Organization for Economic Cooperation and Development (OECD) (Paris). Within the 29 OECD members, production reportedly dipped 3.4 percent to about 462 million mt, while demand declined 1.3 percent to 407.3 million mt.
The domestic market mirrored the above numbers to some extent. According to the American Iron and Steel Institute (Washington, D.C.), domestic steelmakers shipped approximately 102.1 million net tons last year, down about 3.5 percent from the exceptionally strong 1997 market. Steel production, meanwhile, reached 107.7 million tons, only 1 percent lower than the previous year.
Apparent U.S. steel consumption, defined as total mill shipments plus net imports, rose 5.3 percent to 138.1 million tons. The reason? Record raw steel imports, up 33 percent from the previous record set in 1997 and accounting for 30 percent of apparent consumption. Finished steel imports also set a record at 34.7 million tons.
Consequently, as domestic producers experienced a loss in market share and subsequent depressed prices for both flat and long products, a number of steelmakers and the Independent Steel Workers of America initiated antidumping suits. The House passed a measure in March that would impose quotas (though such a measure violates World Trade Organization rules). The Senate wasn’t expected to support the House bill.
While the actual financial damage to the steel industry was being assessed, it was clear that domestic steel prices slumped and margins tightened as the economic crises in Asia, Brazil, and Russia took their toll. As metal entered the U.S. market, domestic hot-rolled sheet prices fell about 20 percent in the second half of last year to levels not seen in more than 20 years.
Ferrous scrap processors, in turn, saw their volumes decrease 4.5 percent from last year, according to preliminary data from the U.S. Geological Survey. In addition, the export market for iron and steel scrap was a complete disaster, with only 4.5 million tons shipped—a far cry from previous annual export totals closer to 10 million tons.
Thus, lower scrap throughput, raw material inventory reductions, and noticeable increases in imported pig iron, scrap, and other competing materials combined to cause significant price, margin, and profitability erosion throughout the scrap industry. Mill buying prices for No. 1 HMS, for instance, which started off 1998 at $130 a gross ton, literally plunged to around $70 by year’s end.
Midyear Outlook. Steel analysts are expressing cautious optimism for the domestic steel industry based, in part, on evidence that the antidumping cases are beginning to turn away steel imports this year. Data through February 1999 indicate that steel imports have declined for four consecutive months.
Bear Stearns believes that domestic steel producers could see additional relief in the form of higher prices by the second quarter. Solomon Smith Barney (Chicago) also asserts that sheet prices will rise in the second quarter, with further increases termed “likely” for the third quarter.
As for scrap’s fortunes for the balance of this year, Solomon Smith Barney also sees a firming trend, with prices above the lows posted at the end of 1998. Higher rates of domestic steel production and increased Asian scrap buying may be enough to keep prices above trough levels, the firm says.
In the world market, the Australian Bureau of Agriculture and Resource Economics (Canberra) sees further contraction in the world’s iron and steel markets. World steel production will decrease from last year’s 780 million mt to 772 million mt in 1999 before rising to 830 million mt by 2004, the group predicts.
Scrap’s share of the world market, which has historically been around 44 percent, is expected to decrease to about 40 percent, according to Morgan Stanley Dean Witter. Less scrap will be consumed over the next decade, the firm says, due to the increasing demands for low-residual metallic charges and the continued shrinkage of home scrap. For 1999, the group forecasts global steel production to reach 743 million mt, with scrap consumption totaling 310 million mt.
Lead & Zinc
The Western World lead market slipped from its small deficit in 1997 to a surplus of 34,000 mt in 1998, says the International Lead and Zinc Study Group (ILZSG) (London). Though demand exceeded production, the gap was more than filled by exports from Asian countries. The export market for refined lead saw a drop-off in shipments from China, while shipments from the Commonwealth of Independent States increased.
ILZSG, Cominco, and Metal Bulletin Research placed lead demand and consumption at just over 5.2 million mt. They also agreed that last year’s total Western World consumption was slightly lower, rising less than 1 percent from 1997.
In the United States, apparent lead consumption rose 1.5 percent over 1997 paced by a strong domestic market for automotive replacement batteries, according to preliminary numbers from the U.S. Geological Survey. Battery Council International (Chicago) concurred, reporting that shipments of replacement batteries increased 7.8 percent in 1998 to 78.6 million units. Shipments of original-equipment batteries didn’t enjoy similar strength, slipping 17 percent to 13.6 million units.
U.S. primary lead production was lower by 1 percent while lead recovered from scrap remained virtually unchanged from 1997. Net lead imports rose and stocks fell. The result was higher overall lead consumption last year, but scrap’s share decreased slightly from 70 to 69 percent.
Though the domestic smelting industry recorded little year-on-year growth, scrap processors and brokers did participate in a stronger export market last year. Total U.S. lead scrap exports rose 25 percent, thanks mainly to battery lead scrap shipments to Canada, reports the U.S. Department of Commerce, Bureau of the Census.
Both lead and zinc exhibited little price volatility compared with other base metals last year, though their respective 1998 annual averages were lower than the previous year. For most of last year, LME lead traded in the mid-20s-cents-a-pound range, while zinc hovered in the mid-40s.
Turning to zinc, Western World consumption in 1998 was essentially unchanged from 1997. Macquarie Equities Ltd. (London) pegged consumption at 6.42 million mt, virtually unchanged from 1997. ILZSG reports that Western World demand rose marginally to 6.43 million mt compared with 6.42 million mt in 1997.
Western World zinc supply contracted slightly, principally due to lower exports of slab zinc from China. According to Macquarie, net exports of metal (excluding zinc concentrates) dropped by a third to 355,000 mt, thus making the difference between a statistical surplus and a deficit. The firm placed the deficit at 77,000 mt, with producer, consumer, LME, and merchant market stocks figured at 778,000 mt. This shortfall marks the fourth year in a row in which refined consumption has exceeded metal supply.
Apparent U.S. zinc consumption enjoyed a positive year, posting a 3.3-percent increase over 1997’s revised consumption figure of 1.38 million tons, according to preliminary numbers from the U.S. Geological Survey.
Scrap’s share of this market was conservatively estimated by ReMA to be 214,000 tons, unchanged at 15 percent. The export market for zinc scrap continues to shrink, however. Last year’s total of 28,639 tons contrasts sharply with the 1989 record of 107,560 tons.
Midyear Outlook. Lead will continue to experience relative price and demand stability in the near term, though some researchers expect a larger surplus, which could limit lead’s upside on the LME as well as slow the flow of lead scrap.
Western World lead production is expected to expand this year, with capacity increases outside the United States offsetting the closure of Asarco Inc.’s Colorado lead mine last year. Metal Bulletin Research sees Western World demand exceeding projected supply by 68,000 mt, with LME cash averaging 22 cents a pound compared with a 24-cent average last year.
The domestic lead market will continue to rely on recycling to meet the demands of the automotive battery markets. Scrap supply, however, is likely to remain a source of competition between the integrated battery manufacturers, independent secondary smelters, and offshore buyers.
Zinc faces more uncertainty and, hence, more potential for price volatility. CRU International Ltd. (London) forecasts slower Western World consumption set against growing world production. The increase in mine production, the group notes, will force smelter treatment charges higher as smelters increase output in an attempt to lower their unit costs.
Thus, as supply grows faster than projected demand, LME prices should weaken, dropping to a low of 41 cents a pound this year, with quarterly averages as low as 43 cents, CRU says.
Macquarie also expects zinc supply to increase faster than consumption, with the former increasing 3 percent and the latter 1.2 percent. The firm insists, however, that zinc has the potential to rally as demand “recovers later in 1999.”
Nickel & Stainless
Of all nonferrous metals, nickel was perhaps hardest hit by the Asian financial crises. From an LME average of $3.20 a pound in mid-1997, cash nickel prices fell virtually uninterrupted to end 1998 at $1.76, a decline of 45 percent.
An examination of nickel’s world supply-demand balance helps explain why nickel values slumped last year, as well as what it will take to restore a better balance to the market. Metal Bulletin Research placed world nickel supply at 964,000 mt matched against demand of 920,000 mt, suggesting that 44,000 mt went into inventory. Total reported stocks ballooned to 183,000 mt at the end of last year, representing about 10 weeks of consumption, the group says.
Bear Stearns presented a similar fundamental view, with refined supply at 955,000 mt (down 1 percent from 1997) and consumption at 925,000 mt (down 1.3 percent). The firm’s market balance, at a 30,000-mt surplus, brought total nickel stocks, including unregistered refined metal, to 204,400 mt.
Clearly, primary nickel oversupply was the dominant feature in 1998.
Why did the market shift to surplus? The driving forces behind the world nickel market are the Asian stainless steel mills and demand from Western World stainless consumers. Since more than 60 percent of nickel is used in stainless, the depressed Japanese and South Korean economies hurt not only primary nickel demand but also stainless steel trade flows.
In the United States, overall shipments of stainless were only slightly lower than 1997 at 2.05 million tons, but melt production rates were much lower, according to preliminary American Iron and Steel Institute statistics. Stainless steel imports, however, increased 15 percent last year, capturing more market share. And similar to the steel industry, U.S. stainless producers initiated antidumping charges against eight countries as domestic prices for finished product nosedived.
Domestic mills also consumed less nickel-containing scrap last year. Based on preliminary data from the U.S. Geological Survey, scrap consumption may have fallen at least 12 percent, marking the second consecutive year that scrap’s share of this market has decreased. Along with these falling volumes, scrap prices also slid. Mill buying prices for 18/8 stainless steel, which began last year above $700 a gross ton, ended 1998 below $500. Stainless steel scrap processors were further frustrated by the sharp reduction in export orders to Asia and Europe.
Midyear Outlook. The good news for nickel, at least, is that producers have begun to address global oversupply. According to Bear Stearns, Greek and Australian supply curtailments in early 1999 trimmed around 4 percent of estimated Western World supply. As a result, the firm expects a “modest” 3,000-mt surplus compared with last year’s 30,000-mt overhang and predicts an LME price of $2.25 a pound—higher than its earlier $2 forecast.
Other researchers have also lowered their surplus expectations for 1999, though they maintain that the largest nickel producers need to follow suit and further reduce refined output this year and beyond.
In addition, the near-term outlook for stainless steel production and demand isn’t particularly encouraging for the first half, raising the possibility that a large nickel surplus could result. Most industry observers agree that economic recovery in Asia, which accounts for around 35 percent of the world’s nickel consumption, remains key to any future assumptions about nickel and stainless steel demand.
Offering encouragement to the domestic stainless steel producers and their respective scrap suppliers, the U.S. Department of Commerce assessed dumping duties against several countries. The U.S. International Trade Commission is expected to rule on the industry’s injury in May. Should imports fall as expected, this bodes well for higher domestic stainless steel production in 1999, as well as greater use of less-expensive nickel-containing scrap—assuming LME nickel values firm.
Paper & Paperboard
Domestic paper and paperboard production fell 2.3 percent last year from the exceptionally strong 96.9 million tons in 1997, reports the American Forest & Paper Association (AFPA) (Washington, D.C.). The decline was attributed to global weakness in paper markets due to the Asian financial crises and exacerbated by the strong U.S. dollar. Exports of finished paper and paperboard declined 7.2 percent to 12.2 million tons, while imports increased 6.1 percent to 16.6 million tons.
Despite relatively depressed prices for many scrap paper grades, domestic processors saw higher recovery rates in 1998. AFPA notes that recovered fiber increased 3.6 percent, while the available supply grew at less than 2 percent. As a result, the recovery rate rose slightly to 45 percent.
Prices were the real problem for most scrap processors. For example, the average price paid by mills for 18 commonly traded grades of scrap in five regions was $72.58 a ton at end-1998 compared with $90.61 at the start of 1998, or 20 percent lower, according to the Paper Stock Report (Cleveland). Some processors said that last year’s depressed prices were reminiscent of those seen in 1974.
On an upbeat note, scrap paper exports had their second-best year ever, rising 8 percent to about 8.1 million tons despite double-digit declines in shipments to major fiber consumers in the Pacific Rim.
Midyear Outlook. In contrast to 1998 when scrap paper prices started off relatively firm but ended the year on a down beat, some optimists believe that 1999 will prove just the opposite: a weak start but gradually firming as the year progresses. At the end of the first quarter, most recovered paper prices were holding their own, though exporters expressed concern over perceived weakness in the Asian market.
Other brokers and processors, however, remained skeptical that the industry would show much, if any, improvement in 1999.
Resource Information Systems (RIS) (Bedford, Mass.) forecasts a “brief rally” for recovered paper this spring. An improved market for containerboard should be beneficial for OCC suppliers, but a sluggish newsprint market will weigh on ONP, the firm says. In addition, pulp prices are expected to increase, which should help underpin pulp substitutes and high-grade deinking.
RIS also expects, however, that the so-called spring rally will give way to lower paperboard production in the second half of the year and a weaker macroeconomic outlook for the U.S. economy. Matching fourth-quarter 1998 averages for OCC and ONP with forecasted fourth-quarter 1999 prices, RIS predicts that ONP will be lower by $1 a ton and OCC higher by $16 at $49 a ton. In addition, overall scrap paper recovery is expected to increase 3.7 percent, similar to last year’s 3.9-percent growth. •
Last year pummeled the primary and scrap markets as the full effects of the Asian economic crises came home. Have the markets hit bottom? Is the worst over? The consensus seems to be yes.