Commodity Roundtable Coverage—The Party's Over

November/December 1998 

Most scrap and primary metal markets have nosedived this year, victims of the near-global financial crises. While the going may be rough in the short term, there is light at the end of the tunnel—for those who can persevere.

All good things must come to an end.

Sad to say, but that adage describes the dramatic turn for the worse that most commodity markets have taken in 1998.

The main culprits have been the financial crises in most of Asia, Russia, and Latin America, which hit metal commodities especially hard this year. For proof, look at the price declines of the major metals traded on the LME. In the past 12 months (from the end of October 1997 through the end of September 1998), lead prices have slipped 13 percent, aluminum 16 percent, copper 20 percent, zinc 21 percent, and nickel 36 percent.

Given such price drops, one would expect LME stocks to climb, but—with the exception of copper—the opposite has happened. Lead inventories have decreased 3 percent, nickel 12 percent, zinc 22 percent, and aluminum 31 percent. That incongruity leads some market watchers to believe that the Asian crisis has had a disproportionately negative effect on metal prices, with their value falling below production costs in some cases. If this situation persists, producers will be forced to cut production, which could eventually help boost prices.

That won’t happen immediately, however. For the near term, lower real metal consumption, especially in Japan, Russia, and Southeast Asia, and price volatility will continue to define the metal markets. And there’s growing concern that the contagion from troubled economies could threaten to tip the United States and Western Europe into recession.

Here’s what could be in store for aluminum, copper, ferrous, lead, nickel, stainless steel, and zinc for the remainder of this year and beyond, according to speakers at ISRI’s annual commodity roundtables, held Sept. 14-15 in Chicago and Oct. 15 and in Pittsburgh.

ALUMINUM

Tipping Toward Surplus?

Looking at aluminum’s future supply-demand picture, nearly 80,000 tons of new aluminum capacity could come online in 1998 and 1999, said Steven Sedberry, COO of Century Aluminum of West Virginia (Ravenswood, W.Va.), at the aluminum roundtable.

On the demand side, aluminum’s growth has been in transportation, which has overtaken packaging as the metal’s top market, while the aerospace niche also shows promising potential, he noted. Though world aluminum consumption has been “dragged down” by Japan this year, Sedberry forecast a balanced market in 1999, with the possibility of a “modest surplus.”

In aluminum’s larger supply picture, the industry now operates with lower inventory than it did a decade ago due to changes such as just-in-time supply relationships and more balanced market fundamentals, noted both Sedberry and Thomas McNamara, director-equity analyst of CIBC Oppenheimer (New York City).

Ten years ago, McNamara said, three to four months of inventory supply was considered normal for industry use. According to Sedberry, 35 days of inventory used to be a danger signal, whereas that’s no longer the case because the market is “in balance.” Current inventories equate to fewer than 40 days of supply, McNamara said, noting that consumer stocks are at “historically low levels.” By 2000, he reported, inventories are expected to be at about 33 days of supply.

In terms of price, aluminum could see a seasonal boost in demand, which will put upward pressure on LME prices, McNamara said. In general, aluminum’s price outlook will improve in the next two years, with its U.S. price reaching 70 cents a pound in 1998, 75 cents a pound in 1999, and 85 cents in 2000, McNamara said. As a caveat, he added that commodity fund activity could continue to create volatility and uncertainty in the aluminum market.

Brighter Times for Secondaries

Despite the difficulties faced by secondary aluminum smelters, the immediate outlook is “fair,” said William Bean, president of Superior Aluminum Alloys L.L.C. (New Haven, Ind.).

Prices of both aluminum scrap and finished secondary alloyed products have not only stabilized but “actually risen about 1 to 2 cents a pound from the lows of a month ago, after having fallen by over 13 cents a pound since the beginning of the year,” Bean said. These prices could rise 5 to 6 cents a pound by mid-1999, offering proof that the industry is coming off the bottom, he forecast. As prices rise, he added, spreads between scrap and finished secondary alloyed products could widen to an estimated 13 to 14 cents a pound.

Despite these positive price prospects, the influx of Russian secondary alloyed ingot has made life difficult for U.S. secondaries. According to U.S. Bureau of the Census statistics, about 76,000 mt of Russian alloyed ingots were imported in 1997 compared with 76,000 mt in the first half of 1998. That means that the United States may “import 150 million to 200 million additional pounds in 1998 than in 1997,” Bean said.

Even with these problems, however, there will be an ongoing and growing need for secondary specification aluminum alloys in the years ahead, he stated.

Will Comex’s Aluminum Contract Fly?

Can Comex compete with the LME in the aluminum futures trading arena?

John Moore, chairman of the Comex division of the New York Mercantile Exchange (New York City), thinks it definitely can. In fact, despite Comex’s failed attempt in 1983, its new aluminum futures contract—due to be unveiled in early 1999—will succeed, he said, stating, “I guarantee it.”

Aluminum will be traded much the same way Comex trades copper—that is, in an open outcry/auction method, Moore explained. Trading will be available after-hours “on the electronic trading platform Nymex Access, which will make the contract accessible over 22 hours every trading day,” he said. Comex’s aluminum futures contract will be based on Midwest warehouse delivery, a grade P1020A minimum, 99.7-percent purity, in lots of 44,000 pounds.

According to Moore, the North American market doesn’t have a pricing mechanism for aluminum as it does for copper. “What we have,” he said, “is the LME — with all its baggage—as a hedging basis and a survey by an industrial publication to tell us the differential between LME and Midwest U.S. pricing.”

The new contract, Moore maintained, will give traders a form of insurance against price risk and provide a “level playing field with strong financial safeguards and immediate price discovery.”

COPPER

Mixed Prospects for the Red Metal

For a perfect example of copper’s volatile, unpredictable future, look no further than the disparate predictions of speakers at the copper roundtable. One research manager said copper prices will continue to fall over the next year, dropping as low as 65 cents a pound, while another analyst projected that average prices will rise over the long haul, welcoming in the new millennium at 90 cents a pound and even climbing above a dollar by 2001.

The gloomy view came from William Taylor, assistant vice president and nonferrous metals research manager of Carr Futures Metals Group (New York City). A believer in technical analysis, which involves reading various types of price charts, Taylor discussed different tools and terminology to track commodity prices over time periods that range from 30 minutes to several months. These charts can reflect all known factors for a commodity, he noted, whether it’s “supply-demand fundamentals for a given moment or, more specifically, whether the lack of railcars make one region higher priced than another.”

Although clearly an esoteric approach for many attendees—involving concepts such as candlestick charts, head and shoulders, bull pennants, and bearish hammer tops—the ability to read price charts is essential for all commodity professionals, Taylor stressed.

To bolster his point, Taylor detailed how price charts correctly predicted the market drop caused by the Sumitomo copper scandal in June 1996. “Charts gave out the straight dope before the news hit,” he said, “and this was at a time when few were willing to short the market.”

Turning to current charts, Taylor noted that while short-term rallies are possible, the overall trend for copper is downward. “I hate to paint a terrible picture,” he said, “but the technical analysis shows lower prices,” with a low of 65 cents possible nine months to a year down the road.

In contrast, Malcolm Southwood, senior commodities analyst for J.B. Were & Son (London), was bullish on the prospects for copper price recovery. 

Focusing on four key points—worldwide consumption, supply-demand balance, current influences on copper prices, and the prospects for price recovery—he began with a forecast that Western consumption of copper this year will fall 0.4 percent. Asia is the primary cause behind this drop, with key economies such as Japan and South Korea—the world’s second and fourth-largest copper consumers, respectively—poised for major declines.

“Consumption in Japan looks set to fall 10 percent in 1998,” Southwood said. “That alone cuts consumption 140,000 mt this year. And in South Korea, the outlook is even worse with a 20-percent fall very much in the cards. There goes another 120,000 mt.”

On the primary side, only increased consumption of refined metal by brass mills due to the tight scrap market kept him from predicting a larger fall in refined consumption. “But the impact of substituting cathode for scrap is being overplayed by some analysts,” Southwood said, “and it’s certainly not sufficient to give us a balanced or nearly balanced market this year.”

As a result, Southwood forecast a worldwide refined copper surplus of more than 300,000 mt in 1998, with much of this surplus accumulated in the former East Bloc countries and China. In the portion of the East Bloc that once constituted the Soviet Union, he noted, 1998 first-quarter inventories rose about 60,000 mt. Likewise, Chinese exchange stocks for the first half of this year rose almost 77,000 mt, with China’s total “inventory build” reaching as much as 185,000 mt, he said.

Regarding prices, Southwood noted that although the stocks-to-consumption ratio has been below five weeks for much of the year, copper prices have been uncharacteristically weak. That’s because the price of copper has been inversely correlated with the strength of the U.S. dollar, with the current strong dollar “bad news for all commodity prices,” he said. But since the U.S. economy could “slow quite sharply over the next few quarters” while Japanese economic performance starts improving, there could be a “modest technical bounce” for copper prices by year’s end, with an average price for 1998 of 78 cents a pound, Southwood conjectured.

Next year will see slightly lower copper prices—an average of 77 cents a pound—due to another large surplus of almost 200,000 mt, he predicted. But by then, copper producers will begin cutting production following their second year of copper prices below a dollar a pound, he said. That, in turn, could lead to a closely balanced market by 2000, with copper prices ready to “embark on a sustainable price recovery as early as the fourth quarter of 1999,” Southwood maintained, concluding that “our average price forecast for 2000 is 90 cents a pound, and we see copper back above a dollar in 2001.”

Slow Boat to China’s Recovery

The so-called Asian flu has hurt the copper market this year by reducing demand, especially from that region’s construction sector, noted John Chen, executive vice president of Tung Tai Trading Corp. (Burlingame, Calif.). This is especially true in China, where building vacancy rates have reached 60 percent in some areas and cities like Shanghai have imposed a moratorium on new construction, he said.

China, while not as hard-hit as other Asian countries, is also experiencing an economic slowdown, with current projections calling for annual growth of 5 to 6 percent rather than previous predictions of 9 to 10 percent. Thus, China’s days of buying scrap copper orders in the 500- to 1,000-ton range are over for the time being, Chen said. Look for orders of 20 to 100 tons instead.

Aside from buying less, Chinese purchasers are seeking lower grades as well. “A major portion of copper that had previously come in the form of Birch/Cliff and higher grades have been replaced by lower grades of material, such as copper-bearing automotive, insulated wire, and other recovery items,” Chen said, noting that these items take advantage of China’s low labor rates, which are its main strength in the recycling niche.

Although buying trends under China’s communist government can be difficult to decipher, the country should once again make heavy copper purchases after it reforms its banking system and other initiatives, such as transferring ownership of industries from the government to private enterprise, Chen noted. Such reforms could take anywhere from one to three years, and heavy buying could be delayed if China devalues its currency, he added.

For a bellwether of China’s currency fate, watch the value of the Japanese yen, Chen suggested. If the yen, trading in mid-September at 132.5 to the dollar, hits 150 or 160 in early 1999, China’s leaders will “have to swallow their pride and devalue,” he said. If that occurs, he predicted a 25- to 30-percent devaluation of China’s renminbi, from roughly 8.3 to the dollar to 11 or 12. 

It may take “some time” for China’s economy to recover, Chen predicted, but signs to watch for include a strengthening currency, falling interest rates, decreasing vacancy rates, and a rise in new construction.

Calling All Copper

In a closeup look at the supply of copper scrap from the domestic telephone industry, Neal Busch, president of Powercom Services (Atlanta), noted that telephone companies have been using copper in cables and other infrastructure for more than 100 years and that more than 18 billion feet of copper sheath is currently in service, mostly in the regional telephone companies, according to FCC data. The potential amount of telephone copper scrap rises even higher when you add in copper main lines owned by various long-distance carriers, as well as copper in central offices, switching facilities, and the other support functions. Thus, Busch asserted, “I really believe that scrap copper exists today that could be feed for our industry for years into decades and beyond.”

Currently, telephone copper becomes available as scrap in three main ways: the growth of new technology; maintenance, especially after large-scale catastrophes such as hurricanes; and, in a few cases, regulation or legislation that forces companies to dispose of buried cables that are no longer in service.

New technology is the most significant of these factors, Busch stressed. “When new or improved technology is developed, its adoption and implementation sets into motion a mega operation of construction, conversion, and/or contracting,” he explained. For instance, the conversion of U.S. central offices from electronic/analog switching to digital switching during the first half of the 1990s “produced levels of telephone copper scrap previously unprecedented because of the cabling upgrades that were necessary.”

At the same time, however, Busch discounted fiber optics and satellite or microwave technology as posing any real threat to the telephone industry’s reliance on copper, and thus the scrap industry’s supply of material. While such innovations may eventually supplant the need for copper, it won’t happen until so far in the future that no business today need worry about it, he predicted.

But while there is a vast potential store of scrap copper in the telephone industry, the flow of material is actually slowing as that digital switching project nears completion, Busch noted. Meanwhile, other potential material is being left in the ground or in the air on poles due to factors such as tight budgets and convenience. So, he stressed, “it’s our task to try to reverse this attitude of ‘leave it where it is.’”

Price alone may not be enough, he said, since stiff competition is already giving the telephone companies “the best revenues for their scrap in the history of our industry.” Instead, copper scrap recyclers must search for a more analytical method of obtaining scrap—for instance, identifying the unique, non-price-based needs and wants of particular telephone scrap customers.

Calling this approach a “quality characteristic,” Busch concluded, “We should find ways of giving good value in the services we offer to [telephone] customers and lead them in the directions that we know are correct for them.”
Will Lead Climb in 1999?

Although lead prices in 1998 have been fairly stable, they remain below the 11-year average of 27.87 cents a pound, noted Brian McIver, vice president-commercial affairs for Nova Pb Inc. (Ville Ste.-Catherine, Quebec), at the lead roundtable. The current downward trend began in May 1996 and seems to be following previous lead cycles of three years down (1990-93) followed by three years up (1993-96).

But will this pattern continue? More specifically, “will the lead price bottom out in 1999 prior to heading up in value again?” McIver asked. The answer isn’t clear, he said, due to “new variables in the lead marketplace.”

Among these variables is uncertainty over China’s role in the lead market. While the West has switched from being a small net exporter of refined lead in the 1980s to a “significant net importer” today, China’s output has increased dramatically—growing nearly 300 percent in 10 years to reach 1997’s production of more than 700,000 mt, said Angus MacMillan, research manager for Billiton Metals (London). China could be a major exporter of lead in the next five years—or it might be a major importer. Analysts have predicted both outcomes, McIver noted.

A relatively new variable shaking up the lead picture is the wave of mergers and acquisitions that have made global lead producers out of Doe Run Co. (St. Louis) and Quexco Inc. (Dallas), parent company of secondary lead smelter RSR Corp., McIver said. And, of course, no one knows exactly when several “megaprojects” involving lead and nickel mining in Australia will come online, especially given the 37 percent drop in nickel prices in the past year, he observed.

Overall, McIver concluded, “things could be much worse” in terms of global lead demand, which he predicted would remain relatively stable, with an average annual increase in Western World consumption of roughly 1.5 percent a year. In MacMillan’s view, next year will see a 50,000-mt surplus in Western World refined lead—the third consecutive year of surplus—and an average LME cash lead price of 23 cents a pound.

The outlook is less positive for North American scrap processors who handle lead-acid batteries, McIver noted. These batteries, which now account for more than 85 percent of all lead consumed in the United States, are increasingly being collected by battery manufacturers. According to industry estimates, battery manufacturers have increased their control of the scrap battery supply from 60 percent to more than 75 percent in the past five years, he reported. Moreover, even though the number of registered vehicles in the United States increased from roughly 188 million in 1994 to approximately 206 million in 1997, the number of replacement battery shipments in that same period fell more than 5 million units. Whatever the reason—including improved batteries and “less dramatic annual temperature changes,” McIver suggested—the result has been more than 44,000 mt of recyclable lead that didn’t enter the market. 

LEAD

All-Time Highs for Lead

World lead production, on the upswing since 1994, could reach “all-time highs” in 1998, with Western World production nearing 5 million mt, said Louis Magdits, raw materials manager for Doe Run Co.’s resource recycling division (Boss, Mo.). Western World consumption, which has grown from just under 4.2 million mt in 1986 to about 5.2 million mt last year, should hold steady in 1998, he said. This year’s hot summer followed by a cold winter, however, “could prove to be a very good year for U.S. battery manufacturers in terms of unit shipments,” he noted.

Magdits also highlighted lead industry consolidation, noting that his company operates the only two U.S. primary refineries and is the only company integrated as a primary and secondary producer. 

Secondary lead production has undergone “an even more dramatic consolidation,” Magdits noted, pointing to a decline of independent battery breakers from roughly 50 in 1970 to only two or three today. He also discussed Quexco’s plans to acquire GNB Technologies Inc. (Atlanta)—a secondary smelter and battery producer—in a move that means Quexco’s RSR division “may now be entering the battery manufacturing business.” That scenario “could change the client-supplier relationships that currently exist between the battery and lead companies,” Magdits said. “RSR will, with this acquisition, also obtain a battery collection system that may alter their open market activities during certain market conditions.” He also suggested that RSR may need to sell one of its West Coast plants to win FTC approval of the GNB acquisition.

One other change in the lead market has been how tolling agreements between battery manufacturers and secondary smelters having diminished the role of scrap processors in recovering used batteries—a role that admittedly has also been reduced by environmental regulation that drove many processors out of the battery market, Magdits said. At the same time, the growing battery market does offer the possibility of “some increase in volume” for traditional processors, he concluded. 

ZINC

Moving From Deficit to Surplus?

The fundamentals of the zinc market “suggest that North America will remain in a modest deficit position,” while the positive demand growth in 1998 is expected to continue into 1999 and beyond, said Thomas Gramlich, senior trader with Allied Deals Inc. (Piscataway, N.J.), at the zinc roundtable. The same is true for Asian countries such as Taiwan, India, and China, which have so far isolated themselves from that region’s financial crisis, while Western Europe should also “enjoy a period of higher-than-normal zinc demand.”

Although overall zinc consumption depends on the impact of the economic crises in Asia and Russia, U.S. zinc demand is expected to rise at least 5 percent this year, thanks in part to more than 4 million tons of extra galvanized steel capacity expected in this country in 1998 and 1999, he said. The fastest-growing sector of sheet galvanizing is in galvanized steel framing for residential construction. In fact, if growth in this sector continues at its recent pace, about 25 percent of all new residential housing will be constructed using galvanized steel framing by 2000, Gramlich said.

Overall, North American zinc consumption should reach highs in excess of 1.5 million tons by 2000, with total Western World consumption surpassing 6.7 million tons, he forecast.

On the supply side, production troubles helped cut Western World zinc concentrate by 1.5 percent last year, Gramlich said. But the availability of Western World concentrate should increase by as much as 5 percent by 1999, thanks to expected production increases in Europe, Canada, and Australia. Western World refined zinc production should also rise over the next two years because of brownfield expansions and higher utilization rates, he added. According to Billiton Metals’ Angus MacMillan, there will be a 23,000-mt surplus of refined zinc in 1999, a reversal from its projected 65,000-mt deficit in 1998.

As with lead, China will be a pivotal influence on the zinc market. China, in fact, has overtaken Canada, Japan, and the former Soviet Union to become the world’s largest producer of slab zinc, turning out more than 1.4 million mt in 1997, MacMillan said. Large amounts of this material are available for export, he noted, with exports to the West climbing from 214,000 mt in 1996 to 536,000 mt in 1997. Last year’s surge of Chinese exports effectively stopped a bull market in zinc that had been under way, MacMillan said.

Ultimately, zinc prices will face “upward pressure” from increased demand when Asian currencies begin to stabilize, Gramlich said. For his part, MacMillan sees a 1999 LME cash zinc price of 49 cents a pound.

FERROUS

Taking the Long View

Barring “catastrophic events in the world and U.S. economies,” U.S. steel consumption should increase 9 million tons in the next five years and 17 million tons in the next 10 years, forecast Steven Randall, principal consultant with Beddows & Co. (Pittsburgh), at the ferrous roundtable. Although a number of factors—from the Asian financial crisis to volatility on Wall Street—may produce some short-term market weakness, it’s important not to confuse “short-term problems with long-term dynamics,” he said.

In the 1970s and 1980s, Randall noted, economic forecasters felt Japan had found a way to grow 7 percent a year forever. Instead, the Japanese economy has been growing at less than 2 percent annually in the 1990s. Meanwhile, it was commonly believed that the U.S. metals industry “had reached the end of the road” and was headed for “extinction.” Yet in the past 15 years, U.S. steel shipments have grown more than 60 percent, he said.

The U.S. economy, however, is unlikely to escape completely unscathed from the turmoil in so many overseas regions, Randall stated. Already, the United States is experiencing an “unprecedented” influx of steel products. In fact, last year’s record 31 million tons of imports could easily be topped by more than 37 million tons this year, nearly twice the average in the first half of the 1990s, he reported. But except in the case of Latin America—where Randall sees a “significant longer-term structural change taking place”—the flow of foreign steel into the United States will likely decline, stabilizing at about 20 million to 25 millions tons a year.

“With a stable net trade position,” Randall said, “growth in demand would clearly drive equivalent growth in domestic production.” This growth will translate into an additional crude steel requirement of roughly 7 million tons by 2003, most of it from scrap-fed electric-arc furnaces. “The fundamentals in the North American economy are strong, and we see no structural changes or discontinuities in the market which would disconnect even moderate economic growth in domestic steel consumption,” Randall asserted.

Adding a steelmaker’s voice to the generally optimistic steel market picture, Linn Osterman, vice-president, sales and marketing-alloy steels for Timken Co. (Canton, Ohio), said, “While most indicators show 1999 not being as robust as 1998, we believe that 1999 should be a strong year.” Although 1998’s robust market encouraged many companies to build “significant inventories that now must be reduced,” he predicted “additional capacity evolving, especially in the small and intermediate end of the special bar quality market.”

In addition to new capacity, Osterman highlighted five other trends for the steel industry: consolidation, continuous improvement, quality improvement, technological improvement, and the need to provide value-added products and services.

Scrap Consolidation Slowing

The wave of consolidations in the scrap metal industry will continue but at a slower pace, with fewer deals funded by the acquiring company’s common stock, asserted Albert Cozzi, president and COO of Metal Management Inc. (Chicago), one of the industry’s leading consolidators. There are four reasons for this slowdown, he said: cheap scrap prices, cheap stock prices, the Asian financial crisis, and the Philip Services “debacle.” 

According to Cozzi, consolidators will be reluctant to give up stock that they now feel is undervalued, and likewise will want to hold onto their cash “because I believe most people feel that the current market conditions are going to exist for some time in the future.”

Although Metal Management does plan on making more acquisitions, Cozzi ruled out any en masse purchase of the scrap companies currently being sold by Philip Services. He left open the possibility of buying individual Philip properties, however. And while Metal Management has “a big reserve of cash,” the company is taking a “wait-and-see attitude” about future acquisitions “because we think there have been a lot of unreasonable expectations on the part of sellers in the marketplace,” Cozzi noted. He warned that “those people who have been waiting around to sell their companies for some huge multiple of their best year ever” have waited too long. 

The way future deals “are struck and structured will change,” with convertible preferred stock rather than common stock being used, Cozzi said. Also, a fair market value of the company’s assets, plus some kind of projected earn-out, will determine the purchase price, he predicted.

Calling the current scrap market a “remarket”—in which scrap sellers face regrades, rejections, and renigs on contracts—Cozzi predicted an eventual shift of the 30-day contract to longer-term deals but questioned whether smaller scrap processors would have the “critical mass” to accommodate such a change. He also stressed the need for better utilization of equipment, noting that Metal Management “went into one market where there were two major players, each with a baler, a shear, and a shredder—and we replaced all those pieces of equipment with basically one shredder that’s now fully utilized.”

Scrap Complements Continue to Gain Ground

From 1995 to 2000, minimills using electric-arc furnaces will have increased capacity by 20 million tons, said John Kopfle, manager-marketing and planning for Midrex Direct Reduction Corp. (Charlotte, N.C.). This growth is leading to a “shortage of low-residual charge materials,” especially since many electric-furnace steelmakers “are finding they can’t produce high-quality products, such as rod, special bar quality, and hot-rolled coil, using scrap alone,” he noted. Moreover, there’s likely to be “insufficient prime scrap available” to meet the requirements of electric furnace minimills. 

Thus, they’re increasingly turning to virgin iron scrap complements such as DRI, HBI, and pig iron, he said.

For instance, U.S. pig iron imports—which used to be almost exclusively for foundry use—have more than tripled since minimills began buying pig iron to offset high scrap prices in 1993, Kopfle noted. These pig iron imports will likely drop, however, due to global factors ranging from economic recovery in Asia to environmental pressures in Brazil, he said.

In the past 30 years, DRI production has skyrocketed from less than 1 million mt in 1970 to more than 36 million mt last year, with projections calling for 55 million mt by 2000, Kopfle reported. “We’re confident that long-term demand for DRI/HBI will remain strong and that there’s a need for more capacity,” he said.

A Ferrous Tour of Asia

The Asian financial crisis has had a “tangible negative effect” on U.S. ferrous scrap exporters, said Jimmie Buckland, vice president, ferrous export and shipping, for Simsmetal America (Richmond, Calif.). He pointed to reduced demand overseas and an influx of comparatively cheap Asian steel products, both of which also dampen prices for scrap sold domestically. Overall, he predicted, “Asia will continue to require imported steel scrap” but at lower price levels due to the reduced demand.

Turning to a country-by-country examination of the Asian situation, Buckland said Indonesia—the only nation suffering a double whammy of economic and political chaos—is unlikely to play any major role in international metal markets this year.

Thailand has now achieved “some measure of stability” and may be laying the groundwork for a slow recovery, he said. Malaysia is attempting to stem its economic slide with controls on capital flow and currency trading, Buckland noted, adding that “only time will tell” if the controls will work.

Korea, long the largest importer of ferrous scrap in Asia, is likely to remain so for the foreseeable future. This is especially true since the overall economic slowdown in Korea has also reduced its generation of domestic steel scrap, which accounted for 60 percent of its needs in 1997 but will only meet about 40 percent this year, Buckland said.

Taiwan’s economic growth remains positive, but steel industry cutbacks are “inevitable” due to a flood of cheap imported steel from Japan, Korea, and Russia, Buckland said. Still, Taiwan “will continue to need some imported steel scrap.”

Japan, meanwhile, hasn’t been a significant importer of steel scrap for more than two years now, he said. In fact, the country has dampened overall Asian scrap prices by aggressively exporting scrap, pig iron, and steel products. The domestic economic slowdown in Japan has created significant overcapacity in both electric-furnace and integrated steelmaking, but to date the government’s efforts to reinvigorate its own economy—and thus reabsorb more of this overcapacity—have failed.

Finally, China’s economy continues to expand, though it’s unlikely to reach the 8-percent growth originally projected, Buckland said. Recently, the country’s ferrous scrap needs have been met primarily by domestic sources. Will Chinese steel production increase and thereby require significant tonnages of imported scrap? That’s hard to say since the country’s communist government “is seldom forthcoming with its real intentions,” he said.

Difficult and Unusual Times

“These are difficult and unusual times,” asserted Eugene Salvadore, president and CEO of J&L Specialty Steel Inc. (Pittsburgh), in his talk on the global and domestic markets for stainless cold-rolled (CR) sheet and strip at the nickel/stainless steel/specialty metals roundtable.

Though the domestic market has been in “turmoil” due to the near-global economic slowdown, 1998 has still been “growth year” in terms of both domestic consumption and shipments of CR sheet and strip, Salvadore said. U.S. consumption is expected to hit 1.688 million net tons, or 1.8 percent more than the 1997 level of 1.658 million tons, according to J&L research. Shipments this year, Salvadore reported, are expected to grow 2.3 percent compared with 1997 to 1.443 million tons.

Worldwide, consumption of CR stainless steel is projected to grow 5.8 percent a year for the rest of this decade. In 1993, world consumption was just over 6 million tons, and it is expected to reach 10 million tons by 2000. “It’s an extremely steady market,” Salvadore stated.

Turning to world stainless steel capacity and utilization rates, Salvadore said that the U.S. market is approaching self-sufficiency, with capacity forecast to grow from 1.620 million mt to 1.694 million mt by 2000. World stainless steel CR capacity, meanwhile, is forecast to hit 10.273 million mt by 2000 and capacity utilization isn’t expected to fall below the assumed 1997 rate of 87 percent.

The pricing picture for CR 304, however, revealed a negative slope when measuring U.S., Asian, and European prices in the past 31/2 years. The domestics sales price, for example, was approximately $2,700 per mt in the first quarter of 1995, but had fallen to around $1,900 by mid-1998. Still, he said, the U.S. market remains the best game in town, offering the highest prices to offshore suppliers.

Even more disturbing, Salvadore maintained, has been the shrinking “conversion margin” among producers, which he defined as the cash cost of production, plus profit, over raw material cost. This margin has shrunk faster than global utilization rates, thus creating a “survival mode” mentality among domestic producers of CR sheet and strip who see foreign producers capturing market share.

Imports have exacerbated this condition in the past three years, Salvadore said. Consequently, several groups have filed unfair trade cases with the International Trade Commission (Washington, D.C.) charging specific countries with “dumping” product here at prices below their respective home markets. While the outcome of these cases may be favorable to domestic producers, it will take global economic recovery before domestic producers of CR sheet and strip will see profitability again, he stated.

Stainless Recycling Grows Up

The U.S. stainless steel recycling industry has gradually evolved through a combination of events that has brought it to where it is today, said Simon Merrills, president of ELG Metals Inc. (Mc-Keesport, Pa.).

The industry’s “youthful phase” was characterized by many participants of various sizes, speculative buying and selling, existing recyclers that grew into this new field, and a lack of market transparency. At this stage, there were “secrets” in the industry, he said.

From the beginning, stainless steel recycling has always been marked by erratic prices and demand, with recyclers basically taking the position that positive stainless steel demand would create scarcity and prices would rise, not only for nickel, but also chrome, molybdenum, and iron. Consumers also speculated and bought scrap in the expectation of higher product prices. All this, however, led to what Merrills called “inconsistent demand, poor forecasting, and perceived market imbalances.”

Thus, many smaller scrap processors used to think that if they waited long enough, sooner or later the price was bound to shoot up. In addition, in a relatively new industry, the entry fee was low and “an expert was someone who owned a magnet,” Merrills said.

Despite the introduction of the LME nickel contract, the lack of price transparency helped fuel the speculative nature of the market’s youthful phase. But it also hindered the growth process by allowing inefficient companies to survive during periods that would normally have weeded-out poorly run firms, Merrills noted. The number of firms remained high and brokers emerged, looking to exploit the lack of price transparency.

The onset of “middle age” occurred when demand contracted and brokers found it difficult to survive. Consumers, he said, were also forced to cut costs, ultimately creating a shakeout in the supply chain, Merrills said. Processors saw their margins shrink due to lower intrinsic values and higher overheads. What were specialists in this arena to do?

The response, he answered, was to seek ways to increase their respective market shares, at first on the back of a rising nickel market. This strategy worked at first. But as nickel prices fell but demand remained strong, recyclers found they couldn’t keep pace with the price decline.

The market’s next phase—maturity—began in 1996 and continues today. It’s now time, Merrills said, “for the fragmented industry to come together under the banners of a few well-financed, highly efficient companies.” The supply chain “had to be shortened” and increased market share was achieved by acquisition, he noted.

The “mature industry” will be one that’s “totally transparent” in which scrap prices will be well-known to all participants and consumers will only buy from a few reputable, consistent, quality suppliers. This transparency, Merrills suggested, makes a stronger case for scrap to be “valued at least the same as the virgin alternative.”

While scrap valued higher than the intrinsic elements has been a “rare occurrence,” usually brought about by “runaway pricing,” it’s not too unbelievable to think about in the future, particularly in a stable, reasonably priced market, he said.

Merrills reminded listeners that there is a price at which recycling stops and consumers can’t afford to let that happen. Stainless melters, he reasoned, consume more nickel than any other industry and, as a growth industry, they need low, stable prices to maintain this growth. If the nickel market swings wildly because of a lack of scrap, that growth is threatened.

Likewise, consumers have an interest in keeping the scrap supply orderly and controlled and knowing that their competitors don’t have an advantage through speculative buying. 

Thus, to help ensure a steady scrap supply, the price for scrap “should be equal to the intrinsic value,” Merrills said, noting that the elemental value of nickel in scrap will draw closer to 100 percent of the LME if the growth in stainless steel production continues at 6 percent a year.

No Cause for Gloom in Stainless

Before offering a view of 1999 and beyond, Adrian Gardner, an analyst with Brook Hunt (Surrey, England), reviewed what many were saying about nickel and the LME at the start of 1998.

There was a “wide disparity of views” regarding price forecasts, he noted, including Brook Hunt’s own “over optimistic” LME average for 1998 of $2.92 a pound. The firm believed that the small world nickel surplus in 1997 would “fall away, leaving the market closer to balance with consumption still growing” this year, Gardner said. It was also assumed that Western World nickel output was basically constrained, with little new capacity on the horizon. Also, Russian exports weren’t expected to match 1997 volumes. And with LME nickel prices holding below $3 in the final quarter of 1997, stainless steel scrap supplies were expected to “dry up.”

While most analysts shared these fundamental beliefs at the start of 1998, “to be in the majority doesn’t necessarily make you right,” Gardner said, asserting that “1998 has been a nickel forecaster’s nightmare.”

In addition to reviewing supply-demand fundamentals, Gardner noted the role of commodity and speculative hedge funds. Though funds have been involved in metal markets for several years, the extent of their effect is debatable. Nevertheless, there’s agreement throughout industry that their involvement “has substantially altered the traditional link between visible stocks and prices,” he stated.

As evidence, Gardner pointed out that in 1997 and 1998, the decline in nickel prices has far exceeded what one would expect to see in relation to LME stock levels alone. The current stock to consumption ratio of 12 to 13 weeks “certainly doesn’t justify current price levels,” he said. 

Looking at the fundamentals, Gardner focused on “key market influences on nickel” such as Russian supplies, new mine projects including pressure acid leach projects in Australia, nickel in scrap, and stainless steel growth. Refined production is forecast to grow 4.2 percent a year in the next seven years, increasing 55,000 mt from 1998 to 2000 and reaching a total of 950,000 mt by 2005, Gardner reported.

Russian production—which he described as the “single largest influence on the global market”—is expected to remain a feature, with exports to the West holding reasonably steady at 185,000 to 195,000 mt a year. This supply will be added to nickel derived from several new low-cost lateritic Australian mining projects as well as other potential new sources.

With new supply all but assured, what about demand? According to Brook Hunt’s research, the stainless steel industry shouldn’t feel “gloomy about its future,” said Gardner. Though the industry has some challenges ahead, the firm expects Western World raw stainless steel production to grow from 16.2 million mt this year to 22.1 million mt by 2005, or about 36 percent. This growth falls short of the rapid pace of the previous seven years. That should be expected, however, because “stainless is becoming a more mature industry,” he said. According to Brook Hunt, 2001 “will be the worst year of the current cycle, with stainless barely registering any growth at all,” Gardner said.

As for nickel, the company foresees nickel surpluses for the next few years and low prices as a result. Next year’s LME average, for instance, could average $2.34 a pound, up from this year’s expected $2.15 average, he said.

Cobalt: Heading for Single Digits?

In the long term, cobalt consumption has the potential to grow 3 to 5 percent annually for the next five years, said Edward Kielty, a New York City-based industry consultant. In that same period, however, cobalt prices will continue their current downward price trend, eventually bottoming out in the single digits.

From 1998 to 2003, the annual average price for 99.3-percent cobalt could slide from $16 to $18 a pound to $5 to $8, while the price for 99.8-percent cobalt could fall from $18 to $20 a pound to $6 to $9, Kielty estimated.

Despite this short-term price decline, cobalt’s long-term fundamentals remain positive, he said. On the supply side, a steadier and more reliable base seems to be developing, spread out geographically and less susceptible to political events. New mining projects, if realized, could yield 2,500 mt in 1999 and 2,000 mt in 2000, Kielty said, suggesting that the cobalt supply will be increasingly linked to both nickel and copper production. In the longer-term, the supply will hinge more on nickel demand and pricing, he said.

Production continues to increase and is currently more than 28,000 mt a year, with Central Africa still accounting for 25 percent of world output, Kielty noted. The Congo is also playing a significant role, though “to be successful it must achieve political stability,” he said.

Two other important supply sources are U.S. stockpile sales and recycled material, Kielty said. Awards from stockpile sales could reach 2,700 mt a year, while recycling could yield about 2,500 mt annually. Adding these figures to world output, available cobalt supply is approximately 33,000 mt a year against estimated consumption of about 30,000 mt, which has the potential to grow 3 to 5 percent in the next five years, Kielty said.

Titanium’s Solid Long-Term Prospects

In 1997, world markets consumed 130 million pounds of titanium, with the industrial sector using 42 percent, commercial aerospace 38 percent, the military 12 percent, and consumer product manufacturers 8 percent, said Carlos Aguirre, president of the High Performance Metals Group of Allegheny Teledyne Inc. (Albany, Ore.).

The commercial aircraft sector—which consumed 50 million pounds in 1997—showed a leveling at high volume despite the impact of the Asian financial crisis and some production difficulties, Aguirre noted. There’s a growing need to replace aging planes and a trend toward using more titanium per plane, he said.

The industrial sector, which consumed 54 million pounds in 1997, shows evidence of expanding applications, Aguirre said, pointing to infrastructure projects in emerging economies. But the Asian crisis may cause delays and cancellations. The military and consumer markets, meanwhile, absorbed 26 million pounds of titanium in 1997, including growing use of titanium in automotive, medical, and recreational products such as golf clubs, he said.

Turning to prices, Aguirre noted a decline in ingot prices from 1997 to 1998, while mill product prices increased slightly. On the raw material side, prices for both scrap solids and raw turnings have been in a sharp descent since their 1996 peaks, while Japanese sponge prices maintained a gradual upward climb, he said.

Currently, raw material is available in both titanium sponge and titanium scrap, as well as from U.S. stockpile sales. There has been a high generation of scrap from the aerospace sector, as well as more internal scrap supplies from producers and obsolete material, Aguirre said.

Summing up, the titanium industry has “healthy, long-term fundamentals,” though it could be affected by the Asian crisis and will face futher industry consolidation.

 

Most scrap and primary metal markets have nosedived this year, victims of the near-global financial crises. While the going may be rough in the short term, there is light at the end of the tunnel—for those who can persevere.