March/April 2012
Exports of U.S. ferrous scrap have grown tremendously since the start of this century. Traders are optimistic about the prospects for future global demand, though exports’ effect on prices is not always clear.
By Ken McEntee
Over the last decade, export has been the most dramatic thing that has happened” to the ferrous scrap market in the United States, says John Ambrosia, editor of Scrap Price Bulletin (Chicago). Though this country has been the world’s No. 1 exporter of ferrous scrap for quite a while—17 of the last 20 years, according to the World Steel Association (Brussels)—exports have grown significantly in volume, value, and importance to the industry. Most domestically processed ferrous scrap still remains within the United States, but the proportion that’s exported has climbed from 13 percent in 2001 to 32 percent in 2011, according to data from the U.S. Geological Survey (Reston, Va.).
The United States shipped more than 20.5 million mt of ferrous in 2010—about 20 percent of the world’s ferrous scrap exports, according to worldsteel data. In comparison, Germany, the second-largest ferrous exporter, shipped about 9.2 million mt that year, less than half the U.S. volume. Though China is the No. 1 export destination for many U.S. scrap commodities, that’s not always the case for ferrous. Turkey has taken the lead in four of the past six years. Nine countries produced more steel than Turkey did in 2010, but no country imported more steel scrap: more than 19 million mt, according to worldsteel data, 4.4 million mt of which came from the United States. Once final 2011 world export data become available, they will most likely show that Turkey remained the top ferrous scrap importer. It certainly remained the No. 1 destination for U.S. ferrous scrap: According to the U.S. International Trade Commission (Washington, D.C.), in 2011 Turkey imported 5.6 million mt of U.S. ferrous—1.5 million mt more than China received in that period. And exporters have other reasons to be optimistic: Turkey and China together took in only 41 percent of U.S. ferrous exports in 2011. Some other mature and emerging markets, mainly in the Pacific Rim, have become significant destinations, and additional ones look promising in the near term.
The export market “has become a huge factor in material availability and pricing” for ferrous scrap, Ambrosia says. Looking at quarterly and annual averages, ferrous scrap prices hit record highs in 2010 and 2011 before leveling off, he says, and exports played an important role in that achievement. As for availability, ReMA has long argued that the U.S. ferrous scrap supply is “more than ample to meet demand both at home and abroad,” says ReMA President Robin Wiener. The U.S. supply of obsolete ferrous scrap stood at nearly 1.2 billion tons at the end of 2009, according to research Nathan Associates (Arlington, Va.) conducted for the association.
Exports are clearly an important and growing part of the ferrous scrap market. Here’s a closer look at the two biggest destinations for U.S. ferrous exports in the past decade and some thoughts on where the material might be headed in the years to come.
Talking Turkey
Turkey’s emergence as the No. 1 importer of world and U.S. ferrous scrap has been a remarkable phenomenon. According to Turkey’s Steel Exporters Association (Istanbul), the country’s economic liberalization in the 1980s was a turning point not only for the development of the overall economy, but also for its iron and steel industry, which began to invest heavily in the construction of electric-arc furnace steel mills. Today the country has 24 EAFs and two induction furnaces that range in capacity from 200,000 to 5 million mt, as well as three blast-furnace plants with capacities from 1.5 million to 3.5 million mt.
Almost 72 percent of the country’s steel is produced using EAFs, according to worldsteel. Compare that with North America, which in 2010 produced 61 percent of its steel using EAFs; the European Union, 44 percent; South America, 35 percent; and Asia, 20 percent. China, far and away the world’s largest steel producer, used EAFs to produce only 10 percent of the 626.7 million mt of steel it made in 2010. “Turkey considers itself the expert in electric-arc furnace metallurgy,” says the head of export sales for a large U.S. scrap company. The commitment to EAF steel production of the country’s steel industry (which is entirely privately held) explains why it’s such a voracious consumer of ferrous scrap: That’s the primary feedstock such furnaces require.
Where does the steel go? The Steel Exporters Association boasts of one prominent destination: Turkish steel was used in the construction of the Burj Khalifa, the world’s tallest building, in Dubai, United Arab Emirates. Automakers such as Toyota, Honda, Hyundai, Renault, and Fiat also use the material. Major markets include the European Union, the United Arab Emirates, Iraq, Saudi Arabia, and the United States.
Turkey has been the world’s No. 1 importer of ferrous scrap for the past 16 years, according to worldsteel data. Its imports have grown fairly steadily over that period, from 6.8 million mt in 1995 to more than 19 million mt in 2010. Though the United States shipped hundreds of thousands of metric tons to Turkey each year in the late 1990s, in 1999 those exports fell to just 209 mt and then to zero in 2000 before rebounding to nearly 276,000 mt in 2001. (Turkey seems to have replaced its U.S. imports with ferrous scrap from Western Europe in 2000. U.S. and European ferrous prices were essentially the same that year, according to a speaker at the fall 2000 meeting of the Bureau of International Recycling (Brussels), as reported in the November 2000 issue of Recycling International.)
U.S. ferrous exports to Turkey began to grow more rapidly in 2005, when they reached 1.5 million mt, up 15 percent from 2004. They also went from 5 percent to 15 percent of Turkey’s ferrous imports that year. The U.S. contribution to Turkey’s ferrous scrap supply continued to grow rapidly, peaking in 2008 at nearly 4.5 million mt, 26 percent of all Turkish ferrous imports. After a recessionary dip in 2009, exports nearly returned to pre-recession levels in 2010, reaching 4.4 million mt, then they hit a new high, 5.6 million mt, in 2011.
Turkey is looking to add another 3 million mt of steelmaking capacity over the next five years, according to Tim Hard of The Steel Index (London), which tracks industry pricing. The SEA points out that Turkey’s steel producers continue to pursue technological developments to enhance the long-term viability of the industry in the global marketplace. “Every year, Turkey is adding a major new mill or having a significant expansion of an existing mill,” the export sales director says. The Turkish steel industry is “going to continue to expand and expand and expand, and the country doesn’t generate enough of its own scrap to be nearly self sufficient.” Thus, he and others expect continued growth in Turkey’s ferrous imports.
The China factor
At the beginning of this century, when U.S. ferrous exports began to surge, China was driving the trend. China imported about 5.1 million mt of ferrous scrap in 2000, about 1 million mt of that from the United States. It was the world’s No. 2 destination for ferrous scrap from 2001 to 2005, and it supplanted South Korea as the United States’ most important ferrous scrap market from 2001 to 2006.
Industry watchers attribute much of China’s demand growth to its preparation to host the 2008 Summer Olympic Games, which it learned it had won in July 2001. “Construction was going full force right up to the time the games began” in August 2008, recalls Scrap Price Bulletin editor Ambrosia. “That created a tremendous demand for steel in May, June, and July [2008]. During those months, the price of industrial scrap shot up to an unprecedented $800 per [mt] and above, in some cases. Once the Olympics were over, demand plummeted.”
China’s Olympic preparations are likely to have influenced short-term ferrous scrap demand and prices, but it’s interesting to note that its pre-Olympics imports of ferrous scrap peaked in 2005 at 10.1 million mt, fell to about 5.3 million mt a year in 2007 and 2008, and then shot up again to 13.7 million mt in 2009. Similarly, its ferrous scrap purchases from the United States were higher in 2005 and 2006—about 3.6 million mt a year—than they were in 2007 (2.7 million mt) or 2008 (about 3 million mt). Then in 2009 they more than doubled, reaching 6.3 million mt, before falling in 2010. China’s ferrous scrap buying seems to correlate closely to price, says Joe Pickard, ISRI’s chief economist and director of commodities: Its imports go up when prices are low, as in 2009, and they fall when prices are high.
It might be difficult to correlate China’s ferrous scrap buying to its steel production because it makes so little of its steel from imported scrap. As noted above, in 2010 China produced only 10 percent of its steel in scrap-consuming EAFs. That’s still nearly 63 million mt of steel, points out the export sales director—a volume that in itself would have made China the world’s fifth-largest steel producer that year. “Their production is monstrous,” he says. “And their [EAF] capacity is expanding. China is [following] a five-year plan to control pollution by increasing scrap melting instead of using iron ore.” But with only 5.9 million mt of ferrous scrap imports in 2010, imports were less than 10 percent of China’s feedstock for those EAFs.
China’s plan to move more steel production from blast furnaces to EAFs would seem to be good news for scrap exporters—but “China has been predicting that by 2020 it will be self-sufficient for scrap,” the export sales director says. He’s skeptical the country can meet that goal. “It is hard to imagine that China can increase its [steel] production as it is doing and remain independent of the rest of the world,” he says. “A 1-percent increase in Chinese production is almost 7 million tons.” That’s a lot of scrap the country would need to generate. Ambrosia says he hears other skepticism as well. “Maybe the year 2030 is more realistic than 2020” for reaching ferrous self-sufficiency, “but a lot of people believe that, with a billion people and all the cars on the street, maybe they can pull back on what they are importing.” If that’s the case, says the export sales director, “in the next five to 10 years, it’s possible that China could decline as a factor in the American scrap market.”
Another concern is whether China has overextended itself in ramping up new steel production capacity. Excess steel ends up on the export market, where it can depress prices—as it did in 2011, Pickard says. The country has made efforts to remove excess production capacity from the market in the past year, he notes.
Causes and Effects
What’s driving U.S. export growth? Demand, for one. As more and more manufacturing shifts from North America and Europe to Southeast Asia, the demand for ferrous scrap is sure to follow, Pickard says. A contributing factor might be the evolution of containerized ferrous shipping, says Dan Nemeth, manager of ferrous sales for Newell Recycling (East Point, Ga.). “Ten years ago, people wouldn’t think about loading ferrous into containers. Before, it was [all] done by bulk shipping. Now containers are the preferred method for [shipping] into countries like India. It has opened up some new markets, partially because it’s more convenient for transporting the materials inland.” Containerized shipping also gives landlocked U.S. scrapyards better access to export markets, though “it’s still easier to ship domestically for the processors in the United States, unless they are on the coast or have easy access to the ports,” Nemeth says. Another consideration is that U.S. ferrous has developed a good reputation for quality, Hard says. “America has much better sorting of the materials than some other countries, so American material often carries a premium of $10 to $15 a ton.”
Moving from the causes of export growth to the effects, first and foremost seems to be higher prices. Before exports began their climb, ferrous scrap prices typically moved in a narrow range between $80 and $130 a mt, Ambrosia says, but “nobody is expecting that we’ll ever see $100 ferrous again.” Prices quickly moved into the $200 to $300 range and now typically fall in the $400 to $500 range. Higher prices are the result of greater demand, he says. “The export market has caused a dramatic change in how much demand there is for scrap and what the level of competition there is in any given market cycle for that scrap.” He cautions exporters who try to take advantage of demand surges, however. “If the export yards get too aggressive and pile up a lot of scrap in anticipation of a hot market, and that market tanks, all of a sudden that material flows inland and prices get depressed.” That’s what happened in November and January, he says.
Both domestic and overseas demand have affected U.S. ferrous prices in the past decade, Pickard says. The majority of U.S. ferrous scrap never leaves the country, he points out, so “export demand is not the only price driver.” That said, if export demand went away, prices would undoubtedly fall. Ferrous scrap prices leveled out in 2011, but Ambrosia attributes that to their hitting “what is looking more and more like a natural ceiling for this period. … They’re not going to rise infinitely, no matter how hard export or domestic demand pushes.”
Many also blame exports for the market’s greater volatility. “Ten to 20 years ago, if a market moved $2 to $3 in a month, it was a big deal for a lot of people,” Ambrosia says. “With export now playing a major role, you have domestic and export markets dovetailing into each other. ... You now see the market move $20 to $40 dollars in a month, and nobody blinks.” Along the same lines, Hard recalls that domestic shredded scrap was selling for less than $300 a mt in 2006, when exports were beginning to ramp up. “We’re now consistently above $400 in a relatively short time period,” he says. “It has moved the price into a higher plane and has introduced a greater degree of volatility. The export industry is keeping the price high, and for steel mills, it’s all about price.”
Exports can lead to price volatility for a few reasons, these sources say. Shipping rates and traffic interruptions can have a major market impact. “Container prices went up with the activity of the pirates in Somalia,” Nemeth says. Looking ahead, “Iran’s threat to shut down the Strait of Hormuz could have a big impact. In a global market, everything is interrelated.”
Globalization also makes currency exchange rates a factor in scrap sales, says Ryan Hoefler, owner of Cobra Trading (Hudson, Ohio). When the U.S. dollar is weak, foreign buyers can get more of the commodity for less money. Contrast that with the beginning of this year, when the euro dropped to less than $1.25, its weakest point since June 2010. That made U.S. ferrous less attractive to European markets, keeping more of it in the United States. “So much scrap has flooded [into the markets] domestically in the last few months, it has caused the price to go down,” Hoefler says. “There was a $20 to $30 price increase for shredded and other ferrous at the beginning of January, but I think the domestic buyers started to realize how much scrap was out there, and prices rapidly started to decrease,” he says. Many companies “were not able to sell what they needed before the markets headed back to December levels.”
Currency fluctuations can have a short-term impact on the market, says the export sales director, but “those kinds of disruptions tend to work themselves out over a week or two,” he asserts. The economic factors behind the currency moves are more significant, however. “What also is impacting the market is a slowdown in European steel production, meaning they consume less scrap. So exports into Europe are going to suffer a bit, and in turn, the world is affected.” Generally, prices of U.S. scrap destined for export are pretty much in line with domestic buying prices, taking transportation into consideration, he says. “Theoretically, domestic and export prices should always be close unless there is a severe economic distortion,” he says. “It will get out of whack at times during the year, but it corrects itself.”
If exports contribute to price volatility, however, it’s hard to explain why 2011—a year with record U.S. ferrous exports—saw “unusually steady ferrous scrap prices,” Wiener says. It’s possible that U.S. trends such as industry consolidation could be stabilizing prices, Pickard says, but he also points to the fundamentals. “It’s just how supply and demand line up. In 2011, they were pretty well balanced, which dampened volatility.”
Until the world economy becomes less volatile, it’s difficult to project export trends for the next few months, let alone further into the future. Once the economy begins to pick up steam, however, demand for ferrous scrap is sure to increase, these traders and industry observers say—if not in China and Turkey, then in other markets. “There are a lot of countries at various levels of economic development,” Ambrosia says. “They are all going to have different needs. India, for example, is a country that everybody has been closely watching” for growth in ferrous scrap demand. Nemeth also expects to see “considerable new steel capacity in India and in Southeast Asia,” in countries such as South Korea and Vietnam. “Most of the new steelmaking capacity is going to be EAF-based, so they will be consuming more scrap than pig iron and steel substitutes.” The export sales director expects further Southeast Asian demand growth in Malaysia, Thailand, and Indonesia, whose economies are growing 5 to 6 percent a year, he says. Even Europe’s continuing economic uncertainty doesn’t dampen the bullish outlook for some. “If Europe softens, there is always going to be demand somewhere else to keep prices relatively high,” Ambrosia says.
Ken McEntee is editor and publisher of The Paper Stock Report and Paper Recycling Online (www.recycle.cc).