Market Forecast: Remaining Resilient

January/February 2020

By Joe Pickard and Bret Biggers

Even with the continued U.S. economic expansion and record low unemployment rates, the scrap recycling industry and the U.S. economy are likely to face new tests of their ability to weather difficult conditions in 2020.

Heading into 2020, recyclers have ample reason to be more optimistic about the coming year. The trade outlook has improved considerably with the expected passage of the United States-Mexico-Canada Agreement and phase one of the U.S.-China trade deal early in the year, along with China’s announcement that it plans to reclassify certain scrap grades from “waste” to raw materials. U.S. monetary policy was more accommodative at the end of 2019 than at the beginning of the year due to three Federal Reserve rate cuts, which could help revive business investment levels. Investor sentiment has remained elevated following a nearly 24% gain in the Dow Jones Industrial Average in 2019. Meanwhile, more people are back at work—the U.S. unemployment rate remained at a 50-year low of 3.5% in December—which should also bode well for consumer confidence going forward.

But the consensus forecast is for slower U.S. economic growth in 2020, as economic analysts predict the trade wars, softer manufacturing readings, and rising geopolitical and other risk factors will take a toll on growth across the developed economies. For scrap recyclers, trade barriers in key markets, excess domestic scrap supplies, and lackluster demand are reinforcing the disconnect between their declining profitability and a growing U.S. economy overall. Several factors could test the resiliency of the economy, commodity markets, and the scrap recycling industry.

Signs of Slower Economic Growth

The economic expansion is expected to continue in 2020, but at a slower rate of growth. According to the National Association for Business Economics’ December 2019 Outlook Survey, two-thirds of economists predict that a recession won’t occur until 2021 or later. However, as we’ve seen in the past, inflection points are notoriously difficult to forecast. At this time last year, the NABE survey was signaling the U.S. economy would grow by 2.1% in 2019. The same survey now shows an average projection of just 1.8% growth in 2020; other indicators also reveal concerns about the health of the economy and industrial sector.

The Conference Board’s Leading Economic Index for the United States declined 0.3% in December, the fourth negative reading in the last five months. According to Ataman Ozyildirim, the Conference Board’s senior director of economic research, the LEI’s “…six-month growth rate turned slightly more negative in the final quarter of 2019, with the manufacturing indicators pointing to continued weakness in the sector.” That sentiment was reflected in other manufacturing reports, including the Institute for Supply Management’s manufacturing Purchasing Managers’ Index reading for December, which fell to 47.2%—
the lowest reading since June 2019. ISM survey respondents indicate that slowing export orders, expanding inventories, and rising input costs are clouding the outlook for business conditions in 2020.

Not surprisingly, the uncertainty in the economic outlook has affected business sentiment and investment plans. Gross private domestic investment in the United States declined 6.3% in the second quarter of 2019, followed by a 1% decline in the third quarter, according to the Bureau of Economic Analysis. Looking forward, 68% of CEOs the Business Roundtable polled in the fourth quarter said they expect either no change or a decrease in capital spending over the next six months, up from 63% saying that in the third quarter of 2019.

Of course, the economy doesn’t operate in a vacuum, and policymakers will continue to react to the changing economic landscape. The Federal Reserve stepped in to correct the imbalance in the financial markets by lowering the target federal funds rate three times in 2019, helping to undo the inverted yield curve that caused many to speculate that a recession was imminent. With the presidential election coming up, the Fed’s window for adjusting rates in 2020 narrows significantly, as historically the Fed has chosen not to make rate adjustments that could influence the election. Any new monetary policy decisions also could have significant impacts on foreign exchange rates and commodity prices.

Mixed Performance for Commodities

The return on the Bloomberg Commodity Index reversed course in 2019, rising approximately 4% after having been down by double digits the prior year. Market watchers attribute the positive change to the lowering of interest rates, favorable movement in Chinese trade negotiations, and supply disruptions. NYMEX crude oil futures briefly rose to more than $63 per barrel late in 2019 amid ongoing OPEC production cuts and rising tensions in the Middle East. Slowing global demand for oil and rising inventories in the United States late in 2019 were raising concerns about the outlook for 2020, however. The U.S. Energy Information Administration forecasts further inventory buildups in the first half of 2020 that will put moderate downward pressure on crude oil prices. The EIA is forecasting that Brent crude and West Texas Intermediate light sweet crude prices will average around $60 per barrel and $55 per barrel, respectively, in 2020.

Rising global risk factors generally have been supportive for precious metal prices. As investors have increasingly moved assets into safe-haven investments, gold futures in New York rose to more than $1,500 per troy ounce late in 2019, and bullion prices posted their largest annual gains since 2010. While the World Bank expects gold prices to remain elevated at around $1,470 per troy ounce in 2020, improving primary commodity prices haven’t necessarily translated into commensurate gains in scrap prices or scrap market conditions.

Scrap Markets in Transition

For scrap recyclers, reduced Chinese demand, slower industrial production, tight labor availability, depressed scrap prices, and uncertainty about the specifics of trade negotiations have negatively affected market sentiment. Increased scrutiny from the press, policymakers, and the general public—particularly related to residential recycling’s challenges—will continue to shape perceptions about the entire recycling industry this year, even as recyclers are increasingly focused on market development and the targeted investments they need to produce higher-quality recycled commodities.

We expect to see more merger and acquisition activity in the recycling industry in the coming year. Driving these consolidations are the need to reduce costs and secure market share; the ongoing bottlenecks across rail, truck, and barge transportation; a cost of borrowing money that is likely to remain low for the foreseeable future; and the potential for new market development both at home and overseas.

For recyclers, as for other sectors, trade developments remain of paramount importance. Both the USMCA and a preliminary U.S.-China trade agreement appear likely to relax tariffs and trade restrictions. Given the delicate balance between domestic and export scrap demand and the uneven import tariff levels worldwide, many scrap market participants are likely to see positive effects from the new trade deals and China’s expected recognition that certain grades of scrap imports are not waste. Here’s the outlook for some of the key primary and recycled commodities in 2020.

Aluminum

Scrap metal prices continue to have a hard time keeping up with primary metal prices. Primary aluminum prices at the London Metal Exchange ended 2019 down less than 1%, while average old aluminum cast and sheet scrap prices in the United States finished the year down more than 22%. Prices for several aluminum scrap grades, including used beverage containers, fell to 30-year lows in 2019. China’s scrap import restrictions have played a role in the divergence between primary and secondary prices. In late 2017, U.S. exports to China of all aluminum scrap (including UBCs and remelt scrap ingot) exceeded 75,000 mt per month; in November 2019, those shipments were down to just over 5,000 mt.

The Chinese government’s intention to implement new standards for imports of copper, brass, and aluminum derived from recycling will be a key development in 2020. But aluminum recyclers continue to face a host of other challenges, including the low valuation of automotive scrap, competition from scrap imports, weaker aluminum demand, and a potential rebound in global primary aluminum output in 2020 which could result in a supply glut. Absent a sharp rebound in global aluminum demand, forecasters are concerned that aluminum capacity expansion plans will have to be curtailed to rebalance the market. Analysts from Morgan Stanley reported in December that “supply cuts in excess of one million tons are needed to prevent a drop to our bear case of $1,657 per ton [for primary aluminum] in early 2020.”

Copper

The global refined copper market is widely expected to see a supply surplus in 2020. According to the latest forecasts from the International Copper Study Group (Lisbon, Portugal), world refined copper production is expected to exceed copper demand by more than 280,000 mt in 2020, reversing several years of supply deficits. A return to refined copper supply surpluses would only complicate the outlook for copper recyclers, who have been faced with excess domestic scrap supplies and declining export sales. U.S. exports of copper and copper alloy scrap were down 3% year on year, as copper scrap exports to mainland China plunged from nearly 265,000 mt in the January-to-November period in 2018 to just over 85,000 mt during that period in 2019. But improved trade with Malaysia—now the largest destination for U.S. copper scrap exports—India, Germany, Belgium, and other markets has helped to offset the decline in sales to China.

As it would with aluminum, China’s reclassification of high-quality copper and copper alloy scrap imports could significantly reshape the scrap market in 2020. By late 2019, copper prices had already benefited from the signs of progress in the U.S.-China trade talks. As Reuters reported, “A renewed sense of optimism has been evident in the sharp turnaround in fund positioning on copper, as ever the metallic bellwether for the risk-on-risk-off trade. The money men held a net collective short on the CME copper contract for most of 2019 but turned net long in the last days of the year.” A December report from the Goldman Sachs Group pegs the price of copper at $7,000 per ton in 2020.

Iron and Steel

In 2020, the World Steel Association (Brussels) projects Chinese steel demand will only grow 1% while steel demand in the rest of the world will increase 2.5%, driven by 4.1% growth in emerging and developing economies excluding China. As a result, it forecasts global steel demand will grow 1.7%, to 1.8 billion mt in 2020, down from the 3.9% growth rate in 2019. But as it would with other commodities, any improvement in U.S.-China trade relations could have outsized implications for the global steel and ferrous scrap markets.

According to a press release from the U.S. Trade Representative, China has agreed to import at least $120 billion of U.S. manufactured goods in 2020, including iron and steel products. Improved trade deals with major U.S. trading partners such as China, Canada, and Mexico will play an important role for the iron and steel industries, as will ferrous scrap trade flows and domestic capacity expansion plans. For the first 11 months of 2019, Census Bureau trade data show total ferrous scrap exports (excluding stainless and alloy steel scrap) from the United States were up 0.7%, to 14.6 million mt, on sharply higher exports of No. 1 bundles, cast iron scrap, and other grades that more than offset lighter loadings of shredded, heavy melt, and cut plate and structural. At the same time, total U.S. steel imports during the first 11 months of 2019 were down 17.3% compared with the corresponding period in 2018. Major expansion plans announced by Nucor Corp. (Charlotte, N.C.), U.S. Steel (Pittsburgh), and other domestic steel producers could significantly ramp up U.S. demand for ferrous scrap in 2020.

Lead and Zinc

Over the course of 2019, zinc and lead prices were among the worst performers at the London Metal Exchange, falling 6.5% and 4%, respectively. The price decline for the sister metals came despite a drawdown in LME warehouse stocks, which typically coincides with rising prices. Reuters explains that the disconnect stems from the difficulty in getting mined material transformed into refined metal: “Smelters’ collective capacity to convert raw material into metal was last year hampered by a string of outages, including the fire at the Mooresboro refinery in the United States, the temporary suspension of the Skorpion refinery in Namibia and lower output due to an electrical failure at the Trail plant in Canada. Chinese smelters’ ability to lift run-rates, meanwhile, was constrained by the rolling environmental inspections that have become a feature of the country’s metallic supply chains.”

Looking at 2020, the International Lead and Zinc Study Group (Lisbon) is forecasting global demand for lead metal will increase 0.8%, to 11.9 million mt, while it expects world refined lead supply to increase 1.7% in 2020, to 11.96 million mt, leaving a global lead market surplus of 55,000 mt. The ILZSG also sees a 0.9% increase in world demand for zinc being outstripped by a 3.7% increase in global zinc production, resulting in a global zinc supply surplus of 192,000 mt. In light of the expected supply surpluses, the World Bank projects average prices for lead and zinc at $1,950 a mt and $2,450 a mt, respectively, in 2020.

Nickel and Stainless Steel

LME 3-month nickel futures in 2019 ranged from as low as $10,530 per ton in January to as high as $18,850 per ton in September. At the same time, closing nickel stocks in LME warehouses dwindled from more than 207,000 mt at the end of 2018 to less than 65,000 mt in November 2019. Despite the ongoing volatility in nickel prices and warehouse stocks, nickel prices outperformed the other major base metals in 2019, ending the year nearly 32% higher in London compared with the end of 2018. However, prices for stainless steel scrap came under pressure late last year amid reports of excess scrap supplies in the United States and Europe. As a result, the price of 304 stainless steel scrap in the United States declined nearly 2% over the course of 2019 despite rising primary nickel prices.

Even with continued uncertainty regarding nickel and stainless steel demand, Fastmarkets Metal Bulletin reports that “LME nickel’s technical configuration has improved and could continue to support its prices to recover higher in the short term.” The International Nickel Study Group (Lisbon) is forecasting another global nickel market supply deficit this year, which also could help underpin prices. Looking further ahead, Macquarie is projecting a recovery in the stainless steel market starting in the second half of 2020 and healthy growth in nickel demand from the electric vehicle battery market. As a result, they project steadily rising global nickel prices that are expected to reach $19,500 per ton in 2024.

Recovered Paper and Scrap Plastics

For paper and plastics recyclers, tighter import restrictions around the world, rising quality demands, and investments in domestic production capacity will remain key themes in 2020. Import restrictions in China have contributed to the restructuring of the global marketplace for recycled paper and plastic, but additional restrictions and stepped-up enforcement of existing regulations continue to surface. India, for example, is now reportedly strictly enforcing its regulations that call for zero “putrefiable organic matter” in paper consignments and that outline the tolerance for other “recyclable material” that may be present in each of its 48 categories of recovered paper grades.

U.S. exports of recovered paper, paperboard, and pulp decreased nearly 11% in the first 11 months of 2019 compared with the same time period a year ago. U.S. exports of plastic scrap plunged 39% in that 11-month period, year on year, by volume. Looking at plastics by resin type, styrene polymers were the only polymers to see a gain in 2019; all other polymers saw double-digit decreases that ranged between 28% and 69%.

Looking forward, China’s role in the nonmetallic scrap sectors will continue to loom large. RISI reports that “recycled pulp has become an alternative way for Chinese paper producers to obtain the recycled fiber they need… Chinese paper companies have plans to invest in significant amounts of recycled pulp capacity to expand recycled pulp production in different regions, mainly the U.S. and non-China Asia, to solve the potential fiber shortage problem caused by the further drop in RCP imports and the potential zero-RCP-imports scenario sometime in the future.”

Joe Pickard is chief economist and director of commodities and Bret Biggers is an economist for ISRI.