May/June 2005
Despite supply concerns, last year’s commodity markets surpassed expectations in terms of demand and prices, making 2004 truly a year to remember.
By Robert J. Garino
Our last wrap-up story on 2003 noted that global market fundamentals had improved for many commodities and prospects looked good for higher prices in 2004. Market momentum was clearly building, yet industry watchers wondered if the budding recovery was for real.
It was real all right. In fact, 2004 was one for the record books. Demand for many basic raw materials far exceeded projections and supply simply couldn’t keep pace, with aboveground stocks declining sharply to meet the increasing global consumption. In response, many commodity prices soared last year. Several base metals reached multiyear highs on the commodity exchanges, while prices for some scrap grades set all-time records. Other business costs—from energy to transportation—also rose rapidly.
With earlier fears of deflation and recession all but forgotten, inflation worries began to surface last year as the Federal Reserve raised short-term interest rates at five consecutive meetings.
Meanwhile, the war in Iraq continued, oil prices topped $55 a barrel last October, the dollar continued its descent, AQSIQ entered the recycling lexicon, President George W. Bush was reelected for a second term, and hurricanes battered Florida. Aside from a modest second-quarter pause in industrial production, however, there were no lasting “shocks” to the world economy in 2004.
Speaking of the global economy, world GDP growth was 5 percent last year—well above recent rates, with China again setting the pace at a 9.5 percent pace. Likewise, U.S. GDP growth was 4.4 percent last year, the strongest rate in five years. The Dow, meanwhile, closed 2004 at 10,783—up 329 points over 2003—while the U.S. dollar ended the year at a nine-year low against other major currencies.
Based on preliminary figures from the U.S. Geological Survey (USGS) (Reston, Va.), many metals posted multiyear highs thanks to strong fundamentals, both here and abroad. U.S. exporters, for example, shipped $4.5 billion of scrap metal last year, up 41 percent over 2003. In addition, scrap paper exports exceeded 14 million tons last year, valued at $1.5 billion—also a record. Thus, by almost any measure, 2004 was a year to remember for the scrap industry.
Here’s a summary of how seven major commodities fared last year.
Aluminum: The global aluminum market shifted from surplus to deficit in 2004, boosting the metal’s prospects despite concerns about relatively large aboveground stocks. Due to that overhang, many believed that aluminum would be a “price laggard” throughout the year.
As it turned out, LME aluminum prices trended higher as 2004 progressed, recording a nine-year high of 89.5 cents in October. For the year, aluminum’s average price of 78.1 cents a pound was 21 percent higher than the 2003 average.
Based on Aluminum Association (Washington, D.C.) surveys, domestic primary production reached 2.8 million tons last year, 7 percent below 2003 production. Aluminum consumption was 9.6 million tons, up 2.7 percent, while purchased scrap totaled 3.6 million tons, allowing scrap to maintain its 38 percent share of total consumption, USGS and ReMA figures indicate. Aluminum scrap exports, meanwhile, increased 15 percent over 2003.
Copper: The global copper market in 2004 was underpinned by the belief that consumption would far outpace new production, creating a tight supply situation and boosting LME and Comex prices. According to the International Copper Study Group (Lisbon), refined copper production posted a 719,000-mt deficit against consumption. As for prices, copper hit a 16-year high last October as warehouse stocks fell to lows last seen in 1990. Copper’s average 2004 price of $1.27 a pound was 56.2 percent better than the previous year’s average.
Domestic consumption also proved stronger than expected, which strained supplies of all copper units. This, in turn, prompted the Copper & Brass Fabricators Council (Washington, D.C.) to seek restrictions on exports of copper and brass scrap. The U.S. Department of Commerce determined, however, that neither monitoring nor controls were necessary.
According to preliminary ReMA figures, domestic copper consumption was 2.9 million tons last year, up 8 percent. Copper scrap consumption also increased 6.5 percent, year-on-year, reaching 1.35 million tons. In addition, copper scrap exports grew 4 percent.
Iron and Steel: The iron and steel markets had an extraordinary year in 2004. Global steel production exceeded 1 billion mt for the first time, with China serving as the market driver at 272.5 million mt of production. This record global production stretched the raw material supply chain, affecting iron ore, coking coal, pig iron, scrap substitutes, scrap, other feedstocks, as well as energy and transportation.
In the United States, raw steel output exceeded 100 million net tons, marking an extremely positive year. Domestic steel consumption (total shipments plus net imports) was even more impressive, growing by double digits. Similarly, U.S. ferrous scrap consumption exceeded 61 million tons, up 16 percent, while scrap exports exceeded 10.5 million tons, an increase of 2 percent compared with 2003.
Scrap prices, as measured by the No. 1 HMS composite price, averaged an unprecedented $211.60 a gross ton last year. Factory bundles likewise hit a record $442.50 in November.
Lead and Zinc: According to the International Lead and Zinc Study Group (London), lead and zinc posted global supply shortfalls of 190,000 and 214,000 mt, respectively, last year. As fundamentals improved, global inventories of both metals trended lower, though aboveground stocks of zinc—amassed over the previous two years—were still considered relatively large.
The domestic markets for lead and zinc, meanwhile, were characterized by above-trend consumption, according to USGS and ReMA numbers. Specifically, lead consumption grew an estimated 5.5 percent over 2003, while zinc demand increased 9 percent year-on-year, more than making up for its consumption decline in 2003.
Domestic scrap consumption for both metals responded in kind, with lead recovery estimated above 1.3 million tons—a record—and zinc scrap usage increasing 8 percent to 233,000 tons in 2004. On the export side, however, lead scrap shipments decreased 39 percent last year—the lowest level since 1993—while zinc scrap exports rebounded, increasing 25 percent for their best showing since 1994.
Thanks to strong global fundamentals, average LME prices for these base metals improved last year, with lead reaching 38.6 cents a pound (up 64 percent) and zinc posting 48.3 cents a pound (up 26 percent).
Nickel and Stainless: World stainless steel production reached 24.8 million mt in 2004, 7.5 percent higher than 2003, says the International Stainless Steel Forum (Brussels, Belgium). Asia was the largest stainless-producing region, accounting for nearly half of global output.
Though U.S. production figures were not available, U.S. stainless steel shipments in 2004 reached 2.1 million net tons, up 6.2 percent over 2003, says the American Iron and Steel Institute (Washington, D.C.). Domestic stainless scrap consumption, meanwhile, was 871,000 tons, up 6.7 percent year-on-year, USGS notes.
To meet global demand for stainless steel, primary nickel production increased 4.4 percent over 2003, reaching 1.26 million mt, says Macquarie Research (London). Other sources note that new production didn’t keep pace with consumption, leaving the global nickel market in deficit last year. Primary nickel consumption, however, showed less positive growth due, in part, to the metal’s volatile price performance. This, in turn, led to an increase in stainless steel product substitution, increased use of lower nickel-containing alloys, and a greater reliance on scrap.
Paper and Recovered Fiber: Though final figures from the American Forest & Paper Association (AF&PA) (Washington, D.C.) were not available, Resource Information Systems Inc. (Bedford, Mass.) estimates last year’s domestic recovery of scrap paper at 51.2 million tons. If correct, that total would represent an increase of 3.9 percent over AF&PA’s 2003 recovery figure of 49.3 million tons.
U.S. scrap paper exports also set a record last year, totaling 14.1 million tons. China was the major outlet, accounting for 46 percent of all U.S. scrap paper exports.
Recovered paper prices also had a positive year, reaching their best levels since 1999-2000. OCC, for example, averaged around $90 a short ton—its highest level since 1995’s record $127.55—while ONP averaged $85 a ton last year. Combining all grades, scrap paper prices ended 2004 “about $13 a ton higher” than at the start of the year, notes the Paper Stock Report.
In the pulp market, northern bleached softwood kraft list prices began the year at $580 a mt and closed at $650, an increase of 12 percent. Total pulp consumption, meanwhile, was estimated at 230 million mt last year, a 2.5 percent increase over 2003.
Robert J. Garino is director of commodities for ISRI.
Despite supply concerns, last year’s commodity markets surpassed expectations in terms of demand and prices, making 2004 truly a year to remember.