Markets, Manufacturing, and More

ISRI’s annual Commodities Roundtable Forum offered insights on the aluminum, copper, ferrous, and nickel markets, with a special look at the fate of U.S. manufacturing.

By Kent Kiser and Robert L. Reid

Last year, China was the common thread running through ISRI’s Commodities Roundtable Forum. At this year’s roundtable, held in Chicago in September, China remained a hot topic, but it was far from the only important issue. In the wide-ranging roundtables on aluminum, copper, ferrous, and nickel, speakers covered the gamut of factors influencing the markets for primary and scrap commodities. These factors included global economic forecasts, supply-and-demand fundamentals, exchange inventory levels, and currency exchange rates, just to name a few.
   New this year, the roundtables featured a special session on the past, present, and future of U.S. manufacturing, with one speaker asserting that—despite many challenges—American manufacturing “isn’t dead, it’s not dying, and it’s not going away.” Read on for more on the manufacturing session—and all the roundtable action.

FERROUS ROUNDTABLE
‘China Price’ and Currency Manipulation. On a recent visit to China, John Nolan, vice president of sales and marketing for Steel Dynamics Inc. (Fort Wayne, Ind.), had dinner with an executive from a Chinese firm that was building a 6.5-million-mt integrated mill. 
   Two centuries ago, the Chinese steelmaker reportedly told Nolan, while the United States was just getting started, China represented 44 percent of the world’s GDP. Today, China represents just 3.5 percent of global GDP. “‘All we want is to return to our rightful place in the world economy,’” Nolan quoted the Chinese executive.
Given that China hopes to reclaim that “rightful” place quickly, Nolan said, “there’s a risk or potential for China to leave a debris field that would rival that of the Titanic all the way around the globe.”
   Nolan specifically criticized China’s “mercantile” trade policy and currency manipulation practices, which rely heavily on exports and pegging the devalued Chinese currency—the renminbi—to the overvalued U.S. dollar. “Mixed and confusing signals” from Washington about China’s approach to trade and currency have convinced Chinese businessmen, government officials, and other Communist Party leaders that they have America’s “tacit approval” for these measures, Nolan stated.
   While these policies help make U.S. manufactured goods far more expensive than Chinese goods around the world, the United States continues to give China “unrestricted access to American markets,” Nolan said.
   Urging Americans to learn the lessons of history, he pointed to a similar period in the early 1980s when the U.S. dollar was too strong and the currencies of our major trading partners were too weak. Back then, President Ronald Reagan and his treasury secretary James Baker met with foreign leaders to broker an “orderly fall” of the dollar. The result was a 50-percent decline in the dollar against the German deutsche mark, the Japanese yen, and the French franc, as well as a 40-percent decline against the British pound, which helped create the longest peacetime expansion in U.S. economic history, Nolan said. 
   By contrast, China’s 1994 devaluation and dollar-peg of its currency—which has met little or no resistance from the Clinton or Bush administrations—set off a wave of other devaluations among Asian currencies, which precipitated the Asian crisis of the late-1990s, “broke the back” of that peacetime expansion, and helped produce a sharp decline in U.S. manufacturing, according to Nolan. 
   Moreover, currency manipulation “is the new vogue in circumventing U.S. trade laws,” he said. He pointed to an investigation of steel dumping by Russia that had seemed a clear-cut case of Russia selling steel below its costs of production—when the ruble was trading at six to a dollar. Then Russia devalued the ruble against the dollar by 450 percent in the late 1990s. While Russia’s costs of producing steel remained the same in rubles, the stronger dollar value of those rubles put its steel production costs artificially below the price at which it was selling the steel in the United States, Nolan explained.
   China led the way in this currency manipulation game, establishing what Nolan called the “China price,” which is the price at which Chinese suppliers reportedly deliver their goods and services to U.S. customers—and the price that U.S. suppliers must meet to avoid losing business.
   The China price is one that’s undervalued principally through currency manipulation from 10 to 75 percent—Nolan agreed with a 40-to-50-percent figure. In addition, the China price “does not respect profit and loss in any way” and is heavily subsidized by the Chinese government, he charged.
   The result is an estimated $160 billion U.S. trade deficit with China this year—“the largest bilateral deficit the U.S. has ever experienced with any trading partner,” Nolan said.
   In response, he urged scrap dealers and ReMA to support the China Currency Coalition—which includes both ferrous and nonferrous trade associations as well as organized labor and other groups—in its efforts to “end Chinese currency manipulation.” Just before the roundtables, the coalition’s Section 301 unfair trade petition was rejected by the Bush administration. 
Production Problems? Though Chinese scrap buying is “blamed for sending U.S. scrap prices through the roof,” the real drivers in this price hike have been U.S. steel production factors, argued I Michael Coslov, chairman and CEO of Tube City, LLC (Glassport, Pa.).
   In the late 1990s, he noted, the United States used to import some 40 million tons of steel a year, 20 percent of which—or 8 million tons—became scrap. Today, imports have been cut to roughly 20 million tons, eliminating some 4 million tons of steel scrap that used to be available in the United States. 
   Moreover, Coslov said, the growth of scrap-fed electric-arc furnaces means that the steel industry actually needs “an additional 14 million tons of scrap that was not needed 10 or eight or six years ago,” which has a “pretty traumatic impact. It’s the equivalent of 14 minimills needing scrap every day.”
   When the old BOF steelmakers thought scrap prices were too high, Coslov said, they “simply turned on another blast furnace and turned out more hot metal to keep the price of scrap pretty even.”
   Modern steelmakers don’t have that option, in part because their substitutes for scrap—such as DRI, HBI, and pig iron—aren’t as readily available. One reason is that many DRI/HBI operations were shut down when scrap prices plummeted in the late 1990s, he noted. Plus, many of these products are made using natural gas, whose prices have “gone through the roof,” he said.
   Coslov also challenged the idea that China is consuming as much scrap as many people believe, arguing that the country also has many integrated mills. Moreover, he noted that today’s ferrous scrap exports of roughly 11 million tons aren’t that unusual. 
   “We’ve exported 11 million tons lots of times,” Coslov said, adding that the United States is also importing the equivalent of 4 million to 5 million tons of scrap plus 1.5 million to 2.5 million tons of DRI and HBI. 
   “So the net effect [of those exports] is only 4 to 5 million tons, yet the price is higher than anytime in history,” Coslov said. “So how can it possibly be” scrap exports to China or any other location driving up domestic prices? he asked.
   Answering his own question, Coslov asserted that the problem was “right here in this country” because “electric-furnace production came on so fast that people misread the reservoir of scrap.”
Improved Ferrous Financials. During the roundtables, hot-rolled sheet steel was selling at record levels of $700 to $800 a ton, including surcharges, noted Randy Cousins, managing director, industrial products and transportation, for BMO Nesbitt Burns (Toronto). Cousins explained that “the single most important driver behind today’s price blow-off was the destabilization in the price structure for steel.”
   This destabilization caused the rash of steelmaker bankruptcies in North America, which led to industry consolidation that increased market discipline, Cousins said. As a result, the “financial condition of the [steel] industry is much improved,” and now three major players dominate the three major product classes for North American steel: sheet, plate, and long products, he said. Changes in the supply structure “account for 80 percent of the move in the steel price over the last twelve months,” Cousins concluded.
Though steel remains a cyclical business, he wondered whether the “old benchmarks” still apply. For instance, “in the past, a lift in pricing required a sustained utilization rate of 85 percent or more,” he said. But “the current price cycle started with a utilization rate of less than 80 percent,” which has never happened before. Indeed, he noted, at utilization rates below 85 percent, prices tend to fall, not increase. Improving demand has definitely helped boost steel prices, and the devalued dollar is a “seminal event” that isn’t getting enough attention, Cousins said. 
   Looking forward, he noted that, with “supply driving the markets, then the risk to the price is from new supply.” North American steelmakers are “sold out in terms of raw steel,” he said. “There is no marginal capacity.” 
   Imports will provide the additional supplies to meet rising demand, he concluded. Though “deep-discount imports have the potential to flood the market and drive down prices,” he noted, greater market discipline in North America and the dominance by the three suppliers of key product categories should mean “it will take much higher levels of deep-discount offshore steel to disrupt domestic pricing.”
   Focusing on China, Cousins noted that the rate of growth for Chinese steel production has been easing. Factors limiting Chinese growth include pollution concerns and questions over the availability of high-quality metallurgical coal, natural gas, iron ore, and electricity. Also, fears that China would eventually become a major steel exporter have helped limit production expansions in other parts of the world and perhaps even accelerated the closure of some older capacity, Cousins said.
   In a final comment, Cousins suggested that even if steel prices do pull back, “scrap prices have the potential to stay high” given the current record metal spread.
Offshoring Drums and Hedging Futures. Two additional ferrous speakers discussed, alternately, the steel drum market and its impact on scrap, and the possibilities of a steel financial hedging contract. Lester Trilla, president of Trilla Steel Drum Corp. (Chicago), highlighted the impact of the aforementioned “China price” on his company, which has seen its volume decline as customers buy steel drums from Asian producers and shift their drum-buying plants to low-labor Asian countries. As a result, Trilla Steel Drum is also considering building an offshore plant to “go where our customers are,” Trilla said.
   He also noted that the typical steel drum is becoming thinner through the use of lightweight steels, which means they’re using less steel and generating less scrap. Manufacturers and scrap processors need to work together more “to get more value out of our scrap,” he urged.
   As for creating a hedging mechanism for steel, such a move is difficult because steel is a semifinished product whose specifications are driven by users, noted Albert Getz, senior director-metals research at the New York Mercantile Exchange Inc. (Nymex) (New York City). Moreover, “steel does not store well over long periods of time, making a physical delivery contract impractical,” he said.
   Nonetheless, the volatility of steel prices has led some to create their own risk-management vehicles for steel, such as one steel service company that uses a “basket of stocks, bonds, and commodities that roughly track steel prices,” Getz noted.
   For its part, Nymex is reviewing “a cash-settled futures contract based on a reliable market index” that would not entail physical delivery but would “incorporate or be based on the key delivery area of western Pennsylvania.” The same area is the aggregate pricing area for a “volatile diversified wholesale power market” and thus offers “potential for an effective spread relationship between steel and power futures,” Getz concluded.

ALUMINUM ROUNDTABLE
Scrap Shortage? There’s a “widespread shortage” of aluminum scrap in the United States, Western Europe, Japan, and especially China—and these regions will likely endure a “significant shortage” for several years to come, said Parks Dodd Jr., president of Aluminomics L.L.C. (Atlanta). Dodd, a consultant for London-based CRU Group, cited CRU data in forecasting the primary aluminum and scrap markets.
   Overall, scrap demand has been growing 4 to 4.5 percent in these regions while supply has increased only about 3.5 percent, Dodd noted. As a result, China in particular experienced a 950,000-mt shortfall last year that will worsen this year and won’t moderate until at least 2008 or 2009, he said.
   Moreover, data on aluminum scrap is “hard to get ... even from the United States,” Dodd asserted. Labeling the scrap market “opaque,” he noted that consumers were making raw material decisions “based on poor information on what scrap will really be available and at what price.”
   He described the market as being in “disequilibrium,” with narrow U.S. spreads “reflecting more competition for scrap” and “no persistent relationship between U.S. scrap supply and prices.”
   To reach equilibrium, “either scrap recycling rates—and therefore prices—have to rise by up to 10 percent or primary has to be substituted for scrap further, or both,” Dodd stated.
   Though U.S. scrap prices have occasionally moved ahead of ingot, Dodd does not believe scrap can persistently rise above prime. “If we assume a long-run primary price of $1,400 a mt and an average recovery of 14 percent, then the long-run ceiling to the price for scrap is around $1,200 a mt,” Dodd said.
   In 2004, though, CRU’s data showed a volatile primary market, with prices well above that long-run price of $1,400 and occasionally exceeding $1,800.
   LME stocks have been declining rapidly all year, Dodd observed, but the level of unreported stocks is unclear.
   “If you believe there are no unreported stocks, then the aluminum price will cycle much higher,” he noted. If, however, you believe there are unreported stocks, ingot prices will still rise in 2005, “but it’s not a tremendous increase.”
   Dodd predicted 2004 ending with an average primary price of 76 to 77 cents a pound, then gaining a penny or two in 2005 but staying slightly under an 80-cent average.
Gauging Growth. U.S. economic growth will be “OK” next year, with the consumer economy underperforming “in a significant way” and the industrial economy overperforming, “with ramifications for end-use demand for aluminum,” said Lloyd O’Carroll, senior vice president and chief economist for BB&T Capital Markets (Richmond, Va.). Though O’Carroll sees supply restraints for both semifabricated and extruded products, he predicted that overall U.S. aluminum shipments would rise 6.7 percent this year—well above the 1.1 percent recorded in 2003—and 6.2 percent next year. The transportation market will lead the way, with 10 percent growth in 2004 and 9.9 percent in 2005, he forecast. Construction will improve going forward, with 7.5-percent growth expected next year as nonresidential activity begins to rise, he said. Florida, in particular, will see considerable rebuilding following its extensive hurricane damage this year, with plenty of aluminum scrap also coming out of that market.
   Looking globally, O’Carroll noted that Western World primary aluminum consumption has risen considerably since the early 1990s and that China’s consumption could grow about 16 percent this year—slowing somewhat from last year’s 21 percent—and roughly 11 percent in 2005. O’Carroll added that he considers the 11-percent prediction too low, noting that if Chinese consumption exceeds that amount, “the markets can’t get anywhere close to balanced.”
   After rising dramatically since 2000, China’s aluminum production had begun to fall at the time of the ReMA roundtables. Some older smelting technology has already been closed in China, and another 600,000 mt of capacity is at least scheduled to shut down by year’s end, O’Carroll noted.
   China’s recent role as a net exporter of primary aluminum could be ending, he added. The Chinese government’s value-added tax export rebate, which had created a strong incentive to export aluminum, has been cut nearly in half, and rumors say it could be eliminated or switched for a surcharge. “Beijing does not think China should be an exporter of primary aluminum,” asserted O’Carroll.
   Looking at primary aluminum inventories, he noted that they have fallen to levels not seen since the late 1980s, with LME inventories declining by as much as 6,000 mt a day with no letup in sight. 
   In the alumina market, prices that ran up to nearly $500 a mt in early 2004 before selling off were headed back up again during the roundtables. Hurricane damage in Jamaica—which accounts for 7 percent of the world’s alumina refining capacity—and other factors could push prices back above $400, O’Carroll said, noting that China is already paying roughly that much for the alumina it buys off the spot market.
   Alumina shortages should continue at least into 2006, he added. An aluminum deficit will last at least through next year, with global consumption increasing an estimated 5.4 percent against a production rise of just 3.3 percent, O’Carroll said. Moreover, the surplus inventory is expected to disappear completely in 2005. O’Carroll forecast primary aluminum at 88 cents a pound next year, or $1,940 a mt, perhaps even topping $2,000 a mt. Prices should peak in 2005, he added, then decline to roughly $1,800 a mt for 2006—and then “nasty numbers come ’07 if you’re a producer.” 
Exploring Extrusions. The U.S. extrusion market has begun to “crawl out of the Valley of Death,” said Lynn Brown, vice president, communications and external affairs for Hydro Aluminum North America (Linthicum, Md.). In his view, the recent three-year downturn for the U.S. extrusion industry could signal “a new reality” in the market given that previous downturns were usually followed by a quick and sharp rebound.
At the moment, though, the extrusion industry seems to be recovering, with 8 to 10 percent growth expected this year and roughly 5 to 7 percent improvement next year, Brown said. While such growth is “better than nothing,” he stated, “it’s certainly much less robust than we typically see coming out of a downturn.”
Moreover, the recovery is concentrated rather than across the board. Transportation and capital goods could both grow by double digits, Brown predicted, while the durable goods and building-and-construction sectors should see little or no growth.
   “There are a lot of reasons to suggest that a ‘new reality’ is coming at us,” Brown said, pointing to the “significant challenges” facing the U.S. extrusion industry.
   First, there’s a “significant deficit in primary aluminum in North America,” he said. “We estimate it at about 1 million tonnes, which will likely double out through 2008.” This deficit can be closed in one of two ways—by more
imports or by greater reliance on scrap, Brown said. Yet aluminum scrap recovery is actually falling, down 24 percent since 1999. Moreover, there’s “a gap of about 280,000 tonnes that we really can’t explain,” he noted.
   Export volume is up, meaning that some 230,000 mt of that unexplained gap probably went offshore, Brown said. As for the remainder, “the data is lousy. There is no good data.”
   Brown also forecast challenges for billet supply, noting that primary aluminum producers face ongoing power and alumina price pressures while remelt operations have trouble finding the volume and quality of scrap they want.
   Noting that Hydro is concentrating its efforts in remelt, Brown stressed that “the challenge for all of us is to figure out how to effectively dig deeper into the scrap heap that’s out there and figure out how to process that material, how to segregate it, and how to process it without environmental harm.”
   Turning to the ever-present issue of China, Brown noted that while China’s extrusion exports to the United States have risen dramatically, the absolute volume is still just over 1 percent of the North American market. “It’s nothing to be ignored because it’s likely to grow further,” he said, “but the real question, we believe, is the question of finished product.”
   Over the past several years, Brown noted, particular segments of the extrusion industry—such as patio furniture, healthcare products, and architectural products—have moved their operations offshore, taking some 100,000 to 125,000 mt of extruded aluminum with them that returns to North America as finished products.
   Brown also detailed what he sees as the aluminum industry’s failure to effectively compete with alternative materials, such as steel and plastic. As a result of poor material promotion, for instance, “we find very distorted perceptions about the properties of our material” on the part of designers, architects, and product developers. Productivity in the U.S. extrusion industry is flat compared with growing productivity in Europe, he added. Plus, the domestic extrusion industry isn’t even boosting its own capacity. Instead, manufacturers have installed 60 percent of the new presses since 1998, “choosing to backward integrate as opposed to relying on the extrusion industry to provide them with their parts and services.”
   Brown called on extruders to change from the old ways of “mediocre” service, low investment, and low innovation to work to build up the extrusion industry and make scrap a greater part of an emphasis on sustainability.
Secondary Thoughts. Exploring the secondary smelting markets, Jim Butkus, president and general manager of Audubon Metals L.L.C. (Henderson, Ky.), noted that his industry is enjoying an upturn this year after experiencing a “dismal” 2003. Still, secondary smelters find it extremely difficult to set prices at either end of their operations, whether buying aluminum scrap or selling aluminum alloy. Moreover, when secondary smelters have tried to impose surcharges, it’s usually because they want to “get rid of credit-risk customers,” Butkus noted.
   He stressed how dependent the secondary smelting market is on the automotive industry, which accounts for 50 percent of secondary alloy sales. Current projections call for U.S. production of 16 million vehicles this year, an amount that Butkus said “isn’t so bad—it does keep us busy.”
   The LME’s North American Secondary Aluminum Alloy Contract (NASAAC) remains the dominant automotive price index, Butkus said, though he added that it remains a maturing, volatile index. “It’s not one we prefer or favor,” he said.
   Looking ahead, Butkus predicted that primary aluminum prices will stay above secondary prices, that U.S. automakers will enjoy strong sales next year, and that aluminum die-casting shipments will grow 7 percent through 2005. At the same time, commodity prices will rise and larger smelters will continue to move operations offshore, leaving “smaller smelters like us here to fight the pressures that exist domestically,” he said. One way to defeat those pressures is to forge alliances with end-users and scrap processors, Butkus concluded.

COPPER ROUNDTABLE
Detailing Deficits. The refined copper market will see a deficit of some 505,000 mt this year, which will be cut roughly in half for 2005 to 250,000 mt, predicted Thomas Boustead, metals analyst at Refco L.L.C. (New York City). Accelerating mine production is one reason for the declining deficit, he said. Copper mine production grew just 1 to 2 percent in 2003 but should grow 6 or 7 percent this year and next year, he predicted.
   Boustead saw copper prices through the first quarter of 2005 in a range of $1.10 to $1.45, thanks to the ongoing deficit, though he warned that deficits don’t always produce higher prices.
   Concentrating on copper demand, Boustead forecast slower GDP growth in most copper-consuming regions except Europe and Canada. This slowing growth, however, does not signal anything negative, such as a recession or big downturn for copper consumption, he said. Both China and the United States recently enjoyed “extremely rapid growth,” which Boustead described as unsustainable. Thus, “we’re going to have to see some slowing in the economic activity, which will have some effect on the growth of copper and copper demand being less robust in 2005,” he said.
   Though Boustead expects the overall U.S. economy to slow down next year, it won’t necessarily involve the most copper-intensive areas, he said. Building construction, for instance, remains high, and “we remain pretty optimistic about residential construction.” The Federal Reserve’s interest rate hikes could weaken automobile sales, he noted, but the biggest threat to the U.S. economy is the increasing cost of energy.
   In China, the government has started tightening credit standards and limiting credit to certain industrial sectors. Annual growth in Chinese industrial production “appears to have adopted a bit of a downtrend” compared with previous years, Boustead said. Investments in fixed assets have also declined. Together, these factors suggest that Chinese copper consumption “may be a bit slower in 2005,” he said, adding, “We still think it’s going to be fairly robust—perhaps high single-digits, low double-digits.”
China’s Leading Role. Ian Holden, manager of recycling for Noranda Inc./Falconbridge Ltd. (Toronto), projected strong copper consumption ahead, with China leading the way. “We believe global copper consumption will reach 20 million mt by 2010, and China will account for 25 percent of that, or 5 million mt,” he said.
   Though he also predicted a relative slowdown in Chinese consumption, that simply meant that the 23 percent growth from 2003 will be about 15 percent this year.
   China has “room to grow,” he added, noting that Chinese copper consumption per capita is far below its Asian neighbors. Taiwan leads per capita consumption at roughly 65 pounds, while South Korean consumption is roughly 30 to 40 pounds and Japanese consumption is about 25 pounds. By contrast, China consumes 3 to 4 pounds of copper per person. Just by doubling consumption to 7 or 8 pounds per person and multiplying that consumption by 1.3 billion people, China could easily reach 5 million mt of consumption by decade’s end, Holden noted.
   On the supply side, Holden foresees limited increases in copper production for the near-term, thanks to expansions and restarts. Even so, any significant new sources of copper “are a long way off, at least not before 2008,” he said.
   Forecasts of copper prices next year range from a low of 88.5 cents a pound to $1.35, with the average working out to $1.17, Holden said.
   Turning to Noranda’s own scrap needs, Holden stressed the importance of recycling to the firm’s smelting and refining operations, with scrap accounting for 85 percent of Noranda’s platinum/palladium production, 20 percent of gold, 15 percent of copper, and 10 percent of silver. Noranda’s “ideal” scrap shipments would involve truckload quantities from a known source, with ongoing generation of consistent quality, bulk deliveries, but no commingling with other recovered streams, Holden explained.
China’s Magnetic Pull. The United States should show strong growth in copper consumption both this year and next, said Stephen Ruth, senior vice president, sales and marketing for Phelps Dodge Magnet Wire Co. (Fort Wayne, Ind.). “But the real key is China,” he said, noting that as the world’s largest copper consumer, “what happens in China will have an ever-more dramatic effect on copper pricing.”
   In the copper-consuming magnet wire industry, for instance, manufacturing has increasingly shifted to regions with lower labor costs, especially China, Ruth said. “Go into Home Depot to get a Black & Decker cordless screw driver,” he noted. “Five years ago, the motor was made somewhere in North America—today it’s made in China.”
   Phelps Dodge itself recently opened a magnet wire plant outside Shanghai—“not for lower cost, not to ship back to North America,” Ruth stressed. “It’s simply that that’s where our customers are, and to service our customers we had to be there.”
   Though Phelps Dodge is not itself shipping magnet wire back to the United States, the wire is returning inside finished products such as DVD players, refrigerators, and other electrical appliances, Ruth noted.
   Still, he estimated that shifts in where magnet wire is produced have decreased the pool of magnet wire scrap available to North American processors by at least 12 million to 14 million pounds over the past four years, without counting the scrap generated by motor manufacturers or other manufacturers down the line. “All that scrap left the marketplace, which has a big effect on everyone in this room,” Ruth told
attendees.
Red Metal by Blue. Bruce Blue, president and CEO of Freedom Metals Inc. (Louisville, Ky.), challenged the idea that copper is in short supply. Industrial accounts might not be providing as much as before, he conceded, but “supply has skyrocketed” from other sources, such as plumbers, electricians, and small dealers.
   Copper prices have also skyrocketed, he said, though he noted that margins have not increased. Thus, despite this being one of his small firm’s most profitable years ever, those profits required considerable more nonferrous volume. “In years where we had the same amount of profit, our sales were half—we’ve had to double our sales to make the same amount of profit,” he noted.
   Blue expressed concern over the loss of U.S. manufacturing to other countries. Though America’s remaining industries are using more copper, “it’s probably not enough to make up the difference from the lost manufacturing,” he warned. Blue also noted predictions that China would be consuming 35 percent of the world’s oil in a few years, which could dramatically increase the cost of fuel in the United States.

NICKEL ROUNDTABLE
Nickel in a ‘Tenuous Balance.’ Nickel looks to be “fundamentally strong at least for the next couple of years,” supported by strong growth in both stainless and non-stainless markets as well as ongoing supply issues, noted John Vorberger, sales marketing manager, special products for Eramet North America Inc. (Coraopolis, Pa.), speaking at the Pittsburgh Chapter’s nickel roundtable, held in early September in Pittsburgh.
   Global stainless production—which accounts for 67 percent of nickel demand—is expected to grow 5 percent annually in 2005 and 2006, with China continuing to be a significant driver of nickel demand, Vorberger said. Also, nickel-alloy products—which account for 10 percent of nickel usage—will “continue to accelerate and become a more significant contributor on the demand side,” he noted.
   Nickel demand is underpinned, in part, by solid industrial growth, including the United States and Japan, as well as critically low exchange inventory stocks of nickel, Vorberger said. Nickel has also built its strength on supply issues, with limited increases in new production expected in the next few years along with only incremental increases in Russian production, he stated. Offering some figures, Vorberger said there will be 103,000 mt of additional nickel production capacity added through 2006 and 251,000 mt from 2007-2010.
   On the scrap side, the market has seen a “rather significant increase in the availability of stainless steel scrap as well as a very significant rise in the value of iron units in the scrap,” noted Vorberger. Going forward, though, he sees limited growth in the scrap supply and scrap ratios remaining about the same in 2005 as in 2004 on a global
basis. 
   Other dynamics in the nickel market have included “a lot of destocking” from China due to the reins put on its economic growth by the Chinese government, Vorberger said. The substitution of 200 Series stainless for 300 Series stainless has been another trend, replacing an estimated 20,000 to 25,000 mt of nickel demand, though this trend has about reached its peak, he noted.
   Given the low nickel stocks and the current production limitations, “the market does remain volatile to any supply disruption or significant occurrence on the demand side, so there’s a tenuous balance at best,” Vorberger said. 
Stainless Structural Changes Ahead? Beyond fundamental and technical drivers in the stainless market, another factor is the changing structure of the business, said Andrew Wallace, director of purchasing for Allegheny Ludlum Corp. (Coraopolis, Pa.). By structure, he meant “the business structures that define the interactions between producers, suppliers, and consumers and how these businesses are ultimately linked.”
In the ferroalloy market, for instance, there has been a dramatic shift from a structure of numerous traders to a structure of very strong relationships between producers and fewer direct sales agents, Wallace explained. In some cases, producers are selling directly to consumers, and these agents have become the primary contact for the stainless producers. “That structure has diminished the competitiveness of many of these commodities,” he said. “Gone are the days when large stocks of ferroalloys under the control of several traders would be available to compete for spot contract business. I’m not convinced that the consolidated structure in ferroalloys has been good for consumers, whether buying on quarterly contracts or index contracts.”
   Due to a reduction in the win-win relationships in this market segment, Wallace said, consumers have made “strategic moves toward other more beneficial structures.” Allegheny Ludlum, for instance, has shifted its focus to the stainless and alloy scrap market to reduce its exposure to the reduction in the competitiveness in the ferroalloy market.
   “As a result,” he noted, “we are starting to see a shift in the business structures between stainless scrap processors and stainless steel producers. This shift is focused on taking cost out of the supply chain and developing more of a partnership structure between these businesses.”
   There’s also a change underway in the structure between ferrous, or “carbon,” scrap providers and stainless producers, Wallace said, stating, “It’s my observation that ferrous processors are moving away from brokering scrap toward the production of blended ferrous scrap.” In his view, the next goal is for ferrous scrap processors to add chrome-bearing materials to carbon blends so that those scrap blends can be melted directly.
   The challenge is that carbon scrap providers don’t have a lot of chrome-bearing products available to them, which prompted Wallace to ask: “Could this be another structure change in the making between ferroalloy agents and the carbon scrap producers? No one can predict what will happen, but opportunities exist for those on the supply side willing to adopt these new value-added structures to meet this new challenge.”
Reviewing Ferrochrome Factors. Like other raw materials for the stainless business, ferrochrome has seen strong demand and experienced “remarkable price increases” in the past year and a half, rising from 32 cents a pound in January 2003 to 74 cents in April 2004, said Daniel Marx, vice president of Considar Inc. (New York City).
   More than any other time in recent history, he stated, currency exchange rates have had a major role in determining the ferrochrome price. Though South Africa accounts for 50 percent of ferrochrome production, ferrochrome sales are based on the U.S. dollar, not the South African rand. Thus, a weak rand raises the production costs of South African ferrochrome producers. Due to the weak rand, rising freight rates, and exploding coke prices, South African ferrochrome producers have been forced to raise prices dramatically.
   If the rand maintains its current exchange level, Marx said, the planned expansions by South African ferrochrome producers could become too expensive and could be shelved. This would keep the ferrochrome price tight and lead to a slight shortage.
   In the U.S. market, the Defense Logistics Agency (DLA) plans to sell 70,000 to 80,000 short tons a year of ferrochrome from its government stockpiles, Marx said. This ever-present availability of DLA supplies will act as a cap on pricing.
   Another factor that may keep prices in check is the “tremendous increase” in the nickel price and its effect on scrap availability, Marx noted. Historically, as the price of nickel rises, so does the availability of nickel-containing scrap. The higher the scrap utilization by stainless producers, the lower their demand for ferrochrome, he observed. If nickel prices continue to maintain their lofty levels, more scrap will be substituted for nickel and ferrochrome, whose prices will “react accordingly,” Marx stated. Thus, while higher ferrochrome prices concern stainless producers, he said, “I think it’s fair to say that the very high nickel price is a much greater threat to long-term growth in stainless steel.”
A Strong Metals Economic Cycle. Though the U.S. economic growth rate is slowing, there’s still growth and the economy is “probably healthier today than it was this time last year and the outlook is probably healthier,” said Martin Abbott, publisher of American Metal Market (New York City). The U.S. economy will be “reasonably robust” going forward, maintaining its current level of growth around 3 percent, he stated.
   Some issues could dampen the U.S. economy in the future, however. One concern is “the issue of debt in this country at both the individual and the national levels,” Abbott said. In light of another major increase in U.S. consumer credit in July, he asked, “How much longer can the U.S. consumer support not only the U.S. economy but also the world economy?”
   The answer will largely depend on interest rates, which Abbott called “the key to the short-term and long-term performance of the economy.” Higher interest rates—by “many, many percentage points”—and a weaker dollar will be required to bring some balance back into the economy if the United States continues its deficit spending, he asserted. In turn, higher interest rates will “certainly choke off the consumer here in the States.” Unfortunately, he added, “the other economies in the world may not be able to pick up the slack left when the U.S. consumer falls exhausted back on their pocketbook.”
   Other economic issues that could affect the U.S. economy include:
Oil Prices. Though higher oil prices are always a concern, Abbott saw no immediate need for alarm. “We would need to see oil trading at $60 a barrel to have a similar impact as during the energy crisis in the U.S.,” he said.
Automotive Production: General Motors and Ford announced plans to reduce their fourth-quarter output 7.5 percent, reported Abbott, explaining that these moves reflect the “general reduction in the rate of increase in the economy.”
Productivity Gains. Though increasing productivity is generally viewed as a good trend, it can hurt the economy by reducing the number of people working, said Abbott. “Every time you reduce the number of people working, you reduce the number of consumers,” which ultimately could lead to “a collapse of a consumer economy,” he said. 
   Turning to the U.S. stainless market, Abbott noted that stainless imports into the United States rose 21 percent in June compared with the previous June, based on figures from Metal Bulletin Research. While Asian stainless shipments to the United States rose 29 percent that month, China’s portion of those shipments was small. “We can take some comfort from that, or we can take that as a bit of a warning,” Abbott said, suggesting that “there’s plenty more stainless to come from China in the future.”
   Meanwhile, U.S. exports of stainless products declined in June, which is actually a positive sign because it means “U.S. demand is good.” Indeed, he reported, U.S. consumption of finished stainless products rose 10 percent in
the first five months of 2004. The U.S. stainless scrap market has also seen high demand, with June exports of stainless scrap reaching a record 62,900 mt, he said.
   Similarly, the metals economy in Europe is “rocking and rolling,” outperforming the overall European economy. As Abbott remarked, “The metals industry is catching up for a lot of years of under-performance.”
Looking forward, nickel will be the main influence on short-term demand for stainless and scrap in the United States and Europe, he said. As of early September, nickel stocks were edging up, the substitution of 200 Series stainless for 300 Series was largely maxed out, and the nickel market had less of a speculative element from funds, he said. Still, nickel’s price volatility remains “horrendous,” Abbott said. There are also new worries about Norilsk, the large Russian nickel producer. Hong Kong Shanghai Bank recently pulled out of a financing deal with Norilsk, citing uncertainty over the investment climate in Russia. Given these question marks, “I think it’s perfectly natural that buyers would hold off paying for nickel units in any form until they see where the price settles,” he said.
   Overall, Abbott asserted, “we are in a strong metals economic cycle. We think that capacity may be rotating around the globe, but right now the globe seems big enough to take some of that rotation and still maintain some healthy local markets. For 2005 at least, slowdowns will turn out to be just that—slowdowns in an otherwise reasonably strong-trending market.”

MANUFACTURING ROUNDTABLE
In a special roundtable session on “U.S. Manufacturing: Facts and Fiction,” four speakers reviewed the strengths and weaknesses of America’s manufacturing sector.
Pillars and Challenges. William Canis, executive director of the Manufacturing Institute (Washington, D.C.), the education and research arm of the National Association of Manufacturers (NAM), stressed five contributions that manufacturing makes to the U.S. economy and reviewed the four greatest challenges facing domestic manufacturers.
   The five contributions, or “pillars,” involved:
Economic Growth. In the 1990s, manufacturing (including software) accounted for 28 percent of GDP growth, making it the largest driver of economic growth in that period, Canis said. While manufacturing employment has dropped from roughly a third of the workforce 50 years ago to about 11 percent today, the share of GDP from manufacturing has remained steady over the same timeframe, he added.
Productivity. In the early 1980s, productivity growth for both manufacturing and nonfarm business was roughly equal. Then manufacturing productivity took off, and it now has about double the growth of nonfarm business. This is the cause of the “jobless recovery,” Canis notes, because “more and more ‘stuff’ is being made by fewer and fewer people.”
Wages and Benefits. Though surveys show that people think manufacturing is low-pay work, manufacturing workers actually earn 20 to 22 percent more on average in wages and benefits than the rest of the workforce, Canis said. Moreover, manufacturing has a “jobs multiplier” effect in that there are roughly 8 million additional people employed in various sectors to support the 15 million manufacturing employees, meaning a total of 23 million workers depend on a strong manufacturing base in the United States, Canis noted.
Innovation. Though the service sector is larger than the manufacturing sector, manufacturers contribute 62 percent of the research and development spending in the United States. “If we want to be a leading world economy, with high-tech driving it as it did in the ’80s and ’90s, then we need a strong U.S. manufacturing base, or this R&D might drift away to other places around the world,” said Canis.
International Trade. International trade now represents roughly 40 percent of gross output for manufacturing, double the level of seven years ago, Canis said. Meanwhile, trade was basically flat for the nonmanufacturing sectors, meaning that what happens in Europe, Asia, or elsewhere in the world has a bigger impact on manufacturing than on any other part of the U.S. economy.
   At the same time, U.S. manufacturing faces a series of difficult and sometimes unique challenges, Canis explained. These include:
No Pricing Power. Though the consumer price index climbs relentlessly higher, manufacturers have for years found it difficult to pass along added costs in terms of price increases, Canis said. He pointed to two minivans that were built 10 years apart yet cost the same to buy, though the newer model offered many improvements. This lack of pricing power “puts manufacturing in a particular bind that the rest of the economy doesn’t face,” he stated.
Rising Costs. Government-imposed structural costs—such as corporate taxes, regulations, and tort litigation expenses—add 22 percent to the cost of manufacturing in the United States. This makes manufacturing more expensive here than in eight leading competitors: Canada, Mexico, Japan, China, the United Kingdom, South Korea, Taiwan, and France. Despite the image of the United States as a tax haven, the 40-percent corporate tax rate in America is higher than nearly all our major competitors, who have been cutting corporate tax rates for the past decade, Canis noted.
Strong Dollar. When the dollar rises—as it has been doing since about 1995—exports fall. This remains a significant problem regarding China, which pegs its currency to the dollar, Canis said. As a result, many economists say the Chinese enjoy a 40-percent advantage in selling products to the United States, while U.S. manufacturers face a 40-percent barrier when selling to China.
America’s Aging Workforce. The average age of a mechanic at General Motors is now 55, Canis noted. Replacing such skilled workers as they retire is becoming increasingly difficult for manufacturers. One problem is that the younger workforce isn’t as large as the aging Baby Boom generation. Also, the image of manufacturing isn’t positive, with younger workers seeing manufacturing as “dirty, dark, dismal” work that pays poorly and has no future.
   Manufacturers also note that too many of today’s job seekers lack basic math, science, and literacy skills. “Thirty years ago, you could get a manufacturing job right out of high school and it was basically a lot of brawn and not necessarily a lot of brain,” Canis said. “But in most cases those jobs have pretty much left the country.” Instead, today’s manufacturers need workers who have the skills and interest to run computer-controlled equipment, he concluded.
Rising From Ashes. American manufacturing “isn’t dead, it’s not dying, and it’s not going away,” asserted James Mallory, executive director of the Non-Ferrous Founders’ Society (Park Ridge, Ill.). Instead, like the mythical Phoenix, which rises from its own ashes, domestic manufacturing “will come back, and when it comes back it will come back as strong, as robust, if not healthier, than in the past,” he said.
   American manufacturers definitely face some tough obstacles, Mallory conceded. Labor costs here are $19.86 an hour compared with $4.61 in Mexico and only 87 cents in China. Likewise, construction costs per square foot are more than three times the cost of building a new facility in Mexico or China, while energy costs are 25 percent lower in those countries and industrial rents are also lower.
   “That’s not to say, however, that all American manufacturing is destined to move to Mexico or China,” Mallory stressed. Indeed, American manufacturing enjoys certain advantages with its domestic customers, including a shared culture, shared language, and proximity—a big concern for U.S.-based customers that want to receive their supplies on a just-in-time basis, he said.
   Mallory noted that manufacturing has gone through cycles of decline and renewal before, and it will do so again. He praised manufacturing’s contributions to R&D, describing “product innovation as the basis for process innovation.” In addition, he stressed the need for the U.S. government to adopt policies “that encourage rather than retard domestic manufacturing.”
Manufacturers’ Messages. The manufacturing roundtable also featured two other voices—one a steel company and the other a nonferrous foundry. 
   H. Avery Hilton Jr., executive vice president-mills for Commercial Metals Co.’s CMC Steel Group (Cayce, S.C.), reviewed the barriers that make it difficult for U.S. manufacturers to compete in the global economy. These include an inability to attract younger people to industrial work, the current high prices for raw materials, as well as “excessive government regulations” and the “unlevel playing field” created by foreign subsidies and undervalued currencies.
   Still, Hilton pointed to CMC Steel Group as an example of how vertical integration can help a modern manufacturer succeed. Between fiscal year 2002 and 2003, for instance, CMC Steel Group’s fabrication business experienced a sharp downturn, dropping from 34 percent of the group’s before-tax earnings to just 1 percent before starting to rebound this year, Hilton said. In that same period, the group’s recycling earnings “really picked up the slack,” he said, increasing from 6 percent in 2002 to 27 percent in 2003. 
   Citing another steel manufacturer’s forecast—with which he agreed—Hilton predicted a “banner” year for the steel industry in 2005, with a stronger U.S. and world economy, increased domestic steel demand, higher steel prices and increased shipments, together with “flat” costs for raw materials and energy.
   Ivan Jeffrey, CEO of Crescent Brass Manufacturing Corp. (Reading, Pa.), detailed the experiences of his 100-year-old foundry.
   “My scrap dealers used to be an important part of my business,” he said, noting that his operations previously generated about a trailerload of scrap every few weeks. Now, with glass, synthetic materials, and other products often substituting for metal, his firm might generate a trailerload of scrap each quarter.
   Jeffrey pointed to “offshoring,” or sending work overseas to cheap labor markets, as the chief reason for this switch away from metal, noting that such practices have changed not just the cost of production but also “the basic manufacturing method and materials.” Competition from China has hit his industry especially hard, he said. If, for instance, Chinese firms can ship a complete pump, fully assembled and boxed, to a U.S. customer for the same price that Crescent Brass charges for a component part, then “I won’t sell any component parts, and therefore I won’t buy any ingot, and not generate any scrap,” Jeffrey said. 
   If that happens, he suggested, scrap processors would discover “you just had your business offshored also.” 

Exploring ESM
The electronics recycling roundtable focused on the potential impact of environmentally sound management (ESM) programs on the collection and recovery of obsolete electronics. 
   Amanda Hale, environmental, health and safety manager for United Recycling Industries Inc. (West Chicago, Ill.), defined ESM as a set of procedures and policies implemented to:
• minimize harmful effects on the environment caused by an organization’s activities; and
• achieve continual improvement of the organization’s environmental performance.
Robert Tonetti, senior environmental scientist for U.S. EPA’s Office of Solid Waste, discussed ESM requirements within the agency’s Plug-In to eCycling guidelines as well as ESM provisions in the Basel Convention. Adopting an ESM program can help scrap processors gain market advantage and stay a step ahead of federal, state, and international regulations, Tonetti concluded.
   John Hayworth, ISRI’s director of environmental management, explored how ISRI’s new Recycling Industries Operating Standard (RIOS) can help processors manage their ESM programs.

Kent Kiser is publisher and editor-in-chief and Robert L. Reid is managing editor of Scrap.