July/August 2020
By Emilie Shumway
The stainless steel scrap market has remained in balance during the COVID-19 crisis, but only because low demand has been met with low supply. Recyclers should prepare for a slow recovery and a drop in the value of stainless, analysts say.
After stainless steel scrap prices floundered in 2019, in January economists were cautiously projecting a better 2020 for the commodity—along with a continuing strong performance for its essential component, nickel. As ReMA economists Joe Pickard and Bret Biggers reported in Scrap’s January/February issue, commodity experts at Macquarie predicted a “recovery in the stainless steel market starting in the second half of 2020,” a bit of good news for stainless steel recyclers after a 2% decline in 304 stainless steel scrap prices in 2019. Of course, that prediction was BC—before coronavirus.
The onset of the pandemic dealt a blow to both production and consumption of stainless steel, like it did for many other metals. Due to manufacturing shutdowns, “auto production went to basically zero for almost two months, at least in America,” Biggers says, noting that other countries similarly reported 80% to 90% drops in automotive production and sales. According to steel and metals market analysts SMR, the automotive sector uses stainless steel for parts that make up exhaust systems, engine valves, fuel-injection components, structural parts, catalytic con-verters, trim, and more. Other stainless scrap-consuming sectors that have taken a hit include construction, food processing, aerospace, oil and gas, and home appliances. Construction projects are on hold, fewer people are eating out, and the airline industry is not investing in new airplane components.
“I don’t think we’re going to see improvement anytime soon,” says Jim Lawrence, former stainless scrap trader and now a reporter at Fastmarkets AMM. “There’s no reason for it to get better, and it could get worse.” Lawrence points to the many unpredictable factors recyclers face this year, from the potential for more shutdowns should the virus worsen to investor responses to the upcoming election and the potential for a shift in policy. “I think if there’s one comment I’ve heard in the industry more than any other, it’s [about] the unknowns ahead,” Lawrence says. While these unknown factors are indeed the most likely to influence the stainless market in the short term, analysts also are watching global developments in nickel and stainless steel over the long term and piecing together a picture of an industry that’s gradually moving East.
The NPI Factor
As one of the most expensive components in austenitic stainless steel, primary nickel still tends to drive the price of stainless steel, Pickard says, despite being only about 8% to 11% of the alloy, according to the Nickel Institute (To-ronto). Nickel prices are volatile, however, and other factors drive stainless steel’s price when nickel prices are low, Pickard says. In 2019, nickel prices hit a high of $18,850 per mt in September, their highest peak since the fall of 2014. (While the price peak is a relative high, Pickard notes that nickel’s volatility is exceptional; before the last recession in 2007, the commodity was briefly trading above $50,000 per mt.) The recent surge was a result of robust stainless steel production in China driving nickel demand, demand for nickel for electric vehicle batteries, and falling global nickel warehouse stocks, which reached a seven-year low, Natalie Scott-Gray, senior metals analyst at INTL FC Stone (New York), told attendees at the Bureau of International Recycling conference in October. As of mid-June, Lawrence says, prices had dropped back to around $12,700 per mt.
Commodity investment funds and investor sentiment impacts are just as important to nickel pricing, especially in the short term, Pickard says. Among investors, “the expectations around electric vehicle demand had been a real source of strength for nickel.” But those expectations are constantly in flux, responding to state policy, technological developments, and public demand. Even so, for nickel, “there’s a lot of volatility that doesn’t seem to make sense,” Pickard says. “Some of it’s based on electric vehicle demand. Sometimes it’s based on where investors are seeing stock movements. It can be moved by exchange rates, by export policies. There are a lot of different factors.”
As Scott-Gray mentioned at the BIR conference, Chinese production has been one reliable driver of nickel demand. In 2019, China produced more than half the world’s stainless steel, mainly with nickel pig iron it refined from Indo-nesian nickel ore imports. China’s booming production of NPI over the past decade as a replacement for stainless steel scrap has reduced its reliance on stainless scrap imports from abroad. In 2015 and 2016, China imported ap-proximately 150,700 mt and 134,200 mt, respectively, from the United States, making it one of the top importers of U.S. stainless scrap. That number has dropped steadily. In 2019, China imported a miniscule 2,543 mt of stainless scrap from the United States, according to the U.S. International Trade Commission. (The U.S. number represents a trend in Chinese stainless scrap imports overall; in 2018, 37 countries reported exporting 198,312 mt to the country, compared to 45 countries reporting exports of 260,910 mt the year prior, according to the United Nations Comtrade Database.) China banned stainless steel scrap imports by the end of last year. NPI has given it more freedom than it faces with scrap commodities like copper and aluminum, for which China has issued quotas as it rounds down its import consumption. China has even created a new category of imports to keep aluminum and copper scrap imports coming in, a move it has not made for stainless steel scrap.
In an effort to boost its own manufacturing sector, Indonesia banned nickel ore exports in January—two years before it had initially planned to do so. The ban is helping Indonesia build its NPI smelting base, a process that market analyst Robert Messmer of SMR says is “ramping up quickly.” The biggest producers of NPI in Indonesia are Chinese companies looking to fulfill their country’s need for stainless, Messmer says. Tsingshan Holding Group Co. (Wen-zhou, China) is the largest, he says. The company has built an industrial park on Indonesia’s eastern coast in Morowali that will be capable of producing at least 350,000 mt of NPI this year. “The gap that is created by lower production of nickel pig iron in China will probably be easily filled by production in Indonesia,” Messmer says. Markus Moll, managing director of SMR, says Tsingshan has a total capacity of 3 million mt of stainless production in Indonesia, with plans to go up to 5 million. Obsidian Stainless Steel (Jakarta, Indonesia), a subsidiary of Hongkong Xiangyu Hansheng Co. (Hong Kong), has plans to build a 3.5 million mt plant, he adds.
Where stainless production is growing, NPI is an input, not stainless steel scrap. “Basically all” of new stainless production globally is NPI-based, Moll says. “I do not know of a single [stainless] scrap-based melt shop that is under construction at the moment,” he says, noting that Indonesia has changed its strategy from building integrated stainless steel plants to focusing on more profitable NPI plants.
Even India, the biggest importer of stainless steel scrap from the United States in 2019, has shifted toward NPI. Tsingshan has a “plan ready in the drawer” to build a stainless steel production plant in Gujarat in western India that is capable of producing 3 million mt and based on the same technology it uses in Indonesia, Moll says. The plan is on hold as the company works with the government to determine whether it can import its stainless steel into India, Moll says. If the government allows the company to import stainless steel without a duty, he says, Tsingshan likely will not build the melt shop. “From a scrap perspective, you can only hope it stays that way,” he says. “Because that would be another big giant [stainless steel producer] with very low costs. It would be well below [the costs of] anybody else who is using scrap.”
An Oddly Balanced Market
Most American stainless steel scrap gets consumed domestically, Lawrence says—a consequence of trade re-strictions, Chinese use of NPI, and logistical costs. “The export prices are below the domestic price,” he says. The difference might only be a few cents per pound, but transportation costs are higher as well. “You’re talking at least another 5 to 6 cents [per pound] by the time you load the container and ship it,” he says.
In the United States in June, “demand for stainless right now [was] down anywhere from 50% to 60%” due to the impact of the coronavirus, Lawrence says. However—also due to the pandemic—the supply of scrap also has be-come “extremely tight,” he says. What’s driving the price today is both the lack of supply and the lack of demand, he says, with lack of supply driving it slightly more. The situation has resulted in a decent balance between demand and supply.
Analysts do not foresee the market picking up anytime soon. “Globally, the stainless demand will shrink 11% this year—and in some regions, like Europe and North America, it will shrink even more, like 17% or 18%,” Moll says. He predicts a strong recovery in 2021, but not quite strong enough to bring the American and European markets back to pre-crisis levels. “It will be around late 2021 before most things go back to normal on the demand side,” he says. But “even at the end of 2021, we will not have reached 2019 levels [of demand].” Despite low demand projections for North America and Europe, SMR predicts a record level of global stainless steel production in 2021—a consequence of growth in China, Moll says.
Lawrence agrees with the gloomy forecast. Even without the pandemic, summer is traditionally a slow season for mills and, consequently, for processors and dealers, he says. While the “optimism in the scrap business” would usually lead processors to believe things will improve in the fall, Lawrence says he doesn’t see it happening. “Offi-cially, right now we are in a recession—on the edge between a recession and normalcy,” he says. “And when you’re in a recession, it’s going to take some time to get out of it.”
Like Moll, who sees stainless steel production growth only in China, Lawrence does not foresee any addition to stainless steel production capacity in the United States in the short term. Allegheny Ludlum (Pittsburgh) “used to have four electric [arc furnaces], and they’ve reduced that to two,” he says, noting that the company has shifted its focus to producing other special alloys. Several mills that were running at 70% to 80% of their capacity have dropped to around 50%, he adds. “Under the current circumstances I don’t see a reason [for them] to increase capacity,” he says.
The Electric Car Variable
While nickel has traditionally driven prices for stainless scrap, analysts have seen trends that suggest the two metals are moving in separate directions. At the BIR conference last October, panelists noted that nickel prices were booming, but stainless was still in a slump. They attributed the disparity to the growing demand for class-one nickel for lithium-ion batteries. “Since class-one nickel is only used as a last resort when it comes to stainless steel production,” Messmer says—he notes scrap, ferronickel, and pig iron are the preferred inputs—“I think it shouldn’t be so closely connected” to the stainless price. He foresees a split in pricing between metallurgical nickel and chemical nickel for batteries. Without this split, he says, either “stainless gets too expensive, or the cars will stay so expensive that it doesn’t make any sense to buy [them]” for the average person. He says he could imagine a new transformation process or change to the scale of battery production that could reduce the cost.
As noted, investors’ anticipation of a boom in the electric vehicle market has been a big driver of nickel prices in recent years. The coronavirus has dampened the EV market in several ways, Scott-Gray says, with individuals for-going the purchase of an electric car due to poor economic conditions and the low price of oil. So while global nickel demand from the EV sector is expected to drop 15% this year, she says, the future growth in nickel demand for electric batteries is overall “incredibly bullish.” She notes that the long-term prospects for electric vehicles are very good, supported by tightening environmental legislation and an increasing use of nickel in cell chemistries, like the nickel-manganese-cobalt lithium-ion battery. Scott-Gray projects that batteries will leap from 4% of the end-use nickel market now to 37% as soon as 2030.
The use of low-nickel and nickel-free batteries—mainly developed for their lack of cobalt, the most expensive element in EV batteries—has complicated the nickel-pricing picture for electric vehicles, but neither Messmer nor Scott-Gray sees them displacing nickel-containing batteries anytime soon.
In a BIR virtual update in June, Jason Schenker, president of Prestige Economics (Austin, Texas), painted a rosy picture of nickel prices rising in the near future, with prices averaging $13,000 per mt in 2020 and climbing to $15,000 in 2021. Long term, nickel’s use in batteries “will transform end consumption,” Scott-Gray says. On the other hand, electric vehicle market growth will negatively affect ferritic stainless grades, which are basically nickel-free, Messmer says, with electric vehicles not requiring the stainless exhaust systems internal-combustion vehicles require.
The Strength of Stainless Scrap
Analysts note that stainless scrap still has one major property in its favor—stainless scrap processing and using scrap in the production of stainless steel produces only a tiny fraction of the carbon emissions of refining NPI from ore. These environmental challenges mean stainless scrap is still king in the United States and Europe. Increasing global attention to emissions may have an impact on nickel- and stainless-based pricing, policy, and practice in the future, Moll says. “If there’s a significant price on that, then scrap melt shops will retain global competitiveness.”
Scott-Gray agrees that environmental impact will gain in importance. “I do believe that policies and environmental protection will only increase, and we will likely see more protests or uprisings to the developments in Indonesia, as Chinese companies pump money into the construction of new facilities,” as well as in the Philippines, where some of the local population tried to ban open-pit mining. Some stainless steel consumers even refuse to buy NPI-produced stainless steel, Moll notes, including Delphi Automotive (Dublin). While he doesn’t think the widespread adoption of this policy is likely, he does see governments adopting border taxes on carbon, which could hurt NPI. “They’re discussing that in Europe now,” he says.
Another bright spot would be stainless-consuming construction projects that might result from the long-sought-after U.S. infrastructure overhaul—including sewage systems and coastal barriers, which could jump-start stainless demand in the United States. Continued urbanization globally will also ensure demand for stainless stays consistent, Messmer says, as the commodity is indispensable for the food and beverage industry, for sanitary and hygienic equipment in hospitals, and for seawater desalination. “There is no material that you can use like stainless steel,” he says.
Emilie Shumway is senior editor/reporter for Scrap.