November/December 2010
Though problems persist in many commodity markets, there are enough positive signs to justify optimism going forward, according to speakers at ISRI’s annual roundtable event.
By Theodore Fischer
Even with the worst recessionary fears largely past, it still was a pleasant surprise that ReMA held its second-largest Commodities Roundtable Forum, drawing 704 attendees to downtown Chicago in mid-September for the annual market-focused event. The popular gathering always draws a solid core audience interested in the aluminum, copper, and ferrous markets—and in networking with current and prospective trading partners. That said, this year’s event offered the added attractions of a nickel/stainless roundtable and a special workshop on steel futures. Plus, far from being exclusively a metals event, the ReMA forum continued its recent tradition of offering a plastic roundtable. Though the market reports offered in Chicago were far from bullish, most were more optimistic than pessimistic, encouraging attendees to look ahead with confidence. This report is your summary of the main points offered in each roundtable session.
Ferrous: Obsolete Scrap Under Pressure
The ferrous roundtable focused on concerns about worldwide demand for steel along with the availability of scrap in the wake of the recession, which marked the 12th worst decline in steel demand in 100 years and the fourth worst since World War II, said James Moss of First River Consulting (Pittsburgh).
Offering a market snapshot, Moss stated that the developing world will account for 75 percent of steel demand in 2011, compared with the United States at only 6 percent. “In terms of steel, the developed world is essentially a sideshow to the developing world—and that, most likely, is going to be the story for the next generation,” he said.
Examining the use of scrap as a steelmaking raw material, Moss noted that “scrap behaves like any other mineral. It gets deposited in different ways, it gets harvested in different ways, but it behaves like a mineral, particularly in the way it gets used in the economy.” The obsolete ferrous scrap stream will remain under pressure, continuing the trend of the past decade. In 2000, he explained, about 50 percent of ferrous scrap came from obsolete sources; by 2009 that share was 75 percent, showing the greater reliance on obsolete material.
Given its richness in raw materials—especially scrap—the United States will remain a good place to make steel, Moss asserted. If exports continue and U.S. steel demand recovers to the annual average of 100 million tons as in 2005 to 2009, “we could see record scrap shipments by 2013,” he said.
Though ArcelorMittal USA (Chi-cago) claims to be the “world’s leading steel company,” with operations in more than 60 countries, “we are a minimal player in the market for scrap because we are integrated-driven,” said John Harris, the firm’s director of raw material. At the same time, he added, the steelmaker generates the majority of prime scrap in the market, which puts it “at both ends of the spectrum: We don’t feed on prime scrap, but we generate the prime scrap.”
In North America, Harris observed, the price of scrap is based less on steel operating rates than on the volume of exports. When the United States exported 5 million tons a year of ferrous scrap, demand for scrap was “strictly coastal,” he said. When U.S. exports rose to 10 million tons a year, “it started having an effect on the inward areas of our country.” When exports touched 15 million tons, most markets “became export markets.” When exports hit 20 million tons, “then there’s parity, and the market moves to obsolete grades,” Harris said.
Offering a recycler’s view on scrap issues, Rob Bakotich of Ferrous Processing and Trading Co. (Detroit) was bearish about scrap flows in his region. “In Detroit and the Midwest, the inflow of industrial scrap is down 20 percent, and I don’t believe it’s going to come back any more than it is right now.” Obsolete grades are in the same boat. “In Detroit,” he added, “they’re blowing things up making movies, and that’s where scrap is being generated.”
On managing risk, Bakotich noted that scrap dealers always will try to control market volatility by managing their inventory and sales, but he doesn’t see them pushing for a scrap futures market. Though some industrial scrap suppliers may push for long-term pricing or revenue guarantees, “most scrap dealers are suspicious of everybody—that’s just our nature—and don’t believe they’re going to get paid for that futures contract,” he said. “They’re more concerned about the supply of scrap.”
Not to worry, Harris said. The bottom line is “there is no shortage of scrap. There’s a 20 billion-ton reservoir that sits out there globally,” he stated. “We consume only 535 million tons a year. How long is it going to take to get rid of 20 billion tons?”
Nickel/Stainless: New Markets Promise Future Growth
Breaking from its tradition of holding the nickel/stainless roundtable in the Pittsburgh area in late summer, ISRI’s Pittsburgh Chapter added its annual event to the association’s larger fall commodities event this year. Chris Olin of the Cleveland Research Co. (Cleveland) led off with an economist’s perspective on the “metals space.” In his view, the market was entering choppy waters, with sporadic buying likely to continue for the remainder of the year. Though inflation concerns may boost demand for materials in the short term, Olin maintained that current raw materials prices are unsustainable and that macroeconomic concerns are offsetting current positive economic data. Today’s demand drivers include the automotive, appliance, HVAC, heavy equipment, and oil and gas sectors, while the negative sectors—all severe—include the commercial, residential, and public construction sectors.
As for stainless steel, Olin said he sees more upside in the coming 12 to 18 months, primarily because the key drivers—commercial aerospace, oil and gas, power generation, medical, and appliances—are holding up, and new market applications in the nuclear and solar power sectors are emerging. In 2011, the base price of stainless will fall, nickel prices will remain somewhat stable due to foreign buying, and nickel alloy prices will inch up, he projected.
According to Michael Wright of ELG Haniel Metals (Sheffield, England), stainless steel is “the jewel in the crown of the recycling industry,” thanks to its high recycling rate of about 80 percent and its higher-than-average growth rate of about 5 percent a year. “It’s competitive, it’s environmentally friendly, and its intrinsic value is very high in the market,”
he stated.
Pointing to changes in the stainless scrap market in recent years, Wright observed that consumers “no longer want to buy stainless steel; they want to buy metal units.” Consumers seek to buy nickel, chrome, molybdenum, and iron in the cheapest form, which “puts a lot of responsibility on the raw materials supplier,” he said.
To meet consumers’ demands for consistent high-yield rates and low residuals in their stainless scrap supplies, ELG deals in both secondary and prime metals, Wright said. “We can only do this by blending, and this has become a very important part of the business, giving more volume to the market and giving consumers the products with the regular volumes, regular quantities, and regular qualities they want.”
For the nickel alloy industry, the upsurge in nuclear power plant construction—which Larry Foulke of the University of Pittsburgh called a “nuclear renaissance”—offers vast growth opportunities. The United States currently has 104 nuclear reactors, more than any other country, with nearly 20 more in the works. Globally, 59 reactors are under construction, 149 are on order or planned, and another 344 are on hold, Foulke said. In addition, 65 nations that don’t have nuclear power are “making noises to build nuclear power plants.” Tubing made from 600 and 690 nickel-base alloys is ideal material for nuclear power plant applications, thanks to its high strength and resistance to corrosion, Foulke noted.
Copper: Supply Deficit to Drive Scrap Demand
The copper roundtable—which featured a diverse panel that included a copper analyst, a scrap consumer, and a scrap processor—kicked off with a bearish appraisal of the copper market from moderator Matt Heitmeier of Louis Padnos Iron and Metal Co. (Holland, Mich.). Overall sentiment for the red metal turned “decidedly cautious” in the third quarter, he said, as the major Western economies continued to factor in potential fallout from the European sovereign crisis, an economic slowdown in China, and the less-than-optimistic near-term outlook from the U.S. Federal Reserve Bank.
In contrast, the analyst on the panel—Bart Melek of BMO Nesbitt Burns (Toronto)—was bullish on commodities and copper demand. By bullish, he didn’t mean “fabulous growth,” but rather “decent local growth to the tune of around 4 percent.” Several developing countries are moving at “very high rates of speed,” he said, pointing to China, whose GDP is expected to grow 10.2 percent this year and about 9.5 percent next year. Industrialized countries, such as the United States, are not growing as fast. “That essentially means that demand for all sorts of commodities, including copper, will do very well” in developing nations but not as well in developed countries, he said.
Melek’s firm considers copper the cream of the commodities—the most stable and with the best prospects for upside movement. It expects copper demand to grow about 7 percent in each of the next two years, with supply becoming increasingly constrained, yielding roughly a 300,000-mt deficit in 2011. Scrap will be a key component of the copper supply and demand equation in the next 10 years, with mine capacity tracking to decline 3 million mt as demand rises 7 million mt. “We’re going to need at least 9 million mt of metal, and at least 1.5 million mt must come from scrap,” Melek said.
Presenting the scrap consumer’s perspective, Chris Greenfield of brass and bronze ingot maker The Federal Metal Co. (Bedford, Ohio) announced that his firm recently marked its centennial, a notable achievement considering that the North American brass and bronze ingot-making industry had dwindled from about 60 companies to nine in the past 50 years. “The ingot-making industry is obviously shrinking and often described as over capacity,” he said.
Responding to the downturn in domestic demand, Federal Metal is pursuing overseas business and weaning itself away from its traditional niche of leaded plumbing brass. “Demand for red brass and semi-red brass ingot is a direct response to new construction, and the domestic housing market has been stagnant for the last couple of years,” Greenfield said. The U.S. commercial real estate sector, which consumes an estimated 60 percent of copper and brass in new construction, is “far worse off” than the residential housing market and “probably has a longer runway before it recovers,” he added.
Greenfield had high praise for scrap suppliers, who helped his company respond to the downturn in the business cycle. “When we entered the lead-free brass market, scrap suppliers helped us produce Federalloy [the firm’s lead-free copper alloy],” he said. “When we fired up electric furnaces, scrap suppliers helped us tap into industrial scrap streams to meet exacting specifications of items like cupronickel.”
The panel’s scrap processor, Dan Gascoyne of Industrial Services of America (Louisville, Ky.), reviewed some conspicuous changes in copper scrap flows in the past year. “The mix has changed from more retail and less industrial to more industrial and less retail,” he noted. In the bigger picture, industrial scrap generation has been stable or decreasing, and obsolete scrap supplies “are less than they were a couple of years ago as a result of the recession, and margins are not anywhere near what they should be,” he said.
Aluminum: ETFs Are a Big Question Mark
The aluminum roundtable came during what one speaker called “a time of uncertainty” in the market for the light metal. In global terms, demand for aluminum appears to be rising. “Consumption of aluminum in Europe and North America has rebounded—but not by much,” said Lloyd O’Carroll of Davenport & Co. (Richmond, Va.). Production in Europe this year was down 2 million mt in annual run rate from its 2007 peak, while North American production was down 1.5 million mt. China’s production, on the other hand, was up around 20 percent. “The only country that matters in the supply-demand balance is China,” O’Carroll said.
That doesn’t mean this a good time to build new aluminum smelters. “If you built a smelter today in the best location, you need $2,400 to $2,500 a mt LME basis to earn your cost of capital,” said O’Carroll, who doesn’t see prices shifting much from the present $2,100 to $2,150 range.
Continuing the price discussion, Mo Ahmadzadeh of Southold Capital (New York) offered his view that “this market has underperformed most of the other base metals this year.” The big question mark in the aluminum market is the possible introduction of aluminum exchange-traded funds—financial arrangements that own the underlying asset and issue shares in that investment vehicle. ETFs would be a “new source of demand” in the aluminum market, Ahmadzadeh said, adding that he thinks ETFs will replace index funds, which have been a key driver of the market. “Hedge funds will use ETFs as part of assets in play,” he said.
After noting that he expects aluminum’s price to remain around $2,150 a mt in the near term, Admadzadeh cautioned that the price could “get a pretty sharp kick higher” if ETFs enter the market. Those financial vehicles likely would attract “a wider audience than the commodity fund has today.”
The aluminum spotlight also offered a review of the can sheet market, a historically steady niche, said Joe Sasso of JAS Consulting (Rockford, Ill.). “I’ve been in the business 33 years, and a 2-percent rise or 2-percent decline is a significant number,” he noted, adding that the lion’s share—3.59 billion pounds of the 4.15 billion pounds of domestic can sheet production—goes to making domestic beverage cans, with the remainder going for other domestic foods and export. “These numbers have remained very steady over time,” Stasso said. So have the major can sheet producers (such as Alcoa, Wise Alloys, Novelis, and ARCO) and principal can sheet consumers (including Anheuser-Busch InBev, Ball, Crown, and Rexam). What has changed is who controls the domestic can sheet market: “In recent years, control of the market has shifted from the can makers to the mills, which now control the supply chain,” Sasso said, adding, “Significant pricing action is underway.”
Toshi Fukui of the TAI Metals Division of Toyota Tsusho America (Georgetown, Ky.), trading partner for the 15 companies in the Toyota Group, described how its aluminum supply process involves smelting scrap from various Toyota locations and other North American business partners, then transporting it in molten form to its end customer. “The leftover scrap, which we estimate at 30 percent, then comes back to our molten plant next door, which we use as material,” Fukui said. This approach differs from the conventional secondary aluminum system, which involves transporting in ingot form and then remelting it. “We take away the remelting process in what is a cost-effective and environment-friendly operation,” he said.
Plastics: Higher Recycling Rates Needed
Chase Willett of Chemical Market Associates (Houston) launched his presentation as the sole speaker at the plastic roundtable by debunking the notion that the plastics industry consumes vast amounts of oil and gas. “I’ve seen obscene numbers out there in terms of what people think plastics use in terms of our global energy,” he said. In fact, the plastics industry uses about 2.8 percent of global crude oil supplies and only 1.3 percent of the natural gas stream, largely to make PET.
All thermoplastics—defined as a product you can melt, form into a product, remelt, and form into another product—are recyclable, Willett said, noting that it’s far more practical to recycle some plastics than others. PET and HDPE are the most recyclable plastics, followed by PP, he noted.
One of the two principal types of plastics recycling in the United States is what Willett called postindustrial/institutional/retail recycling. The larger type is postconsumer recycling, mainly bottles that reach recyclers through two main avenues. One-third of recyclable bottles come from the 11 states with container deposit laws, in which container recycling rates exceed 70 percent. Michigan has the highest deposit fee and highest return rate due to the “Kramer effect,” Willett said. That name refers to the character Kramer in the Seinfeld sitcom, who collected bottles and cans in New York and drove them to Michigan to collect the 5-cent deposit. Though such behavior is illegal, “it happens every day,” Willett said. The other main avenue is curbside collection programs and other voluntary recycling efforts, which generally have recycling rates below 20 percent. Material collected in deposit-law states sells at a premium because it’s cleaner, he noted.
Most of the 2.5 billion pounds of PET produced annually is landfilled or otherwise lost, with only about 27 percent collected for recycling, Willett reported. About 70 percent of the collected tonnage is exported to China, which forces U.S. companies that pledge to include recycled content in their products to import PET from South America and Mexico. Some 25 percent of the HDPE recovered for recycling gets exported—again, mainly to China—because “they can separate and clean things in China cheaper than we can, and freight is cheap—a couple of cents a pound to ship from Long Beach to Shanghai,” Willett said.
Willett concluded with a tepid invitation for attendees to enter the plastics recycling industry. “We’re not short of people who can at least do the basic collection and sortation of material,” he said. “That’s not to say there aren’t opportunities for folks, but it’s not a license to print money.”
Theodore Fischer is a writer based in Silver Spring, Md.
Market Volatility—and Steel Futures—Here to Stay
At the Commodities Roundtable Forum’s first workshop dedicated to the topic of steel futures, the session’s two panelists did not hedge on their predictions regarding the use of price risk management tools: Futures contracts are definitely the wave of the future.
“Price volatility for ferrous, as far as we can see, is here to stay—and that’s creating greater demand for price risk management tools and solutions,” said Pat McCormick of World Steel Exchange Marketing (Englewood Cliffs, N.J). He foresees no decrease in price volatility in the steel or scrap sectors, “and we’ve got iron ore moving from annual to quarterly contracts, which adds another variable to drive more price volatility.”
Given these conditions, price risk management tools offer steel and scrap companies the best odds to survive and thrive. As McCormick explained, mill margins in China, the United States, and Europe are compressed because there’s an overcapacity of steel. Producers will look for any opportunity to improve their margins when they have market support to accomplish it. As that price gets pushed through the supply chain, steel buyers are exposed because their consumers often aren’t willing to absorb the increase. “Because somebody in between has to manage that market exposure,” he said, “price risk management tools really start to play.”
Paul Shellman with the CME Group (Chicago) also endorsed futures for the steel industry. “It works for hogs, it works for beans, it works for equities—and it will work for ferrous,” he said. “Futures basically provide security, transparency, and anonymous markets.” He attributed recent volatility in steel prices to global developments and spot pricing for iron ore and coking coal. “That’s going to put more price volatility into the market and impact the price of steel, which will impact the price of other raw materials like scrap,” he said.
To manage risk, the steel industry will have to model itself not after copper, with its single worldwide price, but after the oil industry, which offers a variety of products at different prices, Shellman said, asserting, “There should be no single price for steel around the world.”
Current futures contract users exist throughout the supply chain and include mills, service centers, end users, speculators, and investors. Though some market participants may not like the involvement of speculators and investor, “they provide liquidity to the market, and you need that type of activity,” Shellman said.
But how do hedges actually work? “If you buy and sell through an index, you’re naturally hedged,” McCormick noted. In contrast, scrap recyclers with 30 to 60 days of inventory on the ground who fear losing financial value on that inventory can make a financial hedge. “Then, if the price of scrap did go down, the exchange would pay me
the difference.”
Kudos to Our Sponsors
The Commodities Roundtable Forum succeeds in large part thanks to a generous group of exhibitors and sponsors. Tabletop exhibitors this year were Al-jon Manufacturing; American Metal Market; American Pulverizer Co./Hustler Conveyor Co.; Asko; BW Mountain Tarp; Evermore Recycling; First America Metal Corp.; Gurona Group; Harris; Heartland Aluminum; Innov-X Systems; ProfitGuard/Global Commercial Credit; Quad Plus; Recy Systems; Scrap Freight; Scrap Technology; Thermo Scientific Niton; Tradepaq TRM; Tung Tai Group; ScrapRunner; Shared Logic Group; and 21st Century Programming. Sponsors were Harris (ferrous roundtable); Page Transportation (all-day beverage service); Platts (copper rountable); and Tung Tai Group (aluminum and nickel/stainless roundtables). ReMA thanks these companies for their support.
Though problems persist in many commodity markets, there are enough positive signs to justify optimism going forward, according to speakers at ISRI’s annual roundtable event.