November/December 1994
It’s certainly a mixed bag, but the general trend among the commodities examined at this year’s roundtables is toward improving fundamentals and optimism for the coming year.
By Robert J. Garino, James E. Fowler, and Si Wakesberg
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (Washington, D.C.). James E. Fowler is publisher and Si Wakesberg is New York bureau chief of Scrap Processing and Recycling.
The picture painted for most scrap commodity markets by industry experts at this year's series of roundtables sponsored by Scrap Processing and Recycling was a brighter, happier one than last year's portrait, which showed most markets dragging under the weight of a still-sluggish global economy.
Indeed, while Europe and Japan still lag the United States in recovery, putting a damper on many commodity prices, things appear to be picking up, according to roundtable speakers. Demand is strong for most metals, especially in the United States, they pointed out, and this, combined with production cutbacks and a slowed flow of some materials from the former Soviet republics, is returning better balance to long-oversupplied Western World markets.
For plastics and rubber, however, speakers said that scrap supplies generally exceed demand by a wide margin, but the recycling infrastructure is becorm4ng more sophisticated, boding well for the future of these markets.
Aluminum
Overheard at the aluminum roundtable Sept. 22 in Chicago: “Where's Joe? I've been looking all over for him."
"Well, if he isn't here, he's either dead or out of the aluminum business.”
Indeed, it seemed like everybody who is anybody in secondary aluminum was at the event, which drew a record crowd of more than 400.
And the big group was, mostly, a happy one, contemplating aluminum's current strength and apparent potential, thanks to a renewed rise in world consumption led by growing automotive demand and a decline in inventories, as well as strong international prices. Plus, an apparent economic upswing in Europe promised to bolster metal markets beyond the United States. James Southwood, president of Commodity Metals Management Co. (Pittsburgh), summed up the mood, saying, "1995 should be a banner growth year."
Fundamentals Improving
Western World aluminum consumption rose at an annualized rate of 4 percent for the first seven months of 1994, reported Eivind Hagen, senior vice president of Hydro Aluminum A.S. (Oslo, Norway).
On the supply side, about 949,000 metric tons (mt) worth of production cuts out of the 1.263 million mt pledged in last spring's memorandum of understanding among the major world producers had been trimmed as of July, Hagen said. While the biggest chunk of that curtailment, 341,000 mt, came from North American producers, 200,000 mt was lopped from production in the Commonwealth of Independent States (C.I.S.), he reported. There were, however, some production increases in Latin America and East and South Asia. Compiling the net results of the pluses and minuses shows annual world production down 884,000 mt, according to Hagen.
Southwood reported that aluminum held in London Metal Exchange (LME) warehouses peaked at 2,661,525 mt in June and dropped to 2,436,425 mt by early September. Although stocks remain huge, he made a clear distinction between "liquid stocks"--material available to easily change hands in reaction to market developments--and closely held "illiquid stocks" owned by commodity investment funds and others. Liquid stocks, which account for little more than half of the total, slipped from a high of 1,863,800 mt in June to 1,624,400 mt at the beginning of September, Southwood reported, and by the time of the roundtable, they had slid further, to about 1.5 million mt.
As for price prospects, Hagen simply said he was encouraged by the uptrend in LME three-month quotations, which averaged 61.5 cents a pound during the first eight months of 1994. Southwood forecast an aluminum price climb of about 5 cents a pound in 1995 and possibly as much as 10 cents more in 1996.
Stocks and the 'Russian Mystery'
In a statistical review and projection of trends in aluminum supply, shipments, and inventories from 1993 through 1997, Hagen estimated that the slippage apparent in aluminum stocks worldwide during the second half of this year will become even more pronounced over the next three years.
Hagen projected that total annual supply of primary aluminum would rise from an estimated 15.85 million mt in 1994 to 16.3 million mt by 1997, but shipments would also go up-and even faster-from 16.1 million mt to about 17.5 million mt in the same period. The result: declines in world stocks, beginning with an estimated 250,000 mt trimmed in 1994 and expanding to about 1.1 million mt cut annually by 1997.
But the wild card, according to Hagen, is what he called "the Russian mystery," or the unknown future level of Russian aluminum exports. During the first half of this year, he noted, Russian metal flowed abroad at an annualized rate of 2.2 million mt. Bearing in mind that the Russian domestic economy was in disarray, would even less metal be needed at home, resulting in more moving abroad? Hagen wondered.
The Auto Opportunity
Citing the automobile industry inroads aluminum has steered along to date and even greater promise for the future, Yale M. Brandt, vice chairman of Reynolds Metals Co. (Richmond, Va.), declared that "from wheels to engine blocks, bumpers to steering wheels, aluminum is everywhere" in today's car. The average automobile now contains an estimated 2 1 0 pounds of aluminum, he said, and by 2000, that same car will contain 350 pounds.
During 1992 and 1993 alone, there was a 22-percent jump in domestic use of aluminum in the passenger car market, adding up to 450 million pounds of metal, Brandt reported. "Aluminum delivers substantial weight savings in a material that adds value in customers' eyes," he explained, also citing enhanced performance, recyclability, and environmental advantages as reasons for aluminum's growing presence in the auto market.
The metal is winning over a bigger portion of various existing automobile applications, said Brandt. For example, he noted, "Today, 35 percent of all wheels are cast alloy aluminum. Within the next five years, we expect that figure to jump to 50 percent."
The metal is also taking on a wider variety of auto uses, he noted, pointing to all-aluminum body shells, stamped aluminum hoods, suspension parts, engines and pistons, radiators, bumpers, wheels, and steering housings. He cited a number of more-specific examples: "Light alloy radiators are replacing copper and brass units in a number of 1995 cars. ... Honda will use 25 million pounds of recycled aluminum annually in the cylinder blocks, covers, and other cast components of its new V-6 and V-4 cylinder engines they produce in Ohio. ... Aluminum is replacing cast iron cylinder blocks in Ford's Duratec V-6 engines." He added that General Motors also has big plans for an aluminum-intensive engine and transmission.
To meet the growing demand, he said, "our industry will need to produce 3.2 billion pounds just for the automotive industry and probably about 4.8 billion pounds total." While the secondary portion is only about 9 percent of the total supply, it still represents a "significant" increase for the recycling industry, he insisted.
Of course, all this means greater scrap supply from the automobile makers and their suppliers, said Brandt, projecting automotive aluminum scrap to grow from 1 billion pounds today to 6 billion pounds by 2020. Clearly, he said, aluminum recycling is a growth business "and should offer many opportunities for an excellent return on any new investments."
Secondary Shipments Soar
Primary aluminum's new health as well as the growth in automobile aluminum consumption, especially in castings, bode well for aluminum ingot makers. Edward Cowan, president and chief executive officer of Roth Brothers Smelting Corp. (East Syracuse, N.Y.), told the roundtable crowd that the secondary aluminum industry has been shipping its products "at a current rate of 2.5 billion pounds a year-an industry record."
Record shipments this year, however, haven't totally defeated a trend that sees the secondaries' margins of profitability narrowing, even as volumes rise, said Cowan. To a certain extent, he admitted, higher prices reflect somewhat better margins, "but it is difficult to determine how much profitability can be attributed to higher prices or better margins and how much simply to inventory gains."
Cowan pointed out that secondary smelters today are in a highly competitive scrap purchasing market. "In 1978, our industry purchased a large piece of a small pie," he said. "Today, we purchase a smaller piece of a much larger pie." The secondary smelters have not yet found themselves short of scrap to supply their customers' needs as the market has improved, but Cowan wondered aloud whether scrap will continue to be available to secondaries in the future if the industry's shipments continue to expand. He noted that although this question was hardly relevant when standard casting alloy prices were low (in 1992 they were about 57 cents a pound and in 1993 they were about 55 cents a pound), it arises when castings are moving at 80 cents a pound.
Exuding Joy
To the chorus of aluminum optimism, Richard Werner, president of Werner Co. (Greenville, Pa.), added an extruder's voice, reporting that the aluminum extrusion industry has made a strong recovery during the past year and that "1994 shipments, at 322 billion pounds, should be at an all-time high."
"Extruders are sold out and alternative sources are often unavailable," Werner declared. Aluminum billets are particularly tight, he emphasized ' and deliveries are "erratic and extended" for those consumers that seek additional material.
Looking back, he noted that the aluminum extrusion industry actually grew very little over the past 15 years, with total output up about 19.9 percent, reflecting minuscule annual increases on average.
During 1990 and 1991, there was a sharp decline in aluminum extrusion sales, reflecting poor general economic trends, Werner noted. But following this low point, the industry made a dramatic comeback, with annual shipments by 1993 up 14 percent over the 1990 total, he said. This increase was significant in all market sectors except for building and construction, which suffered a 4.5-percent decline in consumption of extruded products. In contrast, the transportation sector's consumption of extrusion products increased 15.5 percent, while use in the consumer durables market was up by 21.7 percent during the period.
But this year is looking even better for the industry overall, he said, noting, "Based on 1994 midyear results, the overall recovery for aluminum extrusion shipments could be as much as 40 percent." Werner noted that expected industry shipments of about 3 billion pounds this year will likely result in production of 750 million to 1.6 billion pounds of prompt scrap by extruders, while another 10 to 20 percent of the 3 billion is likely to return as scrap from post-extrusion fabrication manufacturing.
Copper
Against a backdrop of generally bullish news and fast-rising copper prices on both sides of the Atlantic, speakers and attendees at the Sept. 21 copper roundtable in Chicago were especially animated as they offered their mostly optimistic predictions for red metal markets for the balance of 1994 and beyond.
Recovery Boosts Demand
Based on the outlook for the world's economies for the remainder of this year and next, the copper picture is very encouraging, reported Robert Loewen, vice president of sales for Cyprus Minerals Co. (Tempe, Ariz.). "For the first time in many years, all the world's major economies will be enjoying positive economic growth," he noted. Focusing on the home front, Loewen said, "The U.S. economy may be peaking, but it should still perform near its long-term annual growth rate of 3 percent." He projected domestic economic growth next year of about 2.7 percent, as compared with an estimated 3.6-percent increase for 1994.
Thanks to this broadly upbeat economic news, 1994 will prove to be another record year for refined copper consumption-the ninth in a row, with total world consumption of just under 9 million mt, 3.5 percent over the 1993 total, Loewen reported. And next year looks even better, he suggested, projecting total world consumption to top 10 million mt "for the first time ever," thanks in part to a promised boost in demand from China, whose recent role in the market has been less than bullish.
Focusing on China's role in the world copper picture was roundtable speaker Dawei Li, vice president of Nonferrous Metals (U.S.A.) Inc. (New York City), who reviewed recent Chinese supply-demand fundamentals for the metal. He reported that China imported 363,000 mt of cathode in 1993, which was a bit of a slip from 1992's total of 379,000 mt. Although Li did not offer an estimate of Chinese cathode imports for the current year, Loewen said the 1994 figure will again reflect a decline.
Figures published within China place the country's total copper imports, including unwrought metal, alloy, and semifinished products, at 198,000 mt for the first half of the year, which was off about 15 percent from the comparable 1993 period. Higher world prices for copper were blamed for inhibiting imports.
Despite such evidence of a downturn, Li concluded his presentation by noting that virtually all segments of the Chinese economy continue to improve, and he expects to see China importing more copper to meet the anticipated demand that should result. Chinese buying influence will be felt on the LME, he reckoned.
The U.S. copper market, meanwhile, should see demand this year grow 6 percent over 1993's level, according to Loewen. For 1995, he projected an additional 2 to 3 percent increase in domestic consumption, with this more-modest growth rate a reflection of generally slower U.S. economic growth next year, particularly in "copper-sensitive areas of the economy, such as housing and motor vehicle sales."
Moving Into Deficit?
On the copper supply side, producers are being challenged to meet increasing world demand, said Loewen, who forecast mine output in the 1993-1998 period will rise a fairly modest 8 percent, with most of this increase slated for the second half of 1995.
But new copper supply is hardly set to overwhelm demand anytime soon, according to Daniel A. Roling, first vice president of Merrill Lynch (New York City), who cited depletion of existing reserves coupled with production problems in South America, Africa, and the United States. In fact, in Roling's estimation, the balance of the decade is unlikely to see net growth in new mine supply, with the probable result that copper consumption will outstrip supply for the next three to five years.
Roling projected copper consumption in 1994 to hit 9.661 million mt, matched against anticipated new supply of 9.348 million mt, leaving a gross deficit of some 313,000 mt. For next year, he forecast refined consumption to ratchet up another 3.3 percent to 9.981 million mt--just short of Loewen's projection of a breach of the 10-million-mt mark. Supply, meanwhile, will grow slightly faster in the short term, he predicted, rising 4.6 percent next year to 9.631 million mt. This combination of figures generates a projected 1995 deficit of 200,000 mt. Looking further ahead, Roling said 1996 should see a more balanced supply-demand equation with a modest supply deficit of about 26,000 mt.
1995 Price Prospects
Turning to the direction of copper prices, Loewen summarized projections for 1995 offered by nine independent brokerage houses between April and July of -this year. He reported that after excluding the high ($1.75 per pound) and the low (80 cents), the average of the remaining seven had copper at just under $1 per pound next year. Without weighing-in in favor of any of the individual projections, Loewen commented that fellow roundtable speaker Daniel Roling, whose projection of $ 1.10 for 1995 was counted among the nine summarized, has "had the highest degree of accuracy in copper price forecasting of late." (And indeed, Roling could boast that for more than a year he had been projecting a 1994 average of $1 per pound, which looks to be within a few cents of where it will eventually fall. The Comex price averaged just over 97 cents per pound for the first eight months of the year; for most of the period since, it's been just over $l.)
Still, Roling noted that his 1995 price projection may have to be revised upward to reflect recent trends, explaining his bullish outlook simply: "It's the demand, stupid." But he cautioned that higher average prices next year will be accompanied by increased price volatility. "I expect to see more investment activity on the LME," he said. With so-called hedge funds continuing to shift money away from other investments and into commodities, he said that he would not be surprised to see copper on the LME topping out at $1.25 in 1995.
A European Scrap Perspective
Use of the volatile LME by scrap processors to manage risk was among the topics covered at the roundtable by Michael Oppenheimer, managing director of Mountstar Metal Corp. Ltd. (Biggleswade, United Kingdom). The act of selling a futures contract in order to cover one's physical position is simply not a comfortable concept for European scrap processors, he said. "We packers [processors] like to see the metal in our yard-or see the purchase contract on our books before we sell."
Although not completely opposed to using the LME to hedge physical inventory, he contended that "hedging the risk can sometimes increase the risk" for scrap processors. The risk is of the market going into backwardation and thus defeating the hedge strategy. Because of this potential worry, he said, “most physical merchants in the United Kingdom try to avoid the LME as much as possible." He recommended that all processors considering hedging should recognize the risks before acting.
Hand-in-hand with his suspicion of hedging, Oppenheimer suggested that long-term supply contracts are not necessarily in the best interests of scrap processors. In contrast, he said, being in the spot market offers better opportunities for increased profit margins. Besides, he said, "being in the spot market is fun."
Oppenheimer echoed the prevailing view among the speakers that higher LME copper prices were in the offing, but he also noted that for the short-to-medium term, European consumers appeared well-supplied contractually. Physical copper stocks on the ground, he said, are more than adequate. On the other hand, he noted, "there probably isn't a European merchant who can honestly say that things haven't substantially improved over the previous two years."
Commenting on metal flow in Europe, Oppenheimer characterized as "significant" the amount of refined copper and scrap that has found its way into Western Europe in the past three years, following the collapse of the Soviet Union. Copper scrap from the East, he said, became an especially cheap source of raw material for consumers, resulting in ever-widening spreads between refined copper and scrap. But in 1994, this is no longer the case, he said, pointing out that the first quarter of this year saw "a virtual cessation of material coming into the market' from the C.I.S. followed by a return to "normal pricing levels by the consumers in continental Europe."
Oppenheimer also alerted listeners to rumors heard in Europe of small amounts of C.I.S.-origin radioactive scrap materials reportedly in circulation, causing "many European countries to tighten their import controls on copper scrap from outside the European Union." He reported that Italy in particular has confirmed two such cases of receiving contaminated material from the commonwealth. The threat of radioactive scrap, he cautioned, "is an issue that should concern us all."
Nickel & Stainless
Nickel, stainless steel, cobalt, and ferrochrome are heading into a brighter future in which expanding demand, restricted supply, and falling inventories are already significant features in the market, according to five speakers at the nickel/stainless steel/specialty metals roundtable, held Sept. 8 in Pittsburgh.
Record Demand
There's been a "dramatic improvement in overall demand for stainless steel--and, thus, nickel--this year, and "the global market for stainless steel is now firmly on the upswing," said Denis W. Oliver, group chief executive officer of Ireland Alloys (Holdings) Ltd. (Houston). Stainless steel production in 1994, in fact, could surpass 12 million mt for the first time, and in doing so "will help nickel demand eclipse its former all-time high"-1991's estimated 690,000 mt, said Michael D. Kleczka, assistant vice president of stainless steel sales for International Nickel Co. Ltd. (Inco) (Pittsburgh).
Except for Japan, "all the regions appear to be contributing to the current upturn in nickel demand," Kleczka said. The growth of stainless steel production in Taiwan and South Korea has been particularly noteworthy, he pointed out, and South Africa will soon become a larger presence with the commissioning of the huge Columbus Stainless Steel Project.
Though Japan hasn't done much lately to boost world nickel demand, Oliver noted that the Japanese economy has been perking up, in part due to the country's increased exports to China.
The improvement in the stainless market has led to a decline in European nickel exports to the United States and the Far East "and to an almost universal firming in producer selling prices," Oliver said. Nickel prices have indeed had a healthier glow, with the roundtable day's price of $2.78 a pound, for example, reflecting a welcome rebound from the sub-$2-a-pound price of a year earlier.
Supply Strictures
Aside from improved stainless demand, another reason for nickel's rebirth in 1994 has been an apparent decrease in the flow of nickel from the C.I.S. "For 1994," Kleczka said, "we expect C.I.S. nickel production and, more importantly, nickel exports, to be lower." According to his estimates, C.I.S. nickel production has fallen 50 percent, which translates to a reduction of about 15.9 million mt a year.
Norilsk--Russia's biggest nickel producer--reportedly faces major refurbishing needs if it is to maintain its present level of output, Oliver said. (Soon after the roundtable, in fact, Norilsk shut down some smelters, and its production is expected to decline to 155,000 mt from the 161,000 mt level of last year, which was also a drop from its 1992 output total of 240,000 mt.)
In the West, producers have also made output adjustments, Kleczka noted, adding that, for the most part, "Western producers have been able to sell their output at acceptable prices without accumulating inventories." What declining nickel supply from both C.I.S. and Western producers means, Kleczka said, is that "the market will be in approximate balance after three years of stock increases."
The only cloud on the nickel/stainless horizon at the moment is the issue of a potential stainless scrap shortage, Oliver said. With world nickel needs projected to increase steadily from 673,000 mt in 1993 to about 863,000 mt in 2005, he asked, "Where is this extra 190,000 mt of nickel to come from?" While Western and Russian primary nickel shipments may "partially bridge the gap," he stated, they simply won't be enough.
What, then, about stainless scrap? Oliver saw little possibility for growth in industrial and obsolete scrap, in percentage terms, which means that "relative to overall demand, externally recycled scrap will remain tight for years to come." In fact, he stressed, "there is already evidence of an overall shortage of stainless steel scrap," particularly in Europe, where stainless mills are reportedly paying higher prices for scrap. "It is hardly surprising that increased quantities of stainless scrap have been exported from the United States to Europe this year," he said.
Even so, the long-ten-n expectations for stainless-and, hence, nickel-are undeniably positive, with Kleczka asserting that a few years down the road, 1994's potential record of stainless production of more than 12 million mt may seem like small potatoes."
Reducing Nickel Risk
Presenting a broker's view of the nickel market, with particular emphasis on nickel trading on the LME, Martin Abbott, marketing director of Sogemin Metals Ltd. (London), zeroed in on the "risk" factor, including price moves, nondelivery, customers defaulting on suppliers and vice versa, foreign exchange movements, strikes, explosions, invasions, and interest rate rises.
Trading on the LME, said Abbott--who was formerly marketing director for the exchange--is not about dealing with physical metal, but rather about balancing price risk. "If you have nickel risk that can be related to the price of an LME nickel unit," he said, "it really doesn't matter whether you own your risk in matte, ferronickel, or stainless scrap."
Fluctuating nickel inventories in LME warehouses have been a significant market variable in the past few years. Abbott cautioned industry members not to be "lulled into a false sense of security" by the estimated 140,000 mt of stocks for three reasons: The stocks are not necessarily for sale; if they are sold, it will be at higher prices and good premiums; and for buyers on this side of the Atlantic, they are in the wrong place and "might have zero impact on North American supply."
Looking at nickel's big picture, Abbott agreed with Kleczka and Oliver that the market is growing, the worst is over as far as C.I.S. exports are concerned, "and the only way is up." Furthermore, he predicted, "Someday soon, there will be a realization that prices are low, consumer stocks are low, demand is rising. The result will be a rush to buy physical nickel and a stampede, by those who know how, to buy forward prices."
Cobalt Volatile
"One cannot claim that the cobalt market is stable," said Marc DeJonghe, director of cobalt commercial relations and technical planning for Union Miniere (Olen, Belgium).
Cobalt's current instability stands in contrast to the metal's relative steadiness over the past 12 years, he noted, pointing out that cobalt producers, especially in Africa, 11 contributed greatly to the stabilization of prices" from 1982 to 1991. Though cobalt consumers panicked at the end of 1991, Russian exports to the West managed to stabilize the market. "This year, however," DeJonghe said, "prices are going up again," with merchant prices touching $26 to $28 a pound and bids at the September cobalt sale of the Defense National Stockpile Center (Arlington, Va.) hitting $24.35 a pound.
The fundamentals don't justify the recent price hikes, DeJonghe insisted. Cobalt metal, as well as feedstock for cobalt refineries, appears to be relatively abundant and available, which means that--in his view--"panic buying" seems to be the only reasonable explanation for the peaking of cobalt prices.
On the supply side, he noted, Western World refineries are operating at full or near-full capacity, yet "world refinery capacity is still not fully used," principally because there's unused capacity in Russia and China. The cobalt supply picture is also being affected by destocking of cobalt inventories in Zaire, as well as among traders, DeJonghe said.
For 1995, DeJonghe foresees an end to the current destocking and a gradual drying up of stocks, as well as scrap and residues. Regarding cobalt values, he cautioned that "high cobalt prices of $30 to $40 a pound, during long periods, are unrealistic and will lead to substitution of cobalt by other metals."
Chrome Eyes Recovery
"Chrome has endured the bottom of the cycle and will start its inevitable recovery," predicted William R. Curran, president of Stratcor (Pittsburgh).
Those were very welcome words to chrome and ferrochrome executives, who have seen difficult market conditions since 1988, when world demand began to fall. At that time, South Africa, with nearly 40 percent of Western World capacity, began to restrict its output to stabilize the market, but C.I.S. material flooded Europe, further weakening the market instead. Supplies in the United States also increased dramatically, mainly due to larger imports from Turkey and Western Europe. Because of this oversupply, chrome--which had reached $1 per pound in 1988 and 1989--tumbled and "has been in the price doldrums ever since," Curran said.
Demand began to improve in 1992, though the United States continued to face a significant inventory overhang. Currently, the market "appears to be approaching a more normal supply-demand balance," a situation that should hold true through 1995, Curran remarked. As European demand strengthens, imports will probably subside, though the actual size of the current overhang is unclear.
Looking ahead, Curran expects a strong level of output through 1995, with production up 6.7 percent for this year over 1993 and rising an additional 8.9 percent in 1995. "If the longer-term rate approaches these levels of increase," he stated, “demand could restart idle ferrochrome capacity in a fairly short time."
There's an additional supply concern: the potential sale of material by the Defense National Stockpile Center. Although the center has granted the chrome and ferrochrome industry a one-year reprieve from sales, Curran said, "the ultimate disposal of the government stockpile could have a considerable effect on the supply-demand balance."
Lead & Zinc
With lead trading at a two-year high on the LME and zinc approaching numbers last seen in February, attendees came to the Sept. 22 lead/zinc roundtable in Chicago anxious to learn whether the current bullish mood was for real or simply a flash in the pan.
Participants were quick to point out that, of the various metals quoted on the LME, zinc has been the slowest to recover in 1994. The fact that the metal was trading above $1,000 per mt at the time of the session, however, certainly buoyed hopes. Lead, meanwhile, had rallied to $637 per Mt, repeating the two-year high set a week earlier. Thus, the consensus view was that the good news for both base metals would continue to build.
Zinc's Roller Coaster
Edward Schmidt, president of Big River Zinc Corp. (Sauget, Ill.), set the stage for zinc with a review of world supply-demand fundamentals. Schmidt, who called himself "a believer of fundamentals," declared at the outset that "mine supply drives the market." He characterized 1988 and 1989 as "great years" for zinc, as Western World refined metal production outran mine production by nearly 300,000 mt. Zinc prices on the LME averaged 51.1 and 76.7 cents a pound, respectively, during those years, he pointed out.
Unfortunately for producers, however, mine output quickly overtook refined metal production between 1990 and 1992, resulting in an overall net mine surplus--and correspondingly lower zinc prices. But mine closures in 1993 and 1994 are again reversing that trend, according to Schmidt.
Mine production this year is expected to drop 1.5 percent to 5.078 million mt, 1.5 percent below 1993's 5.156 million. Schmidt observed that this "mine shrinkage" is helping to bring the industry closer to balance.
Surprisingly, however, zinc's relatively depressed state over the past several years has had less to do with abundant Western World mine and smelter production than with excessive metal exports emanating from "Eastern European and Socialist countries," Schmidt reported.
Overall zinc consumption, meanwhile, has remained "very healthy," he said, despite the economic recession that hit the United States, then Europe and Japan, in the early 1990s. Western World consumption has actually increased approximately 8 percent since 1989, representing a compound annual growth rate of 1.5 percent, Schmidt said.
But additions to supply over the past several years have surpassed consumers' ability to absorb additional zinc, thereby dramatically increasing visible aboveground holdings of refined metal. Matching world metal supply against consumption, Schmidt reported only a modest surplus of 69,000 mt in 1990. By 1993, however, the annual surplus had grown to 485,000 tons, and this year he projects the excess supply to reach 369,000 mt.
U.S. Supply Deficit
Virtually all of this surplus metal has been finding its way into LME warehouses, which held more than 1.2 million tons as of mid-September, Schmidt noted. But at the same point in time, LME warehouses in the United States stored less than 25,000 mt of zinc and these stocks were shrinking, attesting to strong demand in North America.
By the end of the year, Schmidt projected, U.S. LME inventories will register at less than 10,000 mt. To meet domestic demand, therefore, zinc consumers will be importing increasing amounts of metal this year and next, he predicted.
While this scenario of positive domestic demand coupled with a statistical metal shortfall on this side of the Atlantic bodes well for the remaining North American producers, the fact that transacted prices are referenced to the LME will limit zinc's upside potential, according to Schmidt.
Higher premiums will encourage imports, but don't expect LME zinc prices to move significantly higher, he said. As a result, Schmidt offered a conservative price forecast, predicting LME zinc prices for the first quarter of 1995 of around 50 cents per pound ($ 1,100 per mt).
Oxide's Scrap Thirst
A look at the domestic zinc oxide market was provided at the roundtable by Bruce Sokol, president of North American Oxide (Clarksville, Tenn.), which opened its doors in 1990 as the only greenfield oxide facility built in the United States since the 1970s. The plant's annual capacity is 20,000 tons, with virtually all production relying on secondary zinc units.
The market for zinc oxide is dependent on growth in basic manufacturing industries, with the rubber industry accounting for about 60 percent of consumption. Another 20 percent is consumed in various chemical process applications, and the remaining 20 percent is accounted for by ceramics, paints, and a host of miscellaneous end uses.
Sokol characterized the current oxide market as "stable," following industry rationalization in the 1980s and early 1990s. Over the past decade, annual shipments by U.S. zinc oxide producers have ranged from a peak of 162,000 tons in 1984 to a low of 131,000 tons in 1991-a year 'most of us would like to forget," said Sokol. Shipments in 1993 totaled approximately 140,000 tons. Net imports (mostly from Canada) added another 34,000 tons, bringing total U.S. oxide consumption last year to just over 173,000 tons. Although 1993 was a slow year compared with 1992, this year, in contrast, "has been strong, with all producers seeming to be busy," Sokol said. He predicted that the oxide business will continue to be strong through 1995.
Today's more-efficient, surviving U.S. oxide producers prefer to buy scrap as opposed to slab zinc for their infeed material, Sokol noted. He estimated that 9.5 million to 1O million pounds of zinc oxide is produced each month from traditional secondary zinc feed, such as old die cast, remelt items, drosses, and so forth. Adding in additional crude zinc oxide reclaimed from electric-arc furnace dust of approximately 4.25 million pounds a month brings secondary zinc's share of total oxide production to about 60 percent, Sokol estimated.
North American Oxide focuses on the higher-recovery scrap items, Sokol noted, such as galvanizers dross, especially top dross from continuous galvanizing lines. He estimated that 50 million pounds of top dross is generated annually, two-thirds of which is consumed by the zinc oxide industry. (The remaining amount is toll-converted and returned as zinc to the steel industry.)
Sokol suggested that there are large volumes of secondary zinc amenable to oxide production available that the industry has not yet tapped, such as material separated from automobile shredder output. But, he noted, oxide producers have to compete with offshore consumers as well as zinc alloyers, brass foundries, and ingot makers for this incremental tonnage.
Despite what appears to be sufficient secondary raw material to meet growing demand, Sokol expressed concern over his company's ability to purchase increasing quantities of what he called "consistent secondary materials." He explained that the amount of scrap currently being processed is unlikely to expand, citing limited availability of zinc-containing dies and top drosses. Even today, North American sometimes finds itself "reaching" to secure the necessary feed, he said.
Sokol concluded his presentation by noting that oxide makers' customers are imposing consistency requirements "that were unheard of five to 10 years ago." He called on scrap suppliers to share his company's goal of committing to consistent volumes and quality of their products to meet these demands.
Lead Fundamentals Strong
The reduction that has transpired in zinc mine production also signals positive effects for the lead industry, since much of world zinc mine production is tied to lead as either a byproduct or coproduct. Roundtable speaker James H. Menk, vice president of sales for Penoles Metals and Chemicals Inc. (New York City), remarked that thanks to mine closures and cutbacks, some analysts now believe that on the supply side, "lead is in the best fundamental position of any of the base metals."
World lead supply has been characterized by tightness in lead concentrates, noted Menk. This has reduced the level of C.I.S. concentrate imports, which in turn, has lowered the level of refined lead leaving the C.I.S. for the West, he explained. The net result is a Western World supply deficit for this year and next, he said.
Paradoxically, however, LME lead stocks increased from about 300,000 mt at the beginning of this year to nearly 370,000 by mid-September. Nevertheless, Menk was not unduly alarmed about the rise, noting that the rate of increase was diminishing. He also pointed out that current LME lead stocks, while historically high, represent "less than four weeks' consumption." (Zinc stocks, in contrast, represent 10 to 11 weeks' consumption.)
Addressing the U.S. market, Menk offered an upbeat assessment for the rest of 1994 and 1995, with demand paced by replacement and original equipment (OE) automotive-type batteries. Battery shipments this year, based on data from the Battery Council International (BCI) (Chicago), "have exceeded our wildest dreams of a year ago," Menk said, crediting a cold winter and a hot summer. BCI data show shipments of replacement and OE batteries were up 15.5 percent and 16.3 percent, respectively, for the first seven months of the year compared with the same period of 1993.
Menk cautioned, however, that inventories of batteries were also growing, suggesting that "short-term lead demand has probably peaked, but is, nevertheless, expected to remain strong."
With continued economic growth projected for both the United States and Europe, backed by slimmed supply, LME lead stocks should fall in the months ahead, Menk reasoned, and this "will do much to bolster LME lead prices." He concluded by saying that he would not be surprised to see the LME climb to "over 30 cents per pound early next year, and in the mid-to-high 30s later on in 1995."
A Look at Mexican Lead
Menk offered a quick profile of the Mexican lead industry from the perspective of the country's lone primary producer, Penoles Metals and Chemicals. (Another producer, Minera Mexico, shut down its lead-refining facility in mid-1993 as a result of "economic and environmental reasons," he noted.)
Penoles accounted for 160,000 mt of Mexico's 1993 primary lead production total of around 180,000 mt, Menk reported. Mexican ores are "silver-rich," he noted--Penoles, in fact, produces lead to get silver--and, thus, the state of the world lead market has little bearing on Mexican lead production.
The country's secondary lead industry, which Menk characterized as "small and fragmented," produces some 110,000 mt annually. Total Mexican lead consumption last year was approximately 175,000 mt, but Menk suggested that growing domestic demand will encourage expansion in secondary lead capacity.
Mexico exported 40,000 Mt of lead to the United States last year, Menk said. This metal, mostly from Penoles, is shipped by rail through Laredo, Texas, servicing markets in the south central United States and the industrial Midwest around Chicago, and through El Paso, Texas, to the California market.
U.S. Capacity Crunch
U.S. lead recycling capacity "is just barely enough to cope with [current] recycling requirements for lead-acid batteries," noted roundtable speaker David Cook, a marketing consultant for Lake Engineering Inc. (Dumont, N.J.). Cook estimated that between 1 million and 1.1 million tons of lead-acid batteries will be scrapped in the United States this year-which is only about 100,000 to 200,000 tons short of the secondary lead industry's current installed capacity of about 1.2 million tons.
Following a review of recent trends in secondary smelter capacity, which has dipped deeply, then rebounded, since 1980, Cook rhetorically asked, "When does demand for recycling catch up and pass recycling capacity?" He contended that a growing scrap supply will soon create urgent demand for new battery recycling capacity.
Growth in the market for starting, lighting, and ignition batteries for vehicles as well as increasing scrappage of industrial batteries will create a demand for battery recycling that will "reach 1.3 million tons per year in three years and top 1.4 million tons by the end of the century," according to Cook, thereby surpassing current secondary smelting capacity.
But there's more: Given the state of competing battery technologies, production of electric vehicles will rely on lead-acid batteries at least initially, according to Cook. This will further increase demand for secondary lead capacity, perhaps by another 200,000 tons per year by 2005, he estimated. As a result of growing traditional and new markets, Cook contended that annual recycling capacity will need to climb to 1.8 million tons--assuming, of course, that the lead-acid battery remains the material of choice in conventional and electric vehicles.
But, despite numerous improvements made to existing smelter technology and scrap preparation over the past decade, current U.S. secondary lead output is all but maxed out at existing facilities, according to Cook. "I believe, with some exceptions, we are now getting about all we can out of our equipment and present technology," he said, noting that limits on air and water emissions plus "almost hysterical public resistance" stymie capacity expansions.
Cook concluded that it will be "virtually impossible to achieve the kinds of capacity increases required without a technological breakthrough." But he said the need for new capacity could be successfully met by supplementing existing pyrometallurgical facilities with "cleaner electrochemical technologies," specifically mentioning electrowinning. This process for recycling the lead-containing pastes found in lead-acid batteries, he noted, has been the subject of Bureau of Mines as well as private research. The principal advantages of electrowinning are environmental gains rather than cost benefits, Cook said, but he pointed out that capital and operating costs per ton of new capacity using the new technology will probably "not be much different from adding to conventional capacity, both at existing and new smelter sites."
While the technology has worked in the lab, it is uncertain how well it will hold up in a real production line. Additional questions related to its projected environmental advantages and other effects need to be examined, Cook noted. He predicted that within the next 12 months "at least one electrowinning pilot plant will be incorporated into an existing recycling facility in North America." Should such a plant prove successful, Cook concluded, electrowinning will open the door to the gradual conversion of most of today's secondary lead industry and thus help meet demand for substantial new secondary capacity.
Plastics & Rubber
The plastic/rubber roundtable, held Sept. 21 in Chicago, focused on markets for scrap that faces relatively weak demand, but in some cases a strong supply-push factor of waste avoidance. Topics covered included the concerns of scrap rubber processors and consumers looking for end markets and the direction of some of the newer resins to enter the plastic recycling realm.
Rubber Markets in Infancy
"The scrap market for rubber is in the beginning stages, as plastic was five years ago," said Michael Walker, who, as product manager for Dodge-Regupol Inc. (Lancaster, Pa.), purchases about 1.6 million pounds of rubber scrap each month. Walker is responsible for finding new sources of raw materials for the company, which combines shredded and screened rubber scrap with a polymeric binder to produce molded products like playground tiles, sheet items such as gaskets, and roll goods like running tracks and gym floors.
The company purchases scrap rubber in the form of tire buffings generated by retreaders from various sources, including scrap brokers, processors who grind the rubber, and directly from the generators themselves. Dodge-Regupol is very selective in purchasing, Walker noted. "We get samples of the scrap rubber, test it, and if it works, we buy it." He counseled patience for potential suppliers, noting that it typically takes from three to six months for Dodge-Regupol to establish a "recycling relationship" with a scrap supplier.
Walker emphasized that the key to rubber recycling is finding an end market for scrap-based products, stating, "There is plenty of scrap available, and we can make something from it because we have a flexible manufacturing process." But, he said, "'the question is: Who will buy it?"
Dodge-Regupol puts a lot of effort into working with large scrap generators to come up with new end products, said Walker. "I think that companies producing scrap rubber have ideas about what kind of products could be sold," he said. "What we try to do is take their scrap rubber, grind it up, create some products, and send it back to their sales people for additional ideas." The recycler seeks to help scrap generators add value to their scrap by making products that will sell, he added.
Scrap Supplier Concerns
For potential suppliers seeking to venture into the rubber recycling business, Walker outlined four groups of issues to be considered up front.
Collection. First compile a profile of your scrap, detailing the type of compound, whether the material is cured or uncured, its physical form, quantity, contaminants, and reliability of supply. Then there's the mechanical issues, such as keeping collection and processing costs down-goals that may be at odds, Walker noted-types of containers, and avoidance of contamination.
Storage. Since the buyer may want a full truckload, you must determine where to put the scrap and what storage will cost. Factors may include use of dock space, weather concerns, and so forth.
Shipping. Consider methods of weighing and marking containers as well as how to help the buyer find a carrier, possibly including backhauls. Cube out the truck to reduce shipping costs.
Costs and benefits. Quantify collection, storage, and shipping costs and overall benefits.
Walker noted that increasing disposal costs are pushing recycling of scrap rubber, and disposal is only going to get more expensive and more difficult. "We have to keep looking for ways to recycle scrap rubber into products people want to buy."
Rubber Recycling Rush
John Kell, environmental compliance coordinator for Carlisle Tire and Rubber Co. (Carlisle, Pa.), also spoke at the rubber session, describing the "push" factors propelling scrap tire recycling from a manufacturer's perspective. Carlisle is a tire manufacturing company that produces cushioned work and play surfaces using recycled rubber from its operations.
Kell reported that changes in Pennsylvania's residual waste regulations have made industry look more closely at recycling alternatives to waste disposal. He also added two other factors pushing manufacturers into recycling: "$80 a ton to dispose of your waste at a landfill" and the fact that "recycling is the 'environmentally correct' thing to do."
Like Walker, Kell's presentation emphasized that scrap rubber demand is weak relative to supply. He noted that his company's tire production has been increasing dramatically in recent years, so its recycled products manufacturing relies exclusively on internally generated scrap at the moment, specifically defective cured tires, defective inner tubes, and tire trimmings. But he said the company remains interested in purchasing scrap from outside sources and hopes to develop markets that will allow it to do so in the future.
As a prospective scrap rubber purchaser, Kell also touched on the topic of specifications, noting that general industry guidelines will be important to rubber recyclers, but that individual consumers will have more specific needs. To Carlisle, which has obviously enjoyed complete control of the quality of its scrap supply that originates in-house, minimization of contaminants and consistent chemical makeup would be especially important for scrap from external suppliers.
Plastic Recycling Broadening
"Over the past decade, old markets for reclaimed plastics have grown and new ones have emerged, a trend that will continue and speed up in the 1990s," Jack Milgrom, managing director of Walden Research Inc. (Concord, Mass.), told roundtable attendees. Milgrom's presentation focused on emerging markets for scrap polypropylene (PP), polyvinyl chloride (PVC), and polystyrene (PS), following a review of current plastic recycling rates.
Citing data from the Society of the Plastics Industry (Washington, D.C.), Milgrom reported that 1.4 billion pounds of postconsumer plastics was recycled in 1993 for an overall recycling rate of 2.3 percent. (By comparison, he noted, virgin resin sales totaled 62 billion pounds last year.)
Focusing on packaging discards, Milgrom reported that about 1.05 billion pounds of the postconsumer plastics recycled in 1993 was packaging material, a modest increase over 1992's 937 million pounds. But he predicted that non-packaging plastic's share of the pie "will become more significant in coming years as the recycling industry learns how to handle more difficult-to-recycle preconsumer and postconsumer plastics, such as wire and cable insulation."
Plastic bottles and rigid packaging materials contributed 901 million pounds to the recycling total last year-reflecting a recycling rate of 16 percent, which was up only slightly from 1992's 15.4 percent. Milgrom noted that these figures suggest the American Plastics Council's (Washington, D.C.) recycling goal of 25 percent for rigid containers by 95 "will be difficult to achieve."
The most common resins in the recycling loop, polyethylene terephthalate (PET) and high-density polyethylene (HDPE) accounted for 70 percent of the postconsumer plastics recycled in 1993, Milgrom reported. Tightening supplies of scrap PET and HDPE are gradually pushing up the prices of these commodities, he noted, but added that this does not necessarily mean better margins for reclaimers, as their feedstock costs rise as well.
PVC and PS, meanwhile, contributed only 3.8 percent of the postconsumer plastics total recovered last year, Milgrom said.
About 220 million pounds of PP scrap was recycled in 1993, with 87 percent of this material coming from vehicle battery casings, Milgrom reported. Most of this resin gets recycled back into new battery casings, but some also ends up in injection-molded products like lawn mower wheels and decorative shutters.
Currently the supply of postconsumer PP is "very limited," said Milgrom, but it should increase as automotive manufacturers and dismantlers generate an additional stream from used bumpers and other automotive components. In Japan, he noted, Nissan Motor Co. Ltd. already turns recycled PP into air ducts, foot rests, bumper parts, and trim for new automobiles. In the United States, postconsumer PP scrap is being used in molded splash shields on 1994-model Ford Thunderbirds, Mercury Cougars, and Lincoln Continentals.
Turning to PVC, Milgrom said the recycling of postconsumer PVC is relatively modest in the United States-European companies have been more active on this front, he noted-while recycling of preconsumer material is extensive. One of the most significant postconsumer sources of flexible PVC scrap is the wire chopping industry, he pointed out. Some of this PVC scrap is recycled into car floor mats, truck flaps, floor tiles, and other automotive parts. One firm, Geon Co., has gone a step further, purifying the PVC recovered from these insulation wastes and using it in “noncritical" wire jacketing.
In recent years, Milgrom noted, some resin makers have begun recycling rigid PVC bottles into nonfood bottles for such products as cleaners, degreasers, and haircare products. And the construction market, which is PVC's largest, is seeing the plastic come back in piping.
Postconsumer PS is available on the market primarily as expandable polystyrene (EPS) packaging collected from schools, institutions, and restaurants--products such as cups, containers, and protective packaging. Loose-fill EPS, such as packaging "peanuts," he noted, is both directly reused and recycled into new loose-fill--to the tune of 15 million pounds in 1993, according to Milgrom. Shredded postconsumer EPS is used as a void-fill, in furniture and large dolls for example, and in plant nurseries to improve soil aeration and as a drainage medium. The construction industry also consumes recycled EPS as a component of lightweight concrete and foam PS sheet. In addition, recycled EPS is used in protective packaging, with some now being incorporated in new food-related packaging.
Two other forms of PS, impact and crystal, are becoming more available as scrap as makers of business machines collect their used equipment for recycling, Milgrom noted. This PS ends up in things like rigid office products and trays.
Looking to the future, Milgrom said that recovery and recycling of PP, PVC, and PS "as postconsumer resins will continue to be a struggle because their use in packaging in the home is minimal in contrast to HDPE and PET." But, he added, "as the automotive and business machine manufacturers more actively collect these plastics--as they are forced to do by society--recycling of these resins will become more significant." Another boost will come from new technology that allows production of cleaner, better-quality resins from what are today considered difficult-to-recycle waste materials, said Milgrom, making more pre- and postconsumer PP, PVC, and PS available for recycling.
A Plastic Service Niche
George P. Glenn III, president and chief executive officer of East Coast Recycling Associates Inc. (Millville, N.J.), spoke at the roundtable from the perspective of a plastic processor.
East Coast Recycling was founded in 1988 with plans to handle all seven common packaging resins, but found it impossible to ensure enough feedstock supply of them all to keep the plant going.
Therefore, about 70 percent of the 23.5 million pounds of scrap plastics the firm now processes is industrial material, mostly from carefully selected high-volume resin users.
"Our niche is to go into a large manufacturing facility to help the company deal with its waste generation," Glenn said. East Coast examines the company's operations--"everything they have going on internally, from manufacturing to [employee] food service programs," he noted--and then develops a program to help the company evaluate and manage its scrap flow while providing consistently high-quality material to the processor.
As in many other states, the growing disposal costs faced by New Jersey plastic-consuming industries have encouraged manufacturers to get serious about recycling, opening doors for a company like East Coast, which currently posts annual sales of about $2.5 million. "Our goal is to help companies redirect their waste from disposal to recycling before they have a crisis," Glenn said. The company has formulated plastic recycling programs for the likes of General Motors Corp., Chrysler Corp., and Ford Motor Co. It has also established hospital recycling programs, handling materials such as used intravenous bags.
One unique aspect of East Coast’s business is the company's use of prison labor, which has eased the difficulty of finding workers to sort plastics, Glenn noted. The company expects to establish its next facility actually within a prison to take greater advantage of this low-cost labor pool. (For details on the prison labor program, see "Personnel Innovations" in the September/October issue.)
Concluding his remarks, Glenn suggested that those interested in getting into postconsumer and industrial plastic recycling talk with members of the Association of Post-consumer Plastic Recyclers (Washington, D.C.), which is an organization of scrap plastic processors and brokers.
The Amorphous Midwest Premium
Aluminum’s “mythical” Midwest metal premium--the extra cost paid for imported primary aluminum ingot shipped to the Midwest--is not the clear-cut number it may once have been or is sometimes assumed to be, said James Southwood.
The premium might run from 4.5 cents to 6.5 cents a pound and represents a number of added costs--such as overseas and domestic freight, loading and discharge, and finance costs--each of which may vary for any given shipment.
Southwood also noted that if stocks in LME warehouses in the United States decline, “the Midwest premium would need to rise” to reflect the added cost of replacing this handy metal.
Quality Rod Supply Questioned
Although refined copper supply may be keeping up with demand and copper rod producers are reportedly running at record levels, Michael Foley, purchasing manager for Belden Wire and Cable (Richmond, Ind.), suggested that sufficient capacity for high-quality rod production may not be “readily available as we move into a new level of business activity.”
Foley explained that they recently developed technique of multiwire drawing requires particularly high-quality rod. While rod makers have caught up and can meet this need technologywise, “during the past few years, the users have been taking up more and more of the available rod capacity without new capacity coming on-stream.”•
It’s certainly a mixed bag, but the general trend among the commodities examined at this year’s roundtables is toward improving fundamentals and optimism for the coming year.