November/December 1996
Though 1996 hasn’t been the tour de force it was expected to be, market experts at ISRI’s fall roundtables were far from pessimistic, with most predicting brighter times for primary and secondary commodities in 1997.
OK, so 1996 hasn’t been the boom year for primary and scrap-related commodities that many market experts predicted it would be. That’s hardly surprising. After all, no one anticipated the Sumitomo copper scandal, which had a negative effect on virtually all base metal markets, and the unexpected slowing of European economies acted as an additional drag on the setback market.
These drawbacks, however, could not overshadow the ongoing strength of the U.S. economy and irrepressible growth of developing nations, which indicated that market fundamentals were—and continue to be—predominantly favorable. As a result, most are confident that the markets for primary and secondary commodities will begin to emerge from their blue funk of 1996 and take on a rosier hue next year.
In these highlights from ISRI’s fall roundtables, market experts discuss how these commodities fared this year and, more important, where they are likely to head in 1997.
Aluminum
If aluminum executives can just wait this year out, there’s a brighter future on the horizon, including improved demand, lower stocks, and relatively higher prices in 1997, according to speakers at the aluminum roundtable, which was held Sept. 26 in Chicago.
Though the aluminum industry currently faces a number of negative factors such as higher LME stocks, lower 1996 shipments compared with 1995, a buildup in production, declining prices, and restrained consumer buying, there have been some recent, counterbalancing positive shifts, said Fred Demler, senior vice president of ED&F Man (New York City).
Among these shifts, shipments have rebounded from their January low, improving 2 percent by midyear compared with 1995. Also, though LME stocks are rising, primary stocks reported by members of the International Primary Aluminum Institute are falling, creating an equilibrium in total stock levels. This balance will begin to tilt in aluminum’s favor, Demler said, predicting that stocks will decline from 8.6 weeks of consumption in the second half of 1996 to 7.6 weeks in the first half of 1997.
Other heartening market shifts include a slowdown in production and a topping out of aluminum sales from Eastern Bloc countries, he noted.
For the remainder of 1996, the aluminum market will be a mixed bag of positives and negatives. On the upside, there will be increased seasonal buying and, hence, tightening supplies, Demler said. Adding a consumer’s viewpoint on the current market, Blair Stewart, vice president of materials for JW Aluminum Co. (Charleston, S.C.), stated that business has been fairly steady. “The fin market is strong, construction is still in season, and litho is enjoying election-related business.”
On the downside, aluminum will largely be defined by weak sentiment for the rest of this year and will feature speculative selling and high LME stocks, Demler stated. In addition, Stewart noted, “Excess rolling capacity continues to depress margins and can sheet is weak for the second straight year,” adding that “scrap spreads are tight in response to low prime prices, but the material is available.” Internationally, though Japan’s economy is reviving, Europe is still weak and China may be slowing.
In 1997, the growing U.S. economy will help bring about a rebound in demand and an end to consumer destocking, as well as a continuing decline in production and diminishing Eastern Bloc shipments—“all of which will build a base for price recovery,” Demler said.
According to Stewart, aluminum prices have been depressed, in part, because consumers built up inventories earlier. In addition, there’s a lack of forward buying, he said, noting that “the commercial buyer sees no reason to protect his price levels, and the speculative buyer is selling.”
As for what kind of price recovery aluminum can expect next year, Demler said that the metal may bottom out at 58 cents a pound in 1996 but rebound to touch 79 cents in 1997, with the year’s average expected to be around 69 cents or higher. Adding his two bits, Stewart projected that the LME quotation would reach 75 cents a pound by the end of 1997.
Assessing Supply and Demand
While aluminum’s prospects are looking up, aluminum executives are worried about the fact that U.S. aluminum consumption has been declining for the past three years, from 5.8 million mt in 1994 to 5.3 million mt in 1995 to a projected 5.1 million mt in 1996, according to Parks A. Dodd Jr., director of corporate planning for Alumax Inc. (Norcross, Ga.).
These declines, which refute the conventional wisdom that aluminum demand does nothing but grow, have occurred during years of general worldwide economic expansion, observed JW Aluminum’s Blair Stewart. Part of this slip in demand is because aluminum can sheet is steadily losing market share to PET, though there’s also the chance that “world economies are shifting away from metals in general and aluminum in particular,” Stewart offered.
Fortunately, this downtrend is expected to reverse itself, with U.S. demand projected to rise 2.5 percent to 5.2 million mt in 1997 and 1.7 percent to 5.3 million mt in 1998, Dodd said. European and Japanese demand, which have also been lagging in 1996, are likewise expected to recover in 1997, growing 4.6 and 1.7 percent, respectively. Overall, Western World consumption will rebound from its expected 0.5-percent dip this year to grow 3.9 percent to 18.3 million mt in 1997 and 3.2 percent to 18.9 million mt in 1998, he reported.
As demand rebounds, Western World primary production capacity will also be expanding steadily, first 1.8 percent to 16.9 million mt in 1996, then 2.4 percent to 17.3 million mt in 1997 and 3.3 percent to 17.9 million mt in 1998, Dodd noted. Perhaps more important, world primary production is expected to grow 6.6 percent this year to 21.1 million mt, though it will grow slower in subsequent years—1.2 percent to 21.4 million mt in 1997 and 4.4 percent to 22.3 million mt in 1998, he said.
What all these demand and production figures mean is that aluminum will have a supply overhang of about 380,000 mt in 1996, but a projected supply deficit of about 190,000 mt in 1997 and 90,000 mt in 1998, Dodd noted.
Throughout these changes, the market’s inventory level is expected to remain relatively stable, totaling 65 days this year and next, and 60 days in 1998, Dodd said.
Secondaries Feel the Squeeze
For secondary aluminum smelters, the market outlook is ambiguous, said Marvin Fink, president of Allied Metal Co. (Chicago). The industry’s problem, he offered, is this: “We have a product that’s in demand, with shipments in the last three months being excellent. Our intake of scrap has been excellent, and our ability to produce has been excellent. Our return on sales has not been excellent. In fact, it has been poor.”
Part of the explanation is that, due to competition, secondary smelters haven’t been able to compensate for relatively expensive scrap and higher silicon prices in their selling prices, Fink explained. “Our price for aluminum ingot dropped 10 cents from September 1995 to the present, while silicon costs in the same period rose 33 percent,” he noted.
Though the aluminum alloy business is expected to grow 35 to 40 percent in the next five years, “our ability to make a fair return will be a struggle,” Fink said, remarking, “We’re at a banquet, but we’re still hungry.” The result of these cost challenges will be consolidation among smelters, with four or five closing their doors for good, he predicted.
One of the top questions on the minds of many copper executives—and the title of the copper roundtable, held Sept. 25 in Chicago—was: Will the red metal end 1996 above $1 a pound?
Despite solid economic news, speakers could find few reasons why copper should climb out of its recent price valley anytime soon to touch that psychologically important price level.
To shed light on the recent drastic fall-off in copper prices on both the LME and Comex, Rick Hirsch, vice president of Deutsch Sharps Pixley Metals (New York City), provided a 20-year copper price perspective, concentrating on the last five years and particularly on the last two, beginning with the “great bull market of 1994.”
At that time, the copper market was defined by synchronized, positive world demand that coincided with the fall of the Berlin wall, as well as world supply deficits and relatively low world copper stocks. This was also a period in which Sumitomo Corp.’s chief copper trader, Yasuo Hamanaka, was exercising “tight control” of the market, Hirsch contended. (For more on this issue, see “Assessing the Sumitomo Scandal” on page 134.)
Hirsch characterized 1995 as a “consolidation period,” noting that world copper growth ebbed in Europe and Japan as large short positions began to accumulate. Still, Comex copper ranged from a high of $1.46 to a low of $1.21 last year.
Though 1996 started out relatively bullish, market conditions changed abruptly in May, followed by additional heavy selling in June—the “month of disaster” due to the Sumitomo scandal—with copper falling from $1.23 a pound in May to 90 cents in July, a 33-cent drop in 45 days, said Bill Rickher, vice president of raw material for Cerro Copper Products Co. (St. Louis). This significant drop, he asserted, implied that copper’s price was “artificially supported.”
Presently, Hirsch noted, copper is “stuck” in a range of 82 to 91 cents a pound, though it’s unlikely the red metal will slip further. “Most of the damage has been done,” he said. “The shorts [traders holding short positions] have been cleaned out. Most of the easy money has been made.”
As for copper’s future prospects, the news is predominantly good, Hirsch said, noting that “the economy is in great shape,” which is beneficial for copper consumption. Though he assumed a world copper surplus next year will be a problem, the current stock-to-consumption ratio remains bullish, he said.
Does this all mean copper will be $1 on Dec. 31? All Hirsch would offer was that there is “value in copper at 90 cents,” while Rickher was more bearish, stating, “There is more downside potential than upside.” The reason, he said, is that copper supply will outpace demand “for the next few years, thus suppressing the price,” and setting up a market scenario that will have important implications for both consumers and scrap suppliers.
Copper’s Consuming Issues
Potentially lower world copper prices notwithstanding, Rickher noted that copper consumers such as Cerro Copper Products will always be in the market for the most economical raw material, such as No.1 and No. 2 copper scrap.
In coming years, however, No. 1 scrap will face stiffer competition from electrowon cathode, which is a “superior substitute feed compared with No. 1 scrap,” Rickher said.
The outlook for No. 2 scrap and other lower grades is less clear, as there is more international competition for these materials, there are fewer substitutes for them, and it is more difficult to find significant quantities at an economic price, Rickher said. “Foreign markets will continue to dictate the price of No. 2 copper,” he added, noting that, as a result, “it’s probably just a matter of time before the number of No. 2 scrap consumers in the States dwindles more.”
Turning to consumer-supplier relationships, Rickher asserted that there’s a worldwide trend among manufacturers to reduce their number of suppliers in an effort to lower costs and increase product quality. These new relationships are usually partnership-style, long-term arrangements in which the manufacturer can count on consistent delivery of a quality product at a reasonable price from the supplier, and the supplier gets consistent demand and a competitive price. This new business trend, which is filtering into the scrap industry, will help guarantee the survival and profitability of both processors and consumers, Rickher concluded.
The Basel Convention: Waste Side Story
Ever since the Basel Convention was first discussed in the late 1980s as a vehicle to control the transboundary movement of hazardous wastes, international traders—including scrap recyclers—have kept a close eye on the treaty’s progress to see if it would affect their commodities.
Offering a glimpse at Basel’s past and present status, Jacques Moulins, corporate manager of environment for Noranda Metallurgy Inc. (Rouyn-Noranda, Quebec), noted that the treaty came into force in May 1992 and, as of February 1996, 100 countries had ratified it, including Canada but not the United States.
According to Moulins, numerous types of scrap metals destined for recovery operations are classified as “hazardous wastes” under Basel. As a result, consent from domestic authorities is needed prior to importing or exporting these materials. Further, shipments of such material must be manifested for transportation, and the importing recovery operations must be approved.
Unfortunately, the Basel Convention makes no clear distinction between “hazardous waste destined for final disposal and hazardous wastes destined for recovery,” Moulins said, adding that a ban on transboundary movement of so-called hazardous wastes becomes effective Dec. 31, 1997.
Before then, however, there is considerable work to be done on the Basel notification process, the definition of hazardous wastes, the harmonization of definitions, compensation and liability protocol, and other issues to ensure that essential trade between nations is not hindered.
On a more positive note, Basel will have no effect on scrap trade between the United States and Canada, Moulins said, because current business relations between the two countries are governed by existing bilateral trade agreements. And despite the treaty’s potentially harmful effect on the larger scope of international scrap trade, he expressed confidence that in the end “common sense will prevail.”
Comex’s Copper Contract
It was only two years ago that there was talk that the Comex copper contract was in jeopardy of failing. Today, “the Comex contract is alive and well. It is healthier than it has been in years,” despite the fact that the LME opened competing copper warehouses in the United States, stated Robert Green, director of metals marketing for Nymex (New York City), who discussed the Comex copper contract.
“Virtually all copper produced for sale inside the United States is sold on a Comex-based copper pricing formula,” said Green, noting that producers adopted Comex in the late 1970s and “have stayed with it.” This amounts to approximately 2.2 million tons of production and roughly 2.5 million tons of consumption. In addition, Green noted, about 40 percent of all refined copper is derived from scrap, and “all scrap is sold on discounts to the appropriate Comex futures contract.”
In the future, the role of the Comex copper contract will expand as Comex contracts in general become more globalized. For instance, Comex contracts are now available for trading in Australia and will be offered in Hong Kong later this year.
Among the exchange’s advantages, Green pointed to Comex’s “extensive clearing system to which all trades are referred. There is no principal-to-principal trading and no broker to customer credit lines. Everything is open and aboveboard.”
Comex also offers new trading vehicles such as strip trading and so-called jumbo trades, Green noted. The former refer to the ability to place orders not only for a given month, but also in strips at a price. This, he explained, allows Comex users to buy or sell copper from two to 24 months at an average price. Jumbo trades, meanwhile, will be offered in a minimum of 40 lots, thereby accommodating some of the large institutional traders who require large volumes. For smaller hedgers, jumbo trades will increase overall liquidity, Green said.
Words and Walls: Trading With China
In recent years, China has been opening up its economy and emerging as a significant scrap importer, presenting vast opportunities as well as imposing challenges to international scrap traders.
Richard H. Schwartz, executive vice president of Calbag Metals Co. (Portland, Ore.), characterized China as a puzzle compared with other Asian nations such as Korea, Taiwan, and Japan. While cultural differences with most Far East countries have been successfully transcended through development of procedures that promote relatively smooth business, “trade with China is challenging and always interesting,” Schwartz said. As evidence, he cited examples of scrap companies that have traded with China and experienced problems with contract default, lack of proper or timely payment, difficulty in letters of credit negotiation, late quality claims, and attempts to renegotiate contracts midstream.
When trading with China, Western World scrap exporters shouldn’t assume that they understand the Eastern mindset, as they often will be simply projecting their own perceptions onto their trading partners, Schwartz said. Cross-cultural interactions can create “circumstances where there is a conflict of values,” he continued, suggesting that “it is at those times that different metaphors or values can dominate.” Attempting to ignore them and impose different values will ultimately prove unsuccessful, he said.
At root, China is a series of “walls” that reflect its unique culture, heritage, and value system, Schwartz offered. Though perhaps difficult to comprehend, these walls must be respected if one wishes to understand how business is conducted in China and discover how to overcome these walls to achieve successful trading with China, he said.
Western World primary nickel consumption has been up and down in the past three years, rising from 782,000 mt in 1994 to 906,000 mt in 1995, with expectations that it will taper off to an estimated 885,000 mt this year, reported John G. Reid, executive director of Queensland Nickel Industries Ltd. (Townsville, Australia), at the nickel/stainless steel/specialty metals roundtable, held Oct. 11 in Pittsburgh.
At the same time, Western World primary nickel supplies have continued to rise steadily, moving from 752,000 mt in 1994 to 825,000 mt in 1995 to a projected 876,000 mt this year, Reid offered.
Despite this decline in consumption and increase in supply, the nickel market continues to exhibit a supply deficit, though the gap has been narrowed considerably—from a supply shortfall of 81,000 mt in 1995 to an expected deficit of 9,000 mt this year, Reid said. This deficit will become larger again by 2000, rising to about 20,000 mt, as Western World consumption jumps to 1.08 million mt and supply lags at 1.06 million mt, he asserted.
The Western World primary nickel market has also seen a slight decrease in stocks in the past two years, with total stocks easing about 7 percent from 222,000 mt in 1995 to a projected 207,000 mt in 1996, Reid noted. Among the four major stock categories, only producer stocks have risen, inching up from 92,000 to 95,000 mt. LME stocks, meanwhile, have declined from 45,000 to 32,000 mt, while reported and unreported consumer stocks have both slipped to 40,000 mt from 41,000 and 44,000 mt, respectively, he said.
What do all of these supply-demand fundamentals mean for nickel prices? Though nickel values have decreased this year, with the LME spot price about $3.25 a pound in early October, Reid predicted a price recovery in 1997, possibly to $4 a pound, rising even higher in 1998, followed by a slight decline the following two years.
The Skinny on Stainless
Examining stainless steel, nickel’s principal end-use market, Stan Jalbert, vice president and general manager of Sammi Resources (Weland, Ontario), noted that world stainless steel production has expanded 5.4 million mt since 1985, with about 3 million mt of that growth occurring in the past four years. In 1993, for instance, world production was 12.6 million mt, increasing to 13.8 million mt in 1994 and 15.6 million mt in 1995. This year, stainless production is expected to continue its ascent, albeit minutely, to around 15.7 million mt, with projections calling for 16.7 million mt of production in 1997, Jalbert offered.
Stainless steel consumption has also enjoyed steady growth in recent years. As a reflection of this demand, U.S. stainless steel shipments have—with the exception of plate and wire rod—grown 33 percent since 1993, rising from 1.4 million mt to more than 1.8 million mt this year, Jalbert noted.
This healthy production and demand aside, the stainless market has been defined by uncertainty this year due to rumors about a “huge overhang of stainless inventory around the world,” Jalbert said. Though the U.S. economy has been strong, lagging European and Asian markets have prompted stainless producers there to ship their products to the United States. And, not surprisingly, the “increasing import of flat-rolled stainless steel from Europe and Asia has taken its toll on domestic producers,” he said. Echoing Jalbert’s comments, Arthur H. Aronson, president and CEO of Allegheny Ludlum Corp. (Brackenridge, Pa.), noted that volume and prices of stainless had indeed declined, asserting that the market will bottom out when European and Asian consumers come back into the buying picture.
Despite this recent market setback, stainless is expected to continue to “maintain good growth well into the future,” with production projected to climb 3 to 7 percent a year in the coming decade, Jalbert said.
On the demand side, the metal is being used in more and more industrial and engineering applications, encompassing construction and architecture, rebuilding and infrastructure, transportation, environmental protection, offshore oil platforms, and seawater desalination, noted Queensland Nickel’s Reid. Consumption of stainless has been particularly high thanks to rapidly developing economies in Asia, South Africa, India, Brazil, and Mexico, he pointed out, noting that “stainless steel consumption growth is more than twice that of the economy in general.”
Looking closer at per capita consumption around the world, Reid said that countries such as Japan, Sweden, Germany, and Italy consume about 22 to 31 pounds per person while the United States uses only about 18 pounds and, thus, holds promise for great future expansion. “If we achieved the consumption rate of Taiwan,” Jalbert marveled, “it would require an additional 6 million mt to the current 2.5 million mt we now consume.”
Offering a brief look at the stainless scrap picture, Jalbert noted that Western World demand for austenitic stainless scrap has risen from about 2.6 million mt in 1992 to an estimated 3.6 million mt currently, representing growth of around 38 percent.
Despite this increased demand, stainless scrap prices have followed the erratic path of nickel prices since January 1995, with 304 stainless scrap, for instance, peaking in the United States around $1,210 per gross ton in August 1995, then slipping to about $780 per gross ton by this September—a 36-percent decrease, Jalbert noted.
While stainless scrap prices can be expected to recover when nickel prices firm, “when it will happen could be anyone’s guess,” he concluded.
Ferrochrome Takes a Ride
The ferrochrome market has experienced dramatic changes in supply, demand, and price in the past few years, with its ups and downs being “just like a roller coaster,” said Josephine A. Ward, president and COO of Reward Raw Materials Inc. (Carnegie, Pa.).
Ferrochrome prices soared from less than 40 cents a pound in late 1994 to more than 80 cents a pound in the spring of 1995, before beginning a dizzying downtrend that brought them back to the 40-cent level by the second quarter of 1996. “And now we’re seeing prices in the high 30s for the first time,” Ward said.
Several factors brought about this precipitous market fall, including an easing off of stainless production, greater availability of attractively priced stainless scrap, and an overhang of hundreds of thousands of tons of high-carbon ferrochrome, she noted. A major cause of this oversupply is new capacity coming on-stream in South Africa. Between 1995 and 1997, for example, the four South African ferrochrome producers planned to add nearly 80,000 mt a year of new capacity, increasing their overall capacity by nearly 50 percent. Other world producers have also been boosting capacity, with a “significant quantity” of ferrochrome coming from Kazakhstan.
Fortunately, moves are afoot to adjust this supply picture to bring the market into better balance. As Ward explained, “Some producers are shutting down furnaces. Others are shifting production to other products. Still others are postponing plans to bring new capacity on-stream.”
These actions, if followed through, will remove around 1.5 million mt of ferrochrome—roughly 35 percent of 1995 production—from the market. These cutbacks “are beginning to change the demand-supply balance,” she maintained, predicting that, in the next few months, the ferrochrome roller coaster—and prices—will begin heading up again.
Titanium on the Upswing
In the early 1990s, the titanium industry was largely depressed as a result of the general economic recession, as well as cutbacks in the military and commercial aerospace sectors, which are major consumers of titanium. From 1992 to 1994, titanium producers shut down several million pounds of capacity in an effort to bring the market into better balance, and several players merged, thus consolidating the industry, noted Michael Metz, director of marketing for Titanium Metals Corp. (Denver).
Currently, world sponge capacity totals approximately 200 million pounds, while world ingot capacity is now around 250 million pounds, offering a combined capacity that is “sufficient to support approximately 190 million mill product pounds,” Metz said. While Russian and Japanese sponge imports have receded from their 1995 highs, these imports are still troublesome, particularly in their price competitiveness, he noted.
Even so, the titanium industry has largely left its dark days behind, and the metal’s growth prospects now appear excellent.
As evidence of the market’s recovery, Metz offered, major titanium producers have posted revenue gains in each year since 1993, titanium shipments have increased in every quarter since the third quarter of 1994, and titanium producers have a healthy supply of new orders.
After showing modest recovery in 1995, the commercial aerospace industry has come on exceptionally strong in 1996. “Large commercial aircraft deliveries are projected to increase 70 percent from 1995 to 1998, with the Boeing 777 popularity of singular significance,” he pointed out.
Military aerospace demand, in contrast, is at its lowest point in 35 years, with many mainstream military aircraft funded at low production rates and aircraft with advanced technology limited by no substantial funding.
On a more positive note, titanium’s use in corrosion-related markets is stable and expected to increase, automotive applications look promising, and—most notably—there has been an explosion of emerging commercial applications, dominated by titanium use in golf clubs, which has brightened prospects for the industry, Metz said. These emerging applications, which are estimated to reach approximately 14 million pounds in 1996, are projected to increase to about 22 million pounds by 2000.
Lead/Zinc
The lead market is affected by eight major factors, said Thomas A. Parker, purchasing manager for Exide Corp. (Reading, Pa.), at the lead/zinc roundtable, held Sept. 26 in Chicago.
These factors include a worldwide shortage of lead concentrates, the curtailment of production in some areas of the world and concurrent increases in production in other areas, a weak world zinc market, growth in battery demand, U.S. government stockpile sales, global lead stocks, and the actions of investment groups and speculators.
These factors will create a Western World lead deficit this year of 124,000 mt, with a 74,000-mt deficit expected in 1997, Parker predicted. As a result, the LME average cash price for lead could end this year around 37 cents a pound and potentially move up to 38 cents in 1997.
Narrowing his focus to the U.S. market, Parker estimated that domestic consumption would reach 1.62 million mt in 1997, a level that would outstrip U.S. primary and secondary production, which he projected would be around 1.36 million mt. “U.S. lead consumption always exceeds production,” he stated.
Commenting on the domestic lead scrap market, Parker noted that “there’s more battery scrap than smelting capacity” and scrap prices, as a result, “are near or at all-time lows.”
A Look at Lead Oxide
Of the 1.5 million mt of refined lead consumed in the United States last year, 1.2 million mt—or 80 percent—went into the lead-acid battery market and roughly half of that total—about 600,000 mt—was in the form of lead oxide, said George Gange, general sales manager of Hammond Lead Products (Hammond, Ind.), who offered a close examination of the lead oxide market.
Lead oxide is produced using ball mills or barton pots, which can produce 1 ton an hour, he explained. About two thirds of lead oxide is produced in captive facilities of battery manufacturers, with four independent lead oxide producers supplying the remaining 200,000 mt, Gange said.
While the lead-acid battery remains lead oxide’s most significant end-use product, the material is used in several other important growth markets. The glass industry, for instance, uses lead oxide in television cathode-ray tubes to cut down on potentially harmful radiation. “TVs contain lead in the front panel, the funnel, and the neck,” Gange explained, noting that the percentage of lead content varies according to the section—from about 2.5 percent in the front panel to 22-24 percent in the funnel to more than 30 percent in the neck.
While the lead incorporated in cathode-ray tubes has been largely unrecycled thus far due to market limitations and technological challenges, a California computer firm has reportedly formed a joint venture with a Canadian producer to recycle the lead-containing monitors and other computer components.
Zinc Prepares to Heat Up
Though Western World zinc growth since 1988 has been fairly steady, with production remaining relatively fixed and consumption outstripping production, the market has still been weighed down by hefty zinc supplies due primarily to exports from former and current Socialist countries from 1990-94, reported Edward J. Schmidt, vice president of sales and marketing for Big River Minerals Corp. (Sauget, Ill.).
Most of this extra metal has ended up in LME inventories, which peaked at more than 1.2 million mt in August 1994. Since then, the stock situation has improved markedly, with LME inventories winnowing to 549,850 mt—or about nine weeks of consumption—at the end of September, Schmidt noted. In the first nine months of this year alone, stocks dropped 118,000 mt, and they could continue to fall throughout the remainder of the year, perhaps posting an overall decrease of 175,000 mt for the year, he conjectured.
As stock levels dwindle to between seven and eight weeks of consumption—perhaps by mid-1997—zinc prices could respond upward, with LME zinc trading around $1,150 a mt, or 52 cents a pound, next year, making zinc a hot metal once again, Schmidt said.
Offering a more detailed look at the price picture, Morton Schwarz, president of Trademet Inc. (Scarsdale, N.Y.), explained that the zinc price is comprised of two components: the LME second morning session’s asking price, which reflects market fundamentals, and the prevailing premium, incorporating financing and delivery costs. Of the two components, the LME value, although the most volatile, is the least-discussed by buyers and sellers, he noted.
Turning to “a few factors that may favorably impact the LME values,” Schwarz emphasized the growing role of financial institutions in the metal business, the projected surplus of zinc concentrates in the coming year, and the continued reduction of supplies of zinc to Western consumers from China and C.I.S. republics. These factors, coupled with continued favorable economic outlooks for developing nations, mean that “one can reasonably expect higher LME values in the near future,” he said.
Domestic zinc consumers, in particular, should prepare themselves for this potential price change, Schwarz suggested, because they have been “lulled into a false sense of security, as the zinc price has been flat for many months.”
As for zinc premiums, Schwarz pointed out that they have, in the past four to five months, climbed from a low of 2.5 cents a pound to around 6 cents. Just how high premiums climb will be determined by Europe’s economic health, the level of slab zinc imports from Europe, and whether or not the metal is in so-called strong hands, he said.
Two good indicators of the direction of the zinc market and, hence, zinc premiums in the future are the monthly offerings of zinc by the Defense Logistics Agency and the U.S. Mint’s twice-quarterly solicitations for zinc to use in penny production. The recent results of both of these tenders “clearly illustrate the recent strength of the premium market, which shows no sign of weakening,” thanks also in part to rumored production problems at North American producers, Schwarz observed.
Ferrous
Higher steel capacity and continued imports of steel into the United States will have a decided impact on the 1997 steel market, said Richard Stauffer, vice president of purchasing for North Star Steel Co. (Minneapolis), at the Oct. 10 ferrous roundtable in Pittsburgh.
Regarding capacity, more than 11 million mt of new flat-rolled steel production is expected to come online in the United States between 1996 and 1998, he stated.
As for imports, Michael Gambardella, managing director of J.P. Morgan & Co. (New York City), noted that, “after bottoming out in February 1996, sheet imports are surging back to 1994 highs.” According to Stauffer, imports may reach 25.2 million mt this year, though they are expected to decline to 20.5 million mt in 1997.
As imports increase and domestic mills continue to operate at high capacity utilization rates, an inventory buildup of about 2.5 million mt will develop in the second half of 1996, with another 1.5 million mt being inventoried in 1997, Stauffer said. The steady influx of steel, coupled with rising inventories, will challenge domestic steelmakers and make it difficult for prices to move higher. In fact, carbon steel prices could dip lower, Gambardella said.
On a more positive note, finished steel consumption has been increasing in North America since its low point in 1991, rising to new highs in 1995 as steel production also mounted, Gambardella said. The annual growth rate of domestic steel demand since 1991, in fact, has surpassed several high-growth emerging economies such as Taiwan, placing the United States fourth behind China, Korea, and Canada.
Offering some numbers on this topic, Stauffer noted that, through July of this year, U.S. mill shipments were up 3.6 percent to 58.8 million mt, while U.S. consumption rose 1.8 percent to 70.7 million mt. By market, automotive sales were up 3.2 percent through September, though vehicle production was still down, and appliance shipments through August were 6.2 percent ahead of the 1995 level. Buoyed by this demand, actual steel consumption could increase 2.8 percent this year and 2 percent in 1997, with usage in the automotive, appliance, and construction segments expected to move upward, Stauffer said.
As for steel prices, “excess inventory and additional new capacity will cause severe price pressure in 1997,” Stauffer predicted. Prices are expected to deteriorate from the third quarter of 1996 through the first half of next year, with the second half of 1997 serving as the “watershed price level,” he said.
Offering some explanation, Stauffer pointed out that, even though inventories at service centers were in balance at 2.8 months of demand, “high mill operating rates combined with stronger imports could create another inventory buildup in the fourth quarter of 1996, leading to price erosion in the first half of 1997.”
A Scrap Price Perspective
Offering a price-focused look at the ferrous scrap market, John J. Mike, president of Simsmetal America (Richmond, Calif.), noted that ferrous scrap prices are “determined mostly by scrap customers’ market factors all associated with their business and their steel and ironmaking operations.”
The long-term outlook for steel scrap is good, Mike asserted, noting that “prices will increase because value and markets will improve, which will be a good situation for our customers and our industry.” History has shown, he noted, that there’s a direct relationship between a strong and profitable metals economy and strong prices in scrap. Contradicting recent forecasts, he pointed out that even though North American steel production is high and there is good demand for scrap, “worldwide markets are down and the true market response of our industry is falling prices.”
Looking ahead, Mike predicted there should be no shortage of scrap in the near future, but there will be short-term price drops when supply exceeds demand. Prices, however, will “rise to new levels, surpassing past highs, once world demand returns,” he asserted. This revival could come sooner rather than later because of a combination of winter weather, increasing world consumption, and new minimill production.
As scrap recyclers look toward the future, price and quality are two important industry factors to monitor, Mike said, noting that higher prices result in the expectation of higher quality. “Recent developments using shredders to blend various grades of scrap to a homogeneous product and programs of formulated blending of low-residual scrap are just two of the progressive quality programs now utilized in active consumer/supplier relationships,” he said.
An End to Ford Bundle Bids
“In the future, Ford will not sell to the market any metal scrap,” stated Christopher T. Hamm, buyer-global raw materials purchasing for Ford Motor Co. (Dearborn, Mich.). Instead, the automaker “will send it directly to the mills to make steel for our cars and trucks. We will send scrap to our foundries to make castings. We will send it to steel bar, stainless, powdered metal, and forging suppliers to make our products.”
Ford, which has been selling industrial bundles under competitive public bids, is the last of the Big Three automakers to halt this practice. Chrysler Corp. and General Motors Corp. ceased their scrap auctions years ago, offering material for sale under bids in a private process.
Last October, Ford phased out the majority of its competitive bidding for ferrous and nonferrous scrap, instead deciding to select recycling firms to manage the ferrous and nonferrous scrap generated at its North American production plants.
Even so, the automaker continued to sell the scrap from its Chicago Heights, Ill., and Maumee, Ohio, stamping plants through monthly tenders, providing a price barometer for industrial bundles each month. But as Hamm noted, Ford plans to eventually privatize the handling of scrap from these operations as well.
As explanation, Hamm observed that “the trend will be the removal of industrial scrap from the free market. The Ford bundle index will no longer exist in the near future.” One reason Ford is making this move is because it’s “more interested in developing a strategic partnership [with scrap recyclers] that focuses on service and risk management.”
By withdrawing its scrap from open market sales, Ford can also “eliminate some price uncertainty and risk.” Another benefit of this move is that it will “eliminate the need to use published indicators as a method for pricing,” he said, adding that “we put too much responsibility for pricing in the hands of the trade journals.”
In the future, Hamm said, automakers and scrap recyclers alike need to “look in other directions for true pricing, such as a terminal market for scrap trading.”
PET Plastics
Domestic sales and captive use of virgin resin continue to outstrip production thus far in 1996, drawing down stockpile levels, said Fyodor Shutov, a professor at the Center for Manufacturing Research of Tennessee Technological University (Cookeville, Tenn.), speaking at the plastic roundtable, held Sept. 25 in Chicago. Polyolefins such as LDPE, LLDPE, HDPE, and PP are especially hot, with most registering double-digit gains compared with 1995 figures. And this uptrend in virgin demand is expected to continue, with U.S. resin consumption projected to grow 9.4 percent annually, outstripping world consumption growth pegged at 2.5 percent a year.
In contrast to the virgin sector, year-to-date exports of plastic scrap are down almost 22 percent compared with similar 1995 figures, with ethylene grades showing the only improvement, albeit only about 2 percent, Shutov noted. Year-to-date prices for exported scrap plastics remain essentially the same—down about 1 percent—from 1995 values. The only strong scrap performer has been vinyl chloride, which has been fetching export prices that have thus far been 23-percent higher than last year.
Looking at the larger plastic recycling picture, Shutov pointed out that “the plastics recovery rate has increased for all plastics, especially for PET and HDPE scrap.” And there is still plenty of room for improvement. By 2000, he noted, “plastics discards will rival the amount of paper and paperboard now disposed into landfills,” which means that plastics “will then represent, after paper and paperboard, the greatest potential contribution to a community’s recovery rate.”
One of the most challenging areas for the plastic industry lies in recycling automotive industry plastic scrap, with thermosetting resin scrap in such products as polyurethane foam car seats being the “most untapped area” in this niche, Shutov asserted. Currently, about 400 million pounds of flexible polyurethane foam scrap are disposed of each year from automobile seats.
Research thus far has indicated that the material can be recycled through chemical and physical means, with pulverization of the material into a fine powder appearing to be a promising option, Shutov said. The foam can be pulverized through cryogenic grinding, impact disk mills, or two roll milling processes, and the resulting foam powder can be use in applications such as filler in various polymer matrices including rigid and flexible polyurethane foam.
Past and Present PET Prospects
In the past decade, thermoplastic polyesters have been one of the fastest growing material segments, with the primary product being PET, said David Cornell, manager of plastics technology and recycling at Eastman Chemical Co. (Kingsport, Tenn.). PET has succeeded, in large part, because it is strong, readily processed, relatively inexpensive, and versatile, finding use in a variety of diverse, unrelated applications such as fiber, film, and blown bottles.
As with virgin PET, recycled PET has also been a success story in the past decade, earning the honor of being the most recycled postconsumer plastic—with an overall PET bottle recycling rate of about 30 percent—and finding use in a variety of applications.
By market segment, the textile industry consumes approximately 50 percent of the available PET scrap supply, while strapping, film and sheet, and alloys account for 28 percent of demand, and bottles take up 22 percent. These consuming markets indicate that “recycled PET now can be used for all the general markets as is virgin,” Cornell asserted.
Turning to market issues, he noted that supplies of both virgin and recycled PET were stretched thin in 1994 and 1995 due to several factors, including cotton crop failures overseas (which boosted demand for synthetic polyester-based fiber), substantial growth in the bottle market (bottle usage is growing approximately 15 percent a year), and limited PET polymer production capacity. In addition, the export markets experienced significant increases with approximately 100 million pounds of bottles exported to the Far East in 1995. These factors caused prices for virgin and recycled PET to rise dramatically.
Despite this strong demand scenario, the 1995 PET recycling rate declined compared with 1994, moving from about 32 to 30 percent, Cornell noted. “This was due to an increase in the number of new PET bottles in the stream,” he explained. So, even though U.S. recyclers recovered 8 percent more PET bottles in 1995 than 1994, the number of bottles produced grew even faster, essentially negating the recycling gains.
In 1996, the overall PET market picture has changed just as dramatically as in the previous two years, with producers adding capacity that has brought supply more in line with demand and prices, not surprisingly, down, Cornell said, noting, “The capacity excess and lower prices has been suggested by several parties to likely last through the decade.”
Such expectations of low PET prices and unrestricted supplies are not necessarily bad, as the situation could lead to more applications for PET, thus creating new market demand, Cornell noted.
Offering other PET market predictions, he conjectured that PET prices, which have been historically very stable, may become more volatile. The increasing availability of virgin “wide-spec” material, which competes with recycled PET, could cause additional market fluctuations.
For PET recyclers, Cornell offered, one way to improve their margins and ensure their viability in the future may be to offer more value-added services. In the long run, he concluded, the supply of recovered bottles depends on the public’s will to recycle PET, as more deposit laws aren’t expected in the United States.
Turning to a related topic, Cornell took a look at PEN—polyethylene naphthalate—a new polyester that is a “higher performance polymer than PET, with greater tensile strength and stiffness, greater temperature resistance, and greater barrier to gas penetration.” Currently, PEN resin costs more than PET resin—PEN homopolymer sells for approximately $5 a pound—and is likely to be in limited supply for the next few years due to its raw material supply line, which consists of about 60 million pounds of available homopolymer equivalent, he noted. This homopolymer is difficult to manufacture, so increases in production are not expected and, hence, the PEN resin price will remain high.
In the future, though PEN homopolymer or blends or copolymers may find use in high performance films, fibers, or containers, it will most likely be used in applications “where PET has been found insufficient in properties to satisfy,” Cornell said.
On the issue of recycling, PEN can be recycled with the same ease as PET, HDPE, and many other plastics. But the real question, he pointed out, is whether PEN and PET are compatible to mix together in the recycling loop? The answer depends on whether the PEN product is a homopolymer or a random or block copolymer, which market the PEN resin has been used in, what color or pigmentation has been used, and what the scrap consuming application will be, Cornell explained.
An Industrial Scrap Outlook
As with postconsumer plastics, postindustrial plastic scrap—such as PS, PP, PE, and ABS—has experienced a dramatic market ride in the past few years, stated Joe Mitchell, operations manager of JLM Plastics Corp. (Joliet, Ill.). “In 1995, the industry experienced the highest prices in recent history,” thanks to strong domestic demand, record Chinese buying, and all-time-high virgin resin prices. These factors tightened the supply of industrial plastic and scrap and prompted some manufacturers to use more of their own scrap rather than sell it or substitute scrap plastic for virgin resin to reduce their costs, he said.
That was then. In 1996, “like all roller coasters, this one came down fast,” Mitchell remarked. New capacity for virgin resin production came on-line worldwide, driving down virgin prices and, thus, increasing the supply of scrap, bringing about a decrease in demand, as many of the temporary buyers of scrap went back to using virgin resin. In addition, the Chinese government closed its borders to scrap plastic imports, which also increased supply and decreased demand for scrap. “Prices responded by dropping even quicker than they had risen,” he said.
Despite this erratic market performance, there is good news for the industrial plastic scrap industry. Currently, demand is strong for industrial PE and PP, with prices for those grades reaching a “good level,” Mitchell reported. PS and ABS have also stabilized, though their prices haven’t yet risen to a comfortable margin level for processors. Overall, “market prices will remain fairly stable over the next six months,” though they could rise quickly again if China becomes a strong buyer in the market, he said.
Examining the end uses for postindustrial plastics, Mitchell noted that the packaging industry uses recycled plastics to manufacture trays, industrial containers and drums, cosmetics packaging, and other products. Horticultural and agricultural product manufacturers use recycled resin to produce greenhouse trays, flower pots, drainage pipes, agricultural film, and irrigation system parts, among other products. The housewares market produces waste containers, laundry baskets, and kitchen utensils containing recycled plastics. Manufacturers of toys as well as auto parts and accessories also use secondary plastic resins.
For consumers of postindustrial scrap plastics, the most important issue is to receive a consistent supply of clean material, Mitchell said. To meet this expectation, scrap processors need to establish good communications with and provide excellent service to their suppliers to receive the best raw material possible. “This will enable you to provide your customers with accurate specifications on the recycled resins that your company offers,” Mitchell said.
When it comes to the actual processing of the scrap, material must be kept clean and segregated according to resin type, he suggested, noting that “most plastics are not compatible with other types of plastics, so good inventory control, recordkeeping, and housekeeping are essential.” In the end, the quality of the processed material will determine whether a consumer continues buying from a processor. “Give good service to your vendors and good quality to your customers, and this will ultimately mean good business for you,” Mitchell said.
Recycling Wire Chopping Byproducts
Every wire chopper has had to face the same question: What to do with the tons of plastic wire chopping residue generated in the process?
Jack Milgrom, managing director of Walden Research Inc. (Maywood, N.J.), attempted to provide some answers to that question by discussing the results of a research project initiated by ReMA and followed up by Argonne National Laboratory (Argonne, Ill.). The project’s primary objective, he explained, is to “develop a process for reclaiming plasticized PVC residues from wire choppings, namely plastic jacketing and insulation scrap, to produce recycled-content plasticized PVC compounds that are virtually indistinguishable from their virgin counterparts.” These compounds, he said, would qualify for use in high-value end-use markets such as new wire jacketing, shoe soles, coatings for metal pipe, and selected automotive components.
According to Milgrom, the PVC content of a heterogeneous mixture of wire and cable chopping byproducts—also called a “dealer’s mix”—varies from 46 to 72 percent, depending on the geographical location of the processing plant and the generator of the cable or wire. This mix typically contains a variety of polymers, PVC, polyethylene, elastomers or rubbers such as neoprene and/or silicone, as well as different fluorinated polymers, nylon, polyesters, and metallized PET, he said.
Thus far, Argonne researchers on the project have encountered a few major problems. The first is how to effectively remove metals that have become imbedded in the plastic or rubber chops. Though a number of somewhat successful procedures have been executed to solve this issue, research continues, Milgrom reported.
Another challenge has been to effectively separate rubber fragments from the PVC stream. Some degree of separation can be achieved simply through the use of vibrating screens, as the rubber and PVC fragments are often different sizes, even when they’ve been run through the same chopping process, Milgrom said. Another approach is a melting process that takes advantage of the fact that crosslinked elastomers such as rubber don’t melt when heated, while PVC does, though this process requires extremely careful manipulation to avoid entrapment of the rubber in the PVC, he noted.
Due to their physical gravity properties, elastomer contaminants such as neoprene are also difficult to separate from other plastics in wire chopping residue, Milgrom reported. Potential solutions to this problem rely on chemical solutions such as calcium carbonate, calcium chloride, or potassium carbonate to change the properties of the dealer’s mix. In this instance, follow-up washing of the scrap material becomes extremely important since salt residues left on PVC affect the properties of the plasticized PVC, he observed.
In sum, Milgrom said, it will take a number of approaches to produce relatively pure recycled-content plasticized PVC, and these and other alternative approaches are under investigation in Argonne’s labs and pilot plant facilities.
Assessing the Sumitomo Scandal
The Sumitomo copper scandal in June was an “LME metals problem, not just a copper problem,” asserted David Threlkeld, general partner of Resolved Trading L.P. (Randolph, Vt.), at the nonferrous division meeting, held in conjunction with the ReMA membership meeting in Atlanta in September.
According to Threlkeld, the years of unauthorized trading by Sumitomo’s chief copper trader, Yasuo Hamanaka, was only the “last symptom” of a long history of abuse regarding LME trading and accountability, and problems still exist on the LME. In his view, the LME is guilty of a “systemic pattern of trading irregularities. It’s as if,” he quipped, “the lunatics are running the asylum.”
The LME began as a principals market and, as such, was not subject to the same level of scrutiny that would have occurred had it been a Comex-style clearinghouse system. The exchange’s rapid expansion “overwhelmed ethical constraints,” enabling it to become a private club in which all trading transgressions were settled “behind the scenes.” As evidence, Threlkeld chronicled eight questionable events in the LME’s history, beginning in the 1970s and ending with this year’s copper scandal that amounted to $2.6 billion in trading losses for Sumitomo. “Is there a pattern here?” Threlkeld asked.
Throughout these problems, he continued, the LME did little to correct the problems under its governance (though the 1986 tin crisis did prompt the exchange to change its charter to look more like a trade clearinghouse as opposed to its original principal market concept).
Threlkeld first became concerned about Sumitomo’s copper trading practices early in 1990 and later in 1991 when Hamanaka directly asked him to back-date $500 million in trades. Threlkeld informed LME authorities, but they reportedly took no action because Hamanaka, they said, had explained his position to their satisfaction. The issue of back-dating trades, however, was never confronted, Threlkeld asserted. Further warnings also went unheeded, ultimately resulting in Threlkeld being prohibited from LME trading.
To ensure its integrity in the future, the LME must “address financial control and greed and not reflect it,” establish clear credit guidelines as a daily event, and carefully follow up on all trading irregularities, including “offshore trading.”
The net result of the Sumitomo scandal on the world copper market has yet to be known because, in Threlkeld’s view, the crisis isn’t over. For one, today’s world copper market is “dangerously overbought” by as much as several million tons, he estimated, which means that copper will likely face downward price pressure in the future. In addition, today’s world copper market has also produced more metal than it consumed back in 1993 and 1994, thereby understating stocks by as much as 600,000 tons, he projected.
Though obviously critical of the LME and its “hands-off, anything-goes atmosphere,” Threlkeld framed his remarks as a plea to protect the longer-term interests of buyers and sellers on the exchange. While he advocates its use as a financial tool to avoid adverse price risk, he stated that the function of any commodity exchange is to avoid or reduce price risk, concluding, “The LME has not done that.” •
—Robert J. Garino, Kimberley R. Harris, and Si Wakesberg
Though 1996 hasn’t been the tour de force it was expected to be, market experts at ISRI’s fall roundtables were far from pessimistic, with most predicting brighter times for primary and secondary commodities in 1997.