Rude Awakening

All good things must come to an end, they say, and the amazing U.S. economic run certainly did at the end of 2000. This review tells what happened and why. 

By Robert J. Garino

Robert J. Garino is director of commodities for ISRI. 

Based on final year-2000 economic data, it appears that the U.S. economy and commodity markets hit a turning point around mid-2000. Unfortunately, the new direction wasn’t for the better, especially for the manufacturing and scrap recycling sectors.
   Though the U.S. economy lost steam in the second half of 2000, its robust performance in the first six months gave the economy its strongest full-year growth in 16 years, perpetuating the nearly decade-long economic expansion. In fact, the U.S. gross domestic product (GDP)—which measures the total value of all goods and services produced domestically—increased 5 percent in 2000, up from the 4.2-percent gain in 1999 and the biggest annual rise since 1984’s 7.3-percent jump. Also, industrial production grew 5.6 percent last year compared with 4.1 percent in 1999, reports the Federal Reserve Board.
   Despite this overall impressive performance, the U.S. economy slowed appreciably as 2000 wound down, especially in key metal-consuming sectors such as automotive and construction. The U.S. GDP eased to a tepid 1-percent annual rate in the fourth quarter—the slowest pace in five and a half years and less than half the 2.2 percent rate recorded in the third quarter.
   As a result—and for the first time in many years—economists started mentioning the “R” word—recession. The only question that remained was, would the U.S. economic landing be a hard one or a soft one? Initial thoughts of a temporary slowdown in 2001 (a soft landing) soon gave way to more serious concerns about the duration and breadth of the economic contraction. Economists were soon scaling back their earlier, more optimistic forecasts for both GDP and industrial production for this year.
   Manufacturers, meanwhile, were running flat out, building up inventories through the first half of 2000 in anticipation of additional sales and price increases. When those didn’t materialize, the sizable inventories compounded the “market correction” many have been experiencing in the first half of this year.
   Recyclers of metals, paper, and other materials were keenly aware that business conditions had downshifted in the second half of 2000. Ferrous scrap processors, for one, were hit by several factors, including slumping industrial production, significant imports of scrap, pig iron, and scrap complements such as direct-reduced iron (DRI), and near-record imports of finished steel, which affected domestic steel production and demand. By December, the U.S. steel industry’s capacity utilization rate was 70 percent compared with rates above 90 percent in the second quarter. As a consequence, ferrous scrap prices moved relentlessly lower.
   Though 2000 may have been a year to forget for many recyclers, there were some positives to note for the year as a whole. Total demand for many commodities exceeded expectations and many new records were set. Still, the year will mostly be remembered for its negative price trends, soaring energy costs, and drastically rising inventories that wreaked havoc on the bottom lines of scrap processors and consumers alike.
   Here’s a closer look at how the nonferrous, ferrous, and paper markets fared last year.

Aluminum 
The dominating features for the domestic primary aluminum industry last year included sharply higher energy prices for smelters in the Pacific Northwest, reduced capacity at midyear, falling demand, and “stubbornly low” dollar-denominated LME quotations for prime aluminum. For scrap processors and consumers, however, the issues also included intense competition among secondary smelters, compressed margins, and a slowing appetite for prepared material as the year progressed.
   The result, compared with 1999, was a reduction in aluminum production (2.9 percent), marginally higher mill shipments (0.4 percent), and slightly lower domestic scrap consumption (1.4 percent).
   One example of reduced scrap usage was the all-aluminum used beverage container (UBC). The 2000 UBC recycling rate, as calculated by ISRI, the Aluminum Association (Washington, D.C.), and the Can Manufacturers Institute (Washington, D.C.), was 62.1 percent compared with 62.5 percent in 1999. Also, the number of pounds collected and the number of new cans shipped last year declined 2.4 and 1.1 percent, respectively.
   On the plus side, exports of remelt secondary ingot, UBCs, and other aluminum scrap increased significantly. Even so, scrap’s share of total aluminum consumption remained unchanged at 41 percent.

Copper
Though certainly not immune to the weak conditions of last year, overall copper usage continued to set records, both domestically and globally. According to the International Copper Study Group (Lisbon), world refined copper consumption rose 7.5 percent to 15.2 million mt, while refined production grew at a more modest 3.1 percent. The result was a statistical shortfall of 331,000 mt compared with a surplus of 284,000 mt in 1999.
   In the United States, domestic copper consumption also increased last year (2.7 percent) while primary and secondary output was constrained due to smelter closures. The U.S. Geological Survey (Reston, Va.) reports, for example, that smelter production has been affected by the closure of three of seven primary smelters over the past two years along with the shuttering of Southwire Co.’s secondary smelter in May 2000, leaving only one dedicated secondary smelter in the United States.
   To meet the consumption needs of wire and brass mills, refined copper imports increased substantially while inventories were subsequently drawn down. Scrap’s share of the U.S. copper market slipped 1 percentage point to 31 percent.
   While scrap processors were adjusting to a changing domestic market, offshore demand for prepared scrap, primarily earmarked for Asian consumers—China, in particular—increased significantly and proved to be a bright spot for the scrap processing industry.

Iron and Steel
World raw steel production totaled a record 843 million mt last year, an increase of more than 7 percent over 1999, notes the International Iron and Steel Institute (Brussels, Belgium). The top-three steel producers were China at 126 million mt, Japan at 106 million mt, and the United States at 106 million mt.
   Domestic ferrous casting shipments, however, did not fare as well as steel mill shipments. Estimates place U.S. gray iron, ductile iron, and malleable iron shipments at just over 10 million net tons, approximately 5 percent below 1999.
   By mid-2000, rates of growth were starting to slow on all fronts, and this slowdown continued throughout the second half. Steel prices, in turn, fell sharply and production cuts were announced in Europe, Asia, and the United States. The domestic steel industry was, in fact, reeling from the combined effects of lower demand, increased energy costs, stiff (some would say “unfair”) competition from offshore producers, and a “lethal liquidity crisis” among the remaining producers. Six steelmakers filed for bankruptcy protection in 2000 as benchmark prices for hot-rolled steel fell 14 percent from $300 a mt in 1999 to an average of $259.
   For the most part, ferrous scrap processors kept pace with the growing demand for iron units last year, with domestic scrap consumption increasing 3 percent but offshore demand (excluding stainless steel and alloy steel scrap) ending the year down 5 percent. Scrap’s market share, meanwhile, held at 42 percent of apparent U.S. steel consumption.
   Mills built up inventories of scrap, pig iron, and DRI in the first half of last year and drastically reduced their intake of raw materials as orders fell and imports grew at an annual rate that would exceed 37 million net tons. The net result was that ferrous scrap prices, as measured by the No.1 HMS composite, suffered a near freefall last year, dropping by a third in the January-December period.

Lead
The Western World lead market showed a virtual balance between supply and demand in 2000. Industry participants again relied on imports of metal from Asian countries to make up for the shortfall in Western World output, notes the International Lead and Zinc Study Group (ILZSG) (London). Refined metal consumption rose 2.8 percent to 5.6 million mt last year, while metal production grew at a smaller 2.2 percent rate to 5 million mt, the group reports. Net imports from the East were higher at 512,000 mt.
   Though lead moved from a surplus in 1999 to a small deficit last year, its price response was muted. Transacted lead prices, as expressed on the LME, showed little inclination to move in any direction and, in fact, managed to post their fourth consecutive annual decline.
   According to ILZSG, U.S. refined lead consumption, which accounts for approximately a third of Western World refined consumption, recorded a modest 0.4-percent increase over 1999—much smaller than the increases in Western World and global refined consumption. U.S. consumption was held in check by a decline in automotive replacement battery shipments last year (down 0.86 percent) as well as a setback in shipments of original-equipment batteries (minus 1.3 percent). This reduction in lead’s largest end-use market resulted in relative tightness in scrap batteries being returned for recycling. This condition kept open-market purchases of scrap batteries on the expensive side, thus severely pressuring profit margins for smelters dependent on this raw material.
   The U.S. Geological Survey estimates a 1.1-percent decline in total U.S. lead consumption, with the amount of scrap lead recovered unchanged at 1.2 million mt. Should these numbers prove correct, lead scrap’s share of apparent consumption increased slightly from 66 to 67 percent.

Nickel and Stainless Steel
Since more than two-thirds of all nickel finds its way into stainless steel and related alloys, it is there that analysts look first for clues about the relative health of the nickel industry.
   As for what happened in 2000, those closest to both nickel and stainless steel believe that global overproduction of stainless through the first six to eight months was a principal factor behind the surge of LME nickel prices, nickel demand, and stainless steel scrap consumption. In the United States, imports of stainless steel products increased to meet the projected demand, and service centers accumulated inventories of unsold product. Meanwhile, nickel-containing scrap flowed to overly optimistic producers as scrap-melting ratios increased.
   By the fourth quarter, however, declining industrial production trimmed back stainless steel demand throughout the Western World, especially in the United States. Stainless steel destocking was under way, new production faltered, and LME nickel prices collapsed, averaging 20 percent lower than the first-half average of $4.28 a pound. Mills’ scrap buying prices, as measured by ISRI, fell 34 percent between April and December.
   Nickel price volatility was also exacerbated earlier in the year by labor issues at two of the largest Western World nickel producers—Inco and Falconbridge—as well as concerns that primary supply tightness would be an ongoing feature despite lower forecasts of consumption. For scrap processors, mill buying of stainless scrap all but vanished at the end of last year.
   Though U.S. Geological Survey and American Iron and Steel Institute figures suggest a positive year overall in 2000, they don’t accurately reflect the abrupt change in market sentiment that occurred in the second half. Stainless steel scrap consumption increased 12.5 percent over 1999 while stainless shipments grew 1 percent to 2.1 million net tons. Scrap’s share of the market gained several points to 43 percent compared with its 38-percent share in 1999. In addition, reported exports of stainless steel scrap powered ahead, increasing 80 percent and posting their best showing in five years.

Paper
The scrap paper industry posted impressive numbers in terms of tons of paper recovered and tons exported last year. Those numbers, however, fail to reflect the steep declines in recovered paper prices, the increase in inventories, and the extended mill downtime announced in the second half of last year. For many scrap paper processors and brokers, 2000 was definitely one to forget.
   On the recycling front, after showing little change in the preceding three years, the overall recovery rate increased to 48 percent in 2000, which equates to 49.4 million tons of secondary paper and paperboard consumed last year—5.6 percent more than in 1999, reports the American Forest & Paper Association (AFPA) (Washington, D.C.). AFPA’s rate measures the total amount of paper recovered for domestic and export use as a percentage of purchased paper and paperboard.
   A closer look at the number reveals that U.S. mill consumption of recovered paper increased 2.3 percent last year despite lower paper and paperboard production (down 2.8 percent compared with 1999). On the export side, total U.S. shipments of scrap paper increased 27.5 percent to a record 10.6 million tons, with Canada, Mexico, and China being the principal buyers.
   Processors enjoyed an impressive price runup for most recovered grades through the first five months of last year, benefiting from the strong domestic market for paper and paperboard products at that time and equally healthy export demand. Several grades, in fact, climbed to five-year highs.
   By midyear, though, the slowing U.S. economy revealed an even weaker containerboard market. Plus, concerns that exports could falter sent several bulk grades lower, establishing a negative price trend that would continue into 2001.
   Outside the United States, inventories of pulp grew and pressure on market pulp prices intensified. In response to changing market conditions, domestic mills announced extended downtime. By the third quarter, virtually all grades were under severe price pressure, including high-end pulp substitutes, deinking grades, and the more common OCC and ONP grades.

Zinc
Despite a record level of shipments to the West from Asian countries, overall demand for refined zinc exceeded supply in the Western World for the sixth consecutive year in 2000, according to ILZSG. Global zinc output also grew for the eighth successive year, with China pacing the growth in refined zinc production. Nevertheless, despite record-setting shipments of slab zinc from China to the West, the Western World refined market recorded a deficit of 36,000 mt last year, with total output reaching 6.1 million mt while metal consumption reached about 7 million mt.
   Though zinc prices began trending lower at the start of the fourth quarter, cash settlement prices expressed on the LME averaged 51.1 cents a pound for the full year, up 4.7 percent over 1999. Cash prices, however, literally collapsed in the final quarter to finish at a low of 46.3 cents on Dec. 29.
   The domestic zinc market relies heavily on the strength of the galvanizing and die-cast sectors that, in turn, rely heavily on the performance of steel in automotive and construction applications. Earlier overproduction in the galvanizing sector was an important contributing factor in declining zinc consumption rates as last year wound down. Consequently, apparent U.S. zinc consumption in 2000 was lower by 1.5 percent, as was the overall consumption of scrap, according to U.S. Geological Survey numbers. Scrap’s share of apparent consumption, however, remained essentially unchanged at just under 15 percent. •