Shifting Sands

July/August 2009

Despite signs of economic recovery, recent contract disputes have forever changed the business climate for international trade in scrap, said those at BIR's Spring Convention.

By Robert J. Garino and Rachel H. Pollack

Only a short drive from the skyscrapers in downtown Dubai, United Arab Emirates, are the undulating dunes of the world's largest uninterrupted sand desert, the Arabian Peninsula's "Empty Quarter." Seen from above, the desert appears uniform and featureless. On the ground, however, subtle differences appear. Some areas are barren of vegetation and otherworldly in appearance, with wind-grooved dunes a sharp contrast to the blue sky. In other directions, low shrubs and palm trees dot the landscape.

Like the Arabian desert, the scrap industry seemed nearly lifeless nine months ago. After the September 2008 collapse of Lehman Brothers triggered a credit crisis, exacerbating a worldwide recession that had started quietly in late 2007, the markets for nearly all scrap commodities collapsed. As the construction, transportation, and retail sectors were reeling from their economic troubles, demand for manufactured goods—and the scrap from which they're created—fell precipitously, as did prices. Things turned ugly, as disputes between sellers and buyers of scrap over reneged contracts cropped up worldwide. At the October 2008 meeting of the Bureau of International Recycling (Brussels), participants sounded ominous warnings about the long-term effects of such disputes and wondered how long this economic downturn would last and how much worse it would get.

Seven months later, the markets for many commodities are showing signs of life, giving participants at BIR's spring convention, held in Dubai in May, some hope that the worst is over. Even though scrap consumers in many industries are going through painful business contractions, demand in China in particular has driven recovery in base metal prices beyond the level the fundamentals would seem to support. Paper and plastics, too, seem to be making a comeback predominantly on the strength of Chinese demand. Paper recycler Jan Bruzelius of IL Recycling (Stockholm, Sweden) may have put it best: He recalled that at the fall 2008 BIR convention, "I said that we are sitting on the beach waiting for the tsunami." As of now, he said, "we certainly have gotten wet, but we are still on the beach, and we are reasonably OK."

Nonferrous Prices Rising Despite Low Demand
Current business conditions are "drastically different" than they were when BIR met just one year earlier in Monte Carlo, said Robert Stein of Alter Trading Corp. (St. Louis), Nonferrous Division president, at the division meeting. Though signs that the global economy was in recession were already apparent last May, it became increasingly clear, he said, that the scrap processing and consuming industries were heading "for extremely difficult times."

As he did at the fall BIR meeting in Düsseldorf, Germany, Stein condemned what he termed the "unethical behavior" of certain commercial concerns in Asia and elsewhere that reneged on supply contracts in the latter months of 2008. The result, he said, is "a changed business climate": Supplier contract terms have tightened, limiting the number of buyers due to financial constraints and limiting the supply of copper units that consumers need. The Nonferrous Division approved two nonbinding resolutions at the Dubai meeting, on contract compliance and on the enforcement of BIR's Code of Conduct, addressing this issue.

Describing the nonferrous metal markets in the United States, Stein noted that lower industrial production has reduced copper scrap flows, keeping available supply relatively tight. He called scrap demand strong, but only relative to the low availability of material. Consequently, for scrap processors facing limited scrap flows, Stein concluded that industry participants are experiencing compressed margins per unit of scrap and compressed profitability. Looking at the current business climate, Stein also warned that a "sustainable recovery is remote."

Stein's cautious remarks mirrored the global nonferrous overview provided by Peter Dahmen of Metallhandels­gesellschaft Schoof & Haslacher (Munich, Germany). The U.S. market has "few positives to report" in terms of macroeconomic conditions, he said. Scrap volumes have picked up, with April activity better than the first quarter, but the secondary aluminum industry in particular continues to struggle with new orders and scrap supply. Smelters are resorting to buying back their NASAAC ingots to cover the few orders, he noted. Copper and brass consumers also are struggling, competing with high export prices.

Looking at the Asian markets, Dahmen said China's copper scrap market is "very short of supply," with sellers getting premiums of up to $800 a mt over Comex and LME prices in Shanghai. The quantities purchased appear to exceed actual consumption, Dahmen noted, fueled by China's economic stimulus package, bank lending, and intention to sell U.S. dollars. The Far East still has the world's highest growth rates, Dahmen said, thus it's "pushing world economies" higher.

Economic contraction across Europe has had a "tremendous" impact on that region's metal markets, Dahmen said. Domestic scrap demand in France and the United Kingdom remains extremely low, with the majority of metal scrap being exported. UK secondary aluminum smelters have been hit particularly hard, and plant closures and bankruptcies are likely. Two major aluminum secondary producers in Germany have already filed for bankruptcy, he added. Dahmen also reviewed market conditions in Australasia, Southern Africa, and the Middle East.

Unlike most Western economies, India is experiencing an economic slowdown, not a recession, reported Ujjwal Munjai of Rockman Industries, an aluminum die-casting business in Ludhiana, India. He placed estimates of India's 2009 GDP growth at 4.5 percent, with 2010 pegged at 5.6 percent. World GDP trends point to positive growth for India, China, and Southeast Asian nations while the U.S., British, German, French, and Japanese economies are contracting, he said. Munjai identified several "key buffers" that are keeping India safe from the financial crises the West is now experiencing: more-than-adequate banking capital, low export dependence, its predominantly rural economy, and a stable government.

Brazil is another country poised for continued strong growth, noted Bianca Vicintin Abud of Metalur Group Brazil (São Paulo, Brazil), a secondary aluminum alloy producer. Brazil's economy has been expanding since 1994, largely due to credit expansion that has followed economic stability, she said. Brazil's automotive and motorcycle industries are growing, Abud said, leading to related growth in its secondary aluminum industry, which must import aluminum scrap to meet its needs. The major suppliers are in Saudi Arabia, Colombia, Mexico, Venezuela, and the United States.

China-based freelance writer Shi Lili offered a perspective on Chinese scrap fundamentals along with comments concerning government policies. Domestic demand for copper scrap has not kept pace with the level of imports, Shi noted, with scrap traders and yard owners holding ever-greater amounts of scrap, as opposed to smelters. Beijing's State Reserve Bureau also has been stockpiling copper to support the country's smelting industry, she said, but these purchases have since leveled off and, as previously noted, have not been offset by an increase in demand.

Fast-rising copper prices, traced to aggressive Chinese buying, and the subsequent "commercial recession" that followed in the fourth quarter of 2008 led to credit problems and reneged contracts, which "cast a dark shadow on the overall reputation of Chinese buyers," Shi said. This has made Chinese scrap buyers "more cautious and reasonable" than before, she said: They're hedging more to reduce price risk, giving closer scrutiny to suppliers, and paying deposits of "at least 30 percent, even up to 100 percent before loading."

Though not defending the practices of the scrap buyers involved in the breakdown in trust between offshore suppliers and Chinese buyers, Shi pointed out that Chinese companies also have complained that suppliers delay shipments or ship to third parties when prices go up, speed up the shipping process when prices go down, and sometimes do not deliver despite having received a deposit in advance. She also noted the growing quality and quantity disputes, which she traced to the onset of the global financial crises.

Tight Ferrous Supply Boosts Prices
Cancelled contracts were also still on the minds of presenters at the Ferrous Division meeting. The deteriorating economic climate worldwide has created a financial "confidence shock" that has overwhelmed the global economy, as well as a corresponding confidence shock of suppliers toward consumers of scrap who have reneged on their contractual obligations, said Ferrous Division President Christian Rubach of Interseroh Hansa Recycling (Köln, Germany).

The problem is not only in Asia, noted Tom Bird of Sims Metal Management (Stratford-upon-Avon, England) and president of the European Ferrous Recovery and Recycling Federation (Brussels). The controversy over canceled orders has negatively affected the business climate within the European Union as well. Actions of certain steel mills within the EU and around the world "have been very disappointing in the last few months," he said. Like Stein, Bird said the canceled and renegotiated orders were a "bad reflection" on the recycling industry and "simply unacceptable."

Scrap shippers are concerned about recent regulatory changes in India, noted Ikbal Nathani of the Nathani Group of Cos. (Mumbai, India). India's director general of foreign trade recently decreed that all scrap imports are subject to mandatory preshipment inspection as of March 23, amending an earlier provision that only nonshredded material required such inspection. The government implemented this policy to prevent radioactive scrap from entering the country, Nathani said—a very real problem, as last year stainless steel elevator buttons exported to Europe from an Indian foundry were found to have high levels of cobalt-60.

Another troublesome development is the Indian Ministry of Environment and Forests' classification of all scrap as "hazardous waste." This designation triggered a requirement for exporters, importers, and shipping lines, as of April 29, to document all shipments; provide a chemical analysis of the material from an "accredited" testing laboratory in the country of export; and provide Indian customs with samples of consigned scrap for further analysis. India is the only country that has classified scrap hazardous waste, Nathani noted, pointing out that the United Nations Environ­mental Programme's Basel Convention classifies iron and steel scrap as "nonhazardous waste."

These two regulatory changes have created numerous problems for scrap exporters, Nathani explained, to the extent that if the MOEF strictly enforces its requirements, it could stop all scrap shipments into India. Both BIR and ReMA are working with Indian government officials to resolve these issues, Nathani said.

Looking at key consuming markets, Blake Kelley of Sims Metal Management (New York) remarked that the U.S. ferrous scrap market firmed in May, but he expected it to trade "sideways to slightly lower in June." Steel mills were only operating at 43-percent capacity, he said, suggesting to some that scrap prices have remained uncharacteristically high. On the other hand, Blake noted that underpinning these prices is a decrease in scrap supply, with obsolete flows down as much as 60 percent. Also, scrap exports continue at historic high rates, and the overall share of scrap held by minimills has probably increased at the expense of shuttered blast-furnace operations.

Summarizing the global steel picture, Kelley cited World Steel Associ­ation (Brussels) data that project 246 million mt less steel production in 2009, resulting in 107 million mt less purchased steel scrap. Year-to-date global steel production is lower by almost 23 percent, Kelley said, with China's output lower by just 0.1 percent while the rest of the world has reduced production by 32 percent. China now accounts for 48 percent of global steel output, he noted.

Scrap prices could go up this year, Kelley said, based on assumptions that global production does not further decline and that destocking along the supply chain has "generally been completed." Nevertheless, he said, scrap prices will "probably stay in a narrow band" this year, limited by finished steel prices, production costs, and the availability of pig iron. The downside, in turn, he said, will be limited by increasing scrap collection and processing costs, a relatively depleted reservoir of obsolete scrap, and increased competition among processors and dealers for the available volumes of ferrous scrap.

Stefan Schilbe of HSBC Trinkaus & Burkhardt (Düsseldorf) gave a global economic outlook, and Tariq Barlas of Al-Tuwairqi Group (Dammam, Saudi Arabia) spoke about the Middle Eastern steel industry.

At the Shredder Committee meeting, several speakers addressed the Middle East's growing ferrous scrap industry. Roy Woolcock of Seram UK (Bridgend, England) said shredder feedstock in Saudi Arabia is notable for containing little to no free copper, as vehicles are "completely stripped" before the metal shells are shredded. Salam Sharif of Sharif Metals (Sharjah, UAE) reported the region contains up to 15 shredders: seven to 10 in Saudi Arabia, two in the UAE, and one each in Iraq, Iran, and Lebanon. Saudi Arabia bans the export of ferrous scrap and the UAE charges a duty on ferrous exports, he noted.

Stainless Turnaround Could Create Shortages
The stainless steel and special alloys industries are facing "extremely difficult circumstances" that are unlikely to improve much by the end of this year, said Michael Wright of ELG Haniel Metals (Sheffield, England), chair of the Stainless Steel & Special Alloys Committee. The worldwide consumption of finished stainless goods will likely fall 20 percent from 2008 to 2009, he said; total stainless consumption will likely drop from 23.6 million mt in 2008 to 19.6 million this year; and 2009's total production will likely be 30 percent to 40 percent less than 2008. The world must wait "for consumption to catch up with stocks," Wright said. The scrap supply is shrinking as well, with 2009 global supply estimated at between 5.2 million and 5.8 million mt compared with 7.4 million in 2008.

The price picture is no better, with the stainless industry facing "severely collapsing prices in all elements—nickel, chrome, moly, and iron," Wright said. Nickel's price dropped 70 percent from early 2008 to early 2009, settling at around $12,000 a mt. Stocks rose from below 6,000 mt at the market's June 2007 peak to 105,000 to 110,000 mt on the LME now. Add in producer stocks of ferronickel and nickel supplier stocks of scrap, Wright said, and the real nickel stock level is actually three times the LME stock level—more than 300,000 mt. Nickel producers have canceled 75 percent of planned new capacity, Wright said.

So long as the nickel surplus remains, Wright said, any price increases will be "due to LME speculation." On the other hand, the low nickel prices should result in a larger austenitic ratio, he pointed out. If production demand does increase, he added, stainless scrap availability will lag and could create shortages for three to six months. Wright expressed his hope that the stainless market has finally "bottomed out."

The regional picture for stainless reflects the global picture to various degrees. Europe's stainless output has fallen about 19 percent year to date compared with the same period in 2008. Across Europe, the four major stainless mills have lost nearly D1 billion since the market's fall, Wright said. China's stainless production is down 60 percent, though there has been some recent reinstallation of capacity, said Mark Sellier, a South Africa-based employee of Oryx/KMR Stainless (Mülheim an der Ruhr, Germany). Many analysts see Chinese production remaining stable or slightly increasing this year. Chinese stainless producers are using a smaller proportion of scrap due to its relatively high price compared with ferronickel and the mills' large stocks of the latter material. Most mills are holding little scrap inventory, and local deliveries and shipments from Japan are satisfying their decreased needs, Sellier said. Further, the country recently increased its import duties for all scrap, which could add as much as $25 a mt to the cost base for importers, further slowing demand. Across the continent, Asian volumes are down more than 75 percent due to significantly reduced manufacturing volumes, Sellier said.

India's demand for stainless was growing substantially until the economic difficulties of last fall, said Anand Gupta of Ambica Steels (New Delhi, India). Orders are down 40 percent to 50 percent since the fourth quarter of 2008, and production and capacity utilization fell by 30 percent on average in the first quarter of 2009. This resulted in a decline in demand for stainless scrap, with first quarter 2009 imports down to about 50,000 mt. The Indian government is working to improve liquidity through the supply chain, which should help improve the demand from major end users, Gupta added.

Container sales to China and India are the heart of today's stainless scrap business in the United States, according to Barry Hunter of Hunter Alloys (Boonton, N.J.), in a report Wright delivered. Hunter was somewhat optimistic, noting that current prices for 18/8 and 316 scrap and reports of high mill utilization rates in China (compared with U.S. and European mills) "hopefully indicate a resurgence of consumer demand." Even so, "it's too early to assume sustainability or any significant market or economic turnaround," Hunter said. He echoed Wright's observation that if a turnaround were to take place soon, "scrap availability compared to price" will be an issue for consumers.

The overall market for high-temperature alloys and titanium is "quite depressed," noted Phil Rosenberg of Keywell (Chicago). Asia is faring better than Europe or the United States, but Asian mills "are still at no more than 60 percent of capacity," and some of that production is due to government subsidies, not marketplace demand. As with stainless, Rosenberg said, "when production turns around, the pipeline—both secondary and primary—will be thin and should lead to a sharp increase in price."

Ildar Neverov of Scrap Market (Moscow) estimated Russian exports will fall 20 percent from 2008 to 2009, down to 100,000 mt. He noted that in March the country decreed that scrap exports must move through only 10 designated ports, down from 40 previously. Only St. Petersburg is well situated to handle exports of containerized stainless, making it the destination for material from all across the country and setting up the potential for logistical problems, he said.

Other presenters included Ahmed Sharif of Sharif Metals, who addressed the nickel and stainless situation in the Middle East, and George Adcock of the London Metals Exchange, who gave the audience a reminder of the benefits of hedging and managing price risk.

Western Paper Demand, Prices Down
The paper world has been going through challenging, testing times, said Paper Division President Ranjit Baxi of J&H Sales International (London), but recyclers and traders can emerge stronger by following three golden rules: First, don't panic. Supply of and demand for recovered paper will continue to exist. Second, develop a positive attitude. And third, realize that good leadership doesn't shy away from making long-term decisions. The market is "confusing and frightening" right now, Baxi said, but he is "proud to see that most recyclers have shown the right values and principles" and will emerge successfully from this period because of it.

Baxi cited estimates that global trade in paper is down 9 percent so far in 2009, with concomitant declines in consumption, followed by supply declines starting in February and March of this year. This decrease in supply is one factor contributing to somewhat higher prices, he said.

Exporters are facing rapidly shifting freight rates, Baxi said, as operators have reduced shipping capacity by 20 percent to 25 percent. Freight costs went up $400 per 40-foot container between January and May, Baxi said, and he expected another $100 increase in June. The upward trend in oil prices will most likely raise bunker fuel prices, too.

Recent, unexpected changes to import regulations are causing some concern for paper exporters, Baxi added. In addition to the difficulties in India described earlier, Indonesia declared a 100-percent inspection rule for scrap paper arriving after June 24, but it only authorized two firms to perform the inspections. Those firms would need to add 6,000 inspectors to meet existing demand, Baxi said. Recyclers and industry associations have asked the government to revise or remove the rule.

Despite these new regulations, Asia is still a strong market for recovered fiber, Baxi said. Chinese imports of scrap paper were up 7 percent from 2007 to 2008, though "2009 will struggle to meet 2008 levels," he said. Export prices for recovered paper are trending upward due to gradually increasing demand and lower collection levels, as well as a weakening dollar, he said. If the recession is indeed ending, the recovery should reduce stock levels, increase demand, and lead to more paper collection.

The regional reports gave examples of how the recession is affecting individual countries' paper markets. Delegates from several European countries reported low demand for paper, especially in the packaging and publishing sectors. Declines in newspaper advertising have hit that industry hard, resulting in less demand for newsprint. With mill order books nearly empty and prices low, papermakers have cut back production or shuttered their plants and cut back on their orders of recovered paper. That has trickled down the supply chain to result in declines in scrap paper collection.

Guest speaker Atul Kaul of the Arab Paper Manufacturing Co. (WARAQ) gave an overview of the Saudi Arabian paper industry. The country generates 1 million mt of scrap paper annually and recovers more than 70 percent of that, Kaul reported. The industry has the capacity to produce about 780,000 mt of paper annually and is growing about 7 percent a year, with scrap paper generation and collection increasing at the same rate.

WARAQ, based in Dammam, relied on imported scrap paper when it was founded about 15 years ago, but it has since invested in domestic paper recovery, Kaul said. It provides education and information to paper recyclers as well as interest-free loans for equipment and trucks, and it has worked on the development of a better financial infrastructure for small businesses. "We treat our suppliers as partners," Kaul said, such as by setting a minimum price for recovered paper "at a sustainable level when the price drops too low."

Chinese Demand Props Up Plastics Market
With spring bringing a significant increase in Chinese demand for plastics and rising prices in North America, "international traders have not been as badly affected as they feared" when BIR met last fall, said Plastics Committee Chair Surendra Borad of Gemini Corp. (Antwerp, Belgium), and those fears might have been an "overreaction" to the economic turmoil, he said. The plastics market is showing tentative signs of recovery, though plastics processors and exporters wondered whether the gains have any staying power.

Giving the example of 98/2 LDPE film scrap, Borad said purchase prices had dropped to F120 a mt last fall but have since moved up to F360 a mt, ex works. Selling prices have risen from $300 to $525 and upwards per mt, C&F, at Chinese ports, with some prices to India as high as $680.

One factor that might have cushioned plastics from the vicissitudes of the market has been processors and traders' ability to stockpile material, Borad said. Compared with ferrous and paper, he noted, plastic scrap is less bulky, more amenable to outside storage, and less perishable. His company had more than 9,000 mt of plastic scrap in warehouses, on the water, or at ports when the market began to drop, he said. "Rather than selling at panic prices, we locked the goods in our warehouses. I hear that many companies in Europe took the same steps, and the market stabilized as a result."

Looking at the plastics market region by region, "the domestic market in Europe has suffered tremendously," Borad said. "There have been a lot of bankruptcies," with the reprocessed market taking the biggest hit. In France, converters are seeking orders and "fighting to keep a minimum of activity until better times," said Jacques Musa of Veolia Propreté (La Plaine St. Denis, France). With the struggles of the auto and construction industries, demand for plastic remains low, despite production cuts. Orders have fallen 50 percent compared with this period in 2008, Musa said, and without access to credit, traders face the "difficult choice" of refusing to sell or risking delayed payment or no payment.

German and Dutch plastics processors also were hit hard last fall, said Peter Daalder of Daly Plastics (Zutphen, Netherlands). "Collectors and traders have just enough air to breathe; the reprocessors are almost needing extra oxygen," he said. After a "total market breakdown" in October, in which companies had to write off up to 50 percent of the value of their stock, the market recovered somewhat in December, particularly in supermarket foil, Daalder said. He noted collection is down 40 percent, with most of the decline in PE and less in PET and films.

On the positive side, China is "back on the market," Musa said, with solicitations from new companies and for materials that previously had not been in demand there, such as certain types of grind and all types of foils—prices for which are on the rise, as demand in France is now exceeding the shrinking supply. Germany and the Nether­lands also face the "strange situation" of reprocessors' prices going down at the same time export prices are going up, Daalder said. "We're making money now, but when exports break down, we'll have a problem."

Daalder confirmed Musa's observation that many Chinese buyers are new buyers paying higher prices to establish new relationships, but he took a skeptical view of the change: "My bad customer started buying at my competitor, and his bad customer is now buying my material." Even so, the result was that "prices rocketed," with April prices almost three times as high as November's. "So at the moment, the export market is over the top, and we're waiting for a breakdown," he observed.

Daalder cautioned that the current Asian market is "unpredictable," and he expects collectors and exporters to "start speculating with materials to keep the customers in Asia happy," which is not healthy. "The cost of this will be a lack of continuity, and this will damage the industry in reliability and professionalism." Further, he predicted, "in the very near future the market will collapse again."

Plastics exporters are facing some of the same trade concerns as other scrap exporters: higher sea freight prices, a shortage of containers in Europe, more stringent customs checks in China, and summer slowdowns in purchasing, Daalder and others noted. But plastics exporters have been spared the increased preinspection controls India has imposed on metal and paper scrap.

The U.S. market stabilized in March and April, with prices increasing by $20 to $40 in May, Borad said. "PE scrap, which was around 16 cents a pound, ex works, in the Southeast in April is now around 18 cents in May," he said. Railcars of material to Houston, which sold for about 25 cents a pound in December, are now 40 cents a pound. Further, collectors are complaining about less scrap coming on to the market. The container shortage seems to have eased, he added. As in Europe, people are being more cautious about payment terms, asking for payment by check immediately upon loading. Borad also reported on the markets in Australia and New Zealand.

The long-term outlook for plastics recycling is still good, Borad said. "Our sector has been growing at a much faster rate than the GDP," especially in developing countries, he said. "There is plenty of business for all of us," whether in trade, technology transfer, or joint ventures, he concluded. •

Robert J. Garino is director of commodities for ISRI. Rachel H. Pollack is editor of Scrap.