May/June 2010
Though ferrous, nonferrous, and paper prices suffered double-digit declines last year compared with 2008, they started climbing upward around March, hinting that a sustained recovery could be underway. By Robert J. Garino and Tom Crane
For the scrap industry, 2008—particularly the second half of 2008—was just downright lousy. Most metals and paper experienced startling price corrections, with some prices free-falling 40 percent. Such dramatic declines, coupled with the year's macroeconomic turmoil, had many analysts wondered if conditions would—or even could—improve in 2009. The answer is a qualified yes. Some manufacturing and service industries did indeed show signs of recovery over the course of the year, though others—particularly housing and automotive—languished through most of 2009. In fact, the Earth Policy Institute (Washington, D.C.) claims that more automobiles were scrapped last year than were purchased—a first since World War II.
In big-picture terms, most published sources say last year's global gross domestic product decreased 1 percent, while the U.S. economy shrank 2.4 percent, the biggest year-to-year decline since 1946. On a quarter-by-quarter basis, however, last year's U.S. GDP went from shrinking 6.4 percent in the first quarter to growing 5.6 percent in the final quarter. That latter figure marked the fastest U.S. GDP growth in six years, suggesting that the worst could be over for the U.S. economy.
Though the U.S. economy showed a measure of optimism, especially in the second half of the year, last year's toll on household net worth was devastating, as financial holdings and home values plunged and unemployment rose. Most official sources estimate that household net worth dropped to $48.5 trillion in 2009, from a pre-recession total of $65.9 trillion, illustrating the severity of the worst U.S. economic downturn since the 1930s. On the employment front, some 8.4 million jobs have evaporated since the recession began in December 2007, pushing the unemployment rate to a high of just over 10 percent last October.
Looking more closely at the metals-intensive industrial production sector, the brightest spots for economic growth and recovery were not in North America but in emerging economies such as China and India, which posted GDP growth rates of 8.7 percent and 6.4 percent, respectively. China, in fact, received most of the credit for the global price recovery in several metal and nonmetallic commodities in 2009.
The U.S. Geological Survey (Reston, Va.) reported that despite some “green shoots” of recovery, overall U.S. metals production in 2009 slipped 7 percent, touching its lowest level since 2005 as the recession curtailed domestic consumption of basic raw materials. The attributed value of this production decline was $21.3 billion, representing a 22-percent decrease from the previous year.
It's no surprise that the U.S. scrap recycling industry felt the pain of the larger economy by experiencing a 36-percent fall in value from 2008, according to ReMA data. Ferrous scrap volumes processed slid 27 percent, for example, while the major nonferrous metal volumes declined 15 percent. Scrap exports, which contribute roughly 40 percent to the industry's overall value, also decreased 25 percent in value, despite an uptick in volume.
On the plus side, last year's upward price trends pointed to markets in recovery, thanks to government stimulus efforts, Chinese demand, and currency considerations. Even so, annual price comparisons between 2009 and 2008 clearly illustrate the depth of the recession. As Macquarie Research (London) notes, 2009 was a weak year for global commodity prices in general, with average base metal tags falling about 27 percent year-on-year and steel plummeting 45 percent. Last year's Dow Jones-UBS Commodity Index was 41 percent off its 2008 peak despite gaining back nearly 19 percent by the end of the year. Precious metals led last year's overall index, but base metals such as copper also joined in. Take LME copper, which averaged $1.48 a pound in January 2009, climbed steadily for most of the year, and averaged $3.18 in December for an increase of 115 percent. Other metals also gained considerable ground last year, though the growth was not uniform, as the U.S. steel industry illustrated.
Finally, the London Metal Exchange Index rose 87 percent last year on slightly lower trading volume and noticeably higher inventories of the six major nonferrous metals traded on the exchange. Again, much of the credit for the price increase went to China and its insatiable demand for base metals. Fresh flows of investment fund money and a weaker dollar also boosted commodity prices well above what the fundamentals justified, many analysts claim.
Against this unsettled but hopeful backdrop, here's a closer look at the major commodities that made up the bulk of the $54 billion scrap recycling industry in 2009.
Aluminum: Though 2009 brought rising price trends for most industrial commodities, year-on-year comparisons were full of significant supply-and-demand negatives, which was certainly the case for aluminum. In fact, the light metal was the price laggard last year among LME-traded base metals.
Even though total world aluminum production and consumption both declined year-on-year, aboveground inventories of primary metal ballooned, and LME aluminum prices fell 35 percent for the year. Total stocks held by the four exchanges in London, Shanghai, Tokyo, and the United States ended last year just over 4.9 million mt, almost double the total in 2008, according to the World Bureau of Metal Statistics (Ware, England).
By midyear, it was clear the global aluminum industry was struggling with excess smelting capacity, modest demand prospects, and large aboveground inventories of primary metal. Market participants attributed the improving price trend more to the relatively weak U.S. dollar than to any meaningful pickup in actual consumption.
A closer look at the North American aluminum market reveals that aluminum demand (total shipments plus imports) fell 17.6 percent, to 9.1 million tons, the Aluminum Association (Arlington, Va.) reports. According to CRU (London), U.S. primary aluminum consumption declined 29 percent last year, to about 3.7 million mt. Total domestic apparent consumption fared somewhat better than primary aluminum usage, totaling 5.4 million mt, down 10.5 percent year-on-year and the third consecutive year of lower aluminum consumption, ReMA data indicate. Domestic use of aluminum scrap likewise was off almost 12 percent. The U.S. recycling rate of all-aluminum used beverage cans also is expected to show a decline in 2009 from the previous year's rate of 54.2 percent, according to the Aluminum Association, ISRI, and the Can Manufacturers Institute (Washington, D.C.), which jointly calculate the annual UBC recycling figures.
Copper: Despite higher Chinese copper consumption and lower global refined production in 2009, the global copper market posted a statistical surplus for the second consecutive year. The International Copper Study Group (Lisbon) pegged the refined surplus at 365,000 mt, though WBMS set the total closer to 209,000 mt. Other sources placed the surplus higher due to their different methods of figuring China's apparent copper demand and inventory holdings. GFMS (London), for example, estimated last year's refined surplus at 777,000 mt.
U.S. copper consumption also declined for the second consecutive year, down almost 16 percent from 2008, while domestic use of copper-bearing scrap slid 8.3 percent, reflecting weak demand from industrial sectors, specifically housing, construction, and automotive. Scrap exports, previously a driving force for the U.S. scrap industry, also cooled as 2009 progressed, ending the year at 843,000 mt, down about 7 percent.
Despite the negatives in the domestic market, copper's price performance was impressive last year, with LME cash ending at $3.33 a pound, up about 140 percent from the 2008 average of $1.39. China drove much of this rise, thanks to its record imports of refined copper in the first half of last year, which drew down Western copper stocks and more than offset weakness elsewhere. China's appetite for the red metal lessened in the second half, but copper prices continued to firm, as fresh investment and government stimulus money offset the less-than-supportive supply-and-demand fundamentals.
Iron and Steel: Global crude steel production decreased approximately 8 percent in 2009, to 1.22 billion mt, according to the World Steel Association (Brussels). China was the leading producer, at almost 568 million mt (up about 14 percent year-on-year), followed by Japan at roughly 88 million mt (down 26 percent), Russia at 60 million mt (down almost 13 percent), and the United States at 58 million mt (down just over 36 percent). Though global production declined, Asia—particularly China and India—and the Middle East recorded positive growth in their steel output last year.
The U.S. steel industry suffered in 2009 by virtually every measure. Shipments across all product lines fell nearly 37 percent compared with 2008 and were about 19 percent below the previous worst year on record. The industry's capacity utilization was slightly more than 50 percent for the full year. Steel imports, meanwhile, totaled 14.3 million mt, down 50 percent and the lowest total since 1991. Compare that with steel imports in 2006, which hit a record 40.4 million mt.
Ferrous scrap prices slid 42 percent last year, as measured by the bellwether No.1 HMS composite price. The volume of ferrous scrap processed also declined 27 percent year-on-year, hitting recyclers with a double whammy. In sum, the domestic industry felt acutely the fall in crude steel production, of which some 62 percent is based on scrap-fed electric-arc furnaces.
U.S. ferrous scrap exports remained one bright spot for domestic processors, who shipped approximately 20 million mt last year—up 6 percent—at a value of $5.4 billion. China surpassed Turkey as the largest buyer of U.S. ferrous scrap, claiming 5.5 million mt, or 27 percent of the total.
Nickel and Stainless Steel: U.S. stainless steel shipments declined again last year, marking the third consecutive year of severely depressed sales of stainless products. Globally, stainless steel output totaled roughly 24.6 million mt, down about 5 percent from nearly 26 million mt in 2008, reports the International Stainless Steel Forum (Brussels). China remained the driving force for the stainless industry, producing 36 percent of the global output of stainless steel sheet, strip, plate, bar products, rod, and wire. Its overall production grew almost 27 percent last year, reaching 8.6 million mt. Asia (including China) now produces 65 percent of the world's stainless steel.
Primary nickel, meanwhile, remained in statistical surplus last year, WBMS says. Nickel prices have dropped 65 percent in the past two years, slipping 32 percent alone in 2009 compared with 2008—a reflection of the lower stainless steel output.
Lower product demand and destocking along the supply chain dragged down the U.S. stainless market in the fourth quarter. For the full year, domestic stainless shipments declined about 13 percent, while overall consumption of stainless steel sheet and strip slumped 22.5 percent. U.S. imports of sheet and strip, which account for 23 percent of consumption, plummeted 50 percent, ISSF says.
Stainless steel scrap exports, meanwhile, increased 13 percent last year, to 1.1 million mt, with Taiwan, China, South Korea, and India the principal buyers.
Lead and Zinc: Supply issues dominated the zinc market in 2009, as the metal's global surplus rose to its highest level since 1993. According to the International Lead and Zinc Study Group (Lisbon), refined supply exceeded demand by 444,000 mt despite a 368,000 mt reduction in supply to approximately 1.1 million mt. The surplus is primarily a result of zinc use declining 593,000 mt in 2009, to a multiyear low of 1.08 million mt. Demand was lower in most regions with the exception of China, where demand increased almost 18 percent.
In contrast, U.S. demand decreased 10.5 percent, reflecting lower consumption of both zinc-galvanized steel (which is 55 percent of the domestic market) and zinc-based alloys (21 percent of the market). By ReMA's calculations, total U.S. apparent zinc consumption for all markets fell 7.8 percent, while zinc scrap consumption inched up 1 percent over 2008, increasing scrap's market share to 33 percent. Offsetting this slight increase in domestic consumption of zinc scrap was the nose-dive of U.S. exports, which fell 48 percent, to 47,000 mt.
Despite poor global and domestic fundamentals, zinc prices trended higher as 2009 progressed, recovering from their lows in the first quarter of last year. LME inventories also climbed, however, ending the year at 488,050 mt, up 93 percent from the end of 2008.
Lead also ended last year in surplus, with ILZSG maintaining that a 2.1-percent increase in refined lead production outstripped a 1.2-percent increase in consumption, yielding a 71,000 mt surplus. LME lead inventories increased almost 225 percent throughout 2009, ending the year at 146,500 mt. On the scrap side, both U.S. consumption and exports of lead scrap fell by double digits last year, decreasing 26 percent and 20 percent, respectively. Even so, lead prices managed to climb over the course of the year, averaging 79 cents a pound for the year, which was still 17 percent lower than the metal's 2008 average.
The automotive battery market paced domestic lead demand, with replacement battery shipments little changed last year at almost 99 million units. The original-equipment battery market declined 27 percent, however, to 12.5 million units, compared with about 17 million units in 2008.
Paper and Recovered Fiber: Nonmetallic commodities such as paper fared no better than their metallic brethren, and in some cases, they were worse off. According to RISI (San Francisco), the global paper market faced one of its worst downturns in the past 60 years in 2009. World paper and paperboard demand slipped an estimated 2.8 percent last year, to about 379 million mt. This decline followed an estimated 1 percent decrease in 2008, thus marking the first time in a decade that demand for these products declined for two consecutive years.
On the domestic front, paper markets also experienced significant production downturns, with North American production down 19 percent to 30 percent, depending on the product, according to the American Forest & Paper Association (Washington, D.C.). U.S. paper and paperboard output, meanwhile, dropped 12 percent, or about 8 million tons, in 2009, AF&PA reports. The overall U.S. capacity to produce paper and paperboard also declined last year 3.4 percent, to roughly 91 million tons, marking the 10th year in a row that capacity has shrunk. (U.S. paper manufacturing peaked in 2000, when industry capacity totaled almost 104 million tons.) AF&PA identified 14 paper mills that closed in 2009.
Despite last year's decreases on the production and demand sides, the paper industry achieved a record 63 percent recovery rate, though the actual recovered paper tonnage fell 3.4 percent compared with the calculated available supply, which dipped 12 percent. U.S. exports of scrap paper helped the industry reach its record recovery rate, growing 1.9 percent in 2009, to 21.1 million tons. To no one's surprise, China purchased 80 percent of the exported tonnage.
One other defining issue in the domestic market last year was the more than $8 billion paid to U.S. paper and paperboard producers under the black liquor alternative tax credit program. Though controversial, that credit, which expired at the end of 2009, helped bolster corporate profits, which contracted 40 percent to 50 percent last year, sources indicate. •
Robert J. Garino is director of commodities and Tom Crane is manager of member services for ISRI.
Though ferrous, nonferrous, and paper prices suffered double-digit declines last year compared with 2008, they started climbing upward around March, hinting that a sustained recovery could be underway.