1995 MARKETS TO STAY STRONG

Indicators point to healthy markets for most commodities, though perhaps a slower rate of growth, through 1995.

After several difficult years, both the economy and the recycling industry are finally enjoying a period of strong markets and firm prices. Although no one can predict the future with certainty, most analysts agree that 1995 will be a year of continued growth.

Doug Handler, manager of econometric analysis, Dun & Bradstreet, New York, characterizes the economy as "fairly solid," but cautions against the natural tendency to get too comfortable.

"There’s a lot of momentum in the economy at the end of the year, but we really shouldn’t be lulled into a false sense of complacency, because the momentum could dry up very quickly," says Handler. "In fact, we do (project) a much slower growth in 1995 than what we saw for most of 1994. Most of that is due to the effects of interest rates finally hitting home. It takes about a year lag for rates to work, so the beginning of 1995 is when we are going to start to see a significant impact."

Areas of spending most likely to be affected by slower growth in 1995 are durable goods, housing and construction and capital goods, Handler predicts. "Each will contribute a small share of the downturn, but cumulatively it’s not a lot. We’re looking for about 2.5-percent growth in the first half of the year. This is down from about 3.5- to 4-percent for this year."

Market watchers should not assume that the growth trends charted in November and December will necessarily carry over into January and February, says Handler. "The whims of consumer spending and investments in capital equipment can turn on a dime."

Handler forecasts healthier growth in the latter part of the year, once Federal Reserve activity early in the year plays itself out.

"The Fed probably has one more move left in it. We don’t know if it will be December or January," he suggests. "Long-term rates will probably continue to rise. By about the middle of the year, I think it will be evident what the impact of inflation will be. We may have inflation peaking at about four percent by the end of the year. I think that forecast will be pretty solid probably by the third quarter. Once that happens, an element of stability will really return to the bond markets and to the interest rate-sensitive sectors in general."

The construction industry, a prime indicator for steel and steel scrap markets, has been "going like gang-busters" through almost all of 1994, says Handler. "There wasn’t any indication of damage due to higher interest rates until November, when we finally saw a significant downturn in expectations." His same prediction of slower growth in 1995 — but growth nonetheless — applies here.

Automotive buying, another driver of the steel and steel-related industries, has improved dramatically, notes Handler, "for reasons that absolutely nobody predicted a year ago, and are difficult to assess. Income, until very recently, was not up at a high enough level or a fast enough pace to support sales."

However, "any forecast of continued growth in the automotive industry is an act of faith," he says. "The most optimistic forecast you can have is a repeat of 1994 activity in 1995, with no growth."

Despite all the warnings of caution for the construction and automotive industries, Handler’s outlook for steel is optimistic.

"Certainly the prices for steel are going to hold up fine. There’s nothing in the forecast that would involve a significant contraction which would suggest that price cuts are in the offing. Capacity is booming, and capacity utilization is high and will stay high. This is not a short-term phenomenon. 1995 is going to be another good year."

Steel industry activity is expected to remain robust through 1995 and beyond, according to Chris McCabe, an analyst with Jacobson & Associates, a steel industry analysis firm in Swarthmore, Pa.

"We see domestic shipments for 1995 continuing at the current pace, and then dropping off a little bit in 1996 and 1997," McCabe forecasts. "Shipment could be above 93 million tons for 1995, down to 92.5 million in 1996, 92 million in 1997 and 91 million in 1998. Exports will probably remain around 4 to 4.5 million tons. As shipments tail off, I think exports will tail off just a touch. Imports are really high this year. It looks like we have them finishing out around 24 million tons, which could be the highest since 1988. We see imports also tailing off as market demand shrinks a little bit."

Handler suggests a similar scenario for copper, aluminum and other nonferrous metals. "There’s nothing to suggest any major price retreats. But again, the acceleration in price growth isn’t going to be there."

Michael Evans, president of Evans Economics and a consulting economist for the American Production and Inventory Control Society, Falls Church, Va., agrees that economic growth will be markedly slower in the earlier months of 1995, and will accelerate toward the end of the year.

"Because capital spending remains strong and export growth is still accelerating," says Evans, "we think that the economy can achieve a soft landing, with real growth falling to about 1.5 percent in the first half of 1995, but then rebounding to almost 3 percent in the second half."

According to Evans’ forecast, the combination of slower growth in employment, rising interest rates and a slowdown in consumer credit will reduce the growth rate in discretionary consumer spending from 4 percent to 2.5 percent

"For the first three quarters of 1994, single-family housing starts were about 8 percent above 1993 levels, but existing home sales were up only 2 percent, and new home sales did not increase at all over 1993 levels. Hence the gap between starts and sales is widening, so it will not be long before builders find themselves with a glut of unsold homes."

The result, says Evans, will be a 5- to 10-percent cutback in the construction of single family homes in early 1995.

In addition, since inventory stocks caught up to sales by the end of 1994, inventory investment will advance more slowly than in 1995, rising about $30 billion per quarter compared with $60 billion for most of 1994, says Evans. Capital spending will remain very strong, however, with producers’ purchases of durable equipment continuing to rise at double digit rates.

SCRAP STEEL. What does all of this mean for scrap steel? Bob Garino, director of commodities for the Institute of Scrap Recycling Industries, Washington, agrees with the assessments of Handler and Evans calling for a slowdown in the hot economy of late 1994. Managing this slowdown will depend in large part on the activities of the Federal Reserve.

"Whenever the Fed has increased rates to two or three percent, they’re just about assuring the onset of a recession," notes Garino . "The fear is that the Fed may in fact overdo it, and create a less than favorable economic climate for 1995. The Fed is motivated by fears of inflation and an overheated economy, so they do these pre-emptive strikes, and supposedly it slows down the economy each time. If you look at the gross domestic product figures for 1994, the economy is going gangbusters. The third quarter numbers were much higher than expected."

At least in the steel can and white goods sector, 1995 is expected to be "darn good," according to William Heenan, executive director of the Steel recycling Institute, Pittsburgh. "We’re looking at anywhere from one to two million tons additional shipments for the domestic producers this year.

"I’ve heard people say that we won’t see the next downturn until 1997, and I hope they’re right. We as an industry need a few years to firm up the balance sheets. The steel industry is very capital intensive. When you build a caster at $300 million, sometimes that’s as much money as a mill makes in a year."

Even if the scrap market remains consistent with the course set in 1994, as many expect, few scrap processors would be likely to complain.

"I see prices (in 1995) somewhere along the same lines (as 1994)," according to Stuart Simms, Parkwood Iron & Metal, Cleveland. "I don’t see any dramatic jumps. In the next six months I see a healthy market. I would hesitate to say how much higher it can go. Five, 10, maybe 12 dollars. There’s room for some upward movement. I can also see it dropping $10 or $15. But $10 or $15 at the price levels at the price levels we’re at still puts the market in a fairly healthy position. I think it will be a long time before we see prime grades for scrap in the low $100s again, which would require a $40 drop."

The outlook for the international ferrous scrap market bears a striking resemblance to that of the domestic economy, according to James Buckland, vice president of ferrous exports at Simsmetal-LMC, Richmond, Calif.

"I’d say the first quarter is going to be a little flat," he projects. "Certain parts of Asia have too much steel right now." These include China, Korea and Japan.

"I think it may take a few months for that to straighten itself out. The market could go down a dollar or up a dollar, but I don’t think it’s going to be a huge change. And the last quarter I see as being strong again."

Wildcard countries like China and even India could play a significant role, if either or both of their economies were to stabilize long enough for them to become consistent players in the international ferrous scrap market," according to Buckland.

"If one of these countries were to take off economically, that could really keep it going for a while."

STRONG MARKET. The outlook for nonferrous metals in 1995 is also very favorable, according to Dick Kosak, purchasing manager for Luntz Corp., Canton, Ohio.

"We look for a strong market in all phases of the industry," says Kosak. "The aluminum extruders, the secondary smelters — their business is all very good. The secondary people’s business is geared around the auto industry, which indicates it’s going to be very good. The first half looks excellent as far as we’re concerned."

Whether this trend will continue through the entire year is not certain, he adds. "Nothing’s for sure in this business. Nickel, aluminum, copper — everything looks very favorable to us at this time, but things can change."

Both domestic and export markets are going to remain healthy into 1995, says Kosak.

"More materials are going to be used because the economy is in full swing and more people are working and buying things," he says. "Economies in Europe are picking up, which will also be a big factor in our business. Once they get going, they’ll be looking more towards us here to help them with some raw materials, scrap materials, even finished product."

POST-CONSUMER. Markets for municipal recyclables, especially paper and plastics, have been very strong in 1994, and prices have been very high. They may not stay quite as high through all of 1995, although it’s likely markets will remain strong, according to Kathleen Meade, communications director for the National Recycling Coalition, Washington.

"When markets go this high, they usually settle back down," says Meade. "But there’s been so much capacity increase with paper, we could be in the beginning of a very strong period."

For the past few years, the emphasis on the post-consumer side has been market development, with the aim of increasing demand for materials. With such strong markets, more attention is now needed on collection systems, says Meade.

"The challenge is how to get more material out of curbside programs," she explains. "I think we’ll see a lot of changes in recycling from now until the year 2000 as people work to find more efficiencies."

Even with glass, a material that in the past suffered from oversupply, strong demand is in the cards for 1995, according to Douglas Gibboney, executive director of the Mid-Atlantic Glass Recycling Program, Carlisle, Pa.

"We’re not getting the glass we need," says Gibboney. "We need more clear, more brown. We’re starting to see Consumer Glass in Canada soaking up some of the green glass from the U.S."

Much of the glass currently collected in commingled curbside systems breaks and can only be used for very low-value applications, he adds.

"The bottom line is that handling is critical," says Gibboney. "The real answer is curbside separation. Glass people would have come out in favor of it years ago had we realized the problems of commingling materials."

Glass producers are concerned about the lack of availability of sufficient recycled cullet, says Gibboney. This is particularly a problem in areas such as California where producers are required to use a certain percentage of recycled feedstock.

"The demand for glass will be there in 1995, as companies are really looking for it," he predicts. "My biggest concern is getting the quality we need. We want to see it collected in such a way that higher quality is possible."

PAPER. There is currently nothing to indicate that paper markets will not remain vigorous in 1995, says Harry Pelz, president of the Peltz Corp., Milwaukee.

"We’ve seen fluctuations this past year, and we’ll probably continue to see fluctuations, but I don’t think we’ll see the days of $15 corrugated and $5 news like we did in the early part of last year," he says. "I think those days are gone, for at least a little bit of time."

However, as the price for secondary paper approaches the price of virgin pulp, the trend of rising prices will probably be tempered, says Pelz.

"(Secondary fiber) has to be attractive, because maybe the recovery isn’t quite the same, the quality isn’t quite the same. But as the cost of using waste paper approaches the cost of using wood to make new sheet, that tradeoff is going to start to come into play, and you might see some mills going back to using wood. I think this will create a cap to prices. But I don’t see it necessarily going substantially down. I think business conditions in general are going to drive it. We’re all the beneficiary of a very healthy economy."

It’s possible there could be shortages of some grades in 1995, says Pelz, but that trend will likely be offset by improved collection systems and new sources of secondary paper.

"In Wisconsin we have the landfill ban coming into effect at the beginning of 1995. That will force a whole lot more paper into the marketplace. That will undoubtedly create some more supply."

PLASTICS. Demand for plastics — specifically PET and HDPE — far exceeds supply today, and this is likely to continue well into 1995 and beyond, says Jack Milgrom, managing director of Walden Research Inc., Concord, Mass.