A Year to Forget

When the Asian tigers turned into helpless kittens in late 1997, Americans wondered how the overseas slumps would affect them. The metals industries in the U.S. began finding out in mid-1998.

The North American steel industry—and its scrap supply base—in particular has become a victim of the financial distress in Japan, Korea, Indonesia and several other nations. Steel mills in these nations (and in the former Soviet Union) continued to produce steel for a manufacturing base that has drastically curtailed its buying. So the Asian and eastern European steel makers slashed the price of the product and began shipping it in unprecedented quantities to North America.

As rolls, coils and bars of steel began showing up at American ports, prices dropped dramatically, and U.S. and Canadian mills began planning for production cutbacks. For suppliers of ferrous scrap, this scenario has led to a dismal situation. Scrap prices have plummeted to mirror steel price drops, export markets have dried up, domestic mills are reluctant to buy very much inventory ahead of time, and Asian and European scrap processors are looking to unload their scrap in North America at any price.

The low prices being paid for secondary metal commodities have also had an unfavorable effect on municipal markets, where the metallic collectibles used to offer generators some assurance of receiving a decent price.

Were the most brutal cyclical aspects of the ferrous scrap market beginning to fade from reality? Certainly some in the scrap industry began to hope that was the case as 1998 began. An increasing number of electric arc furnace steel mini-mills came on-line in 1997 and 1998, and others were being planned and sited throughout North America by established companies and start-up firms.

But the second half of 1998 demonstrated that ferrous scrap is as much a commodity as it has ever been, with all the baggage of volatility that the designation carries. As the ripple effects from Asia made their way to Europe and then North America, scrap processors found themselves in possession of a commodity that was losing value and, eventually, was less in demand.

The American Metal Market composite index for No. 1 heavy melting scrap shows the grade reaching a peak of $138.33 per ton in December 1997 and January 1998. A slow slide from February through June brought the average per ton price down to $119 in July before steady declines began occurring in August. The average per ton price fell from $108 in August to $98 in September and then $82 per ton in October.

As bad as the price drops look on paper, the severity during the autumn months may have been worse than has thus far been recorded. "Publications can’t keep up with the pricing movements," one southern ferrous scrap buyer said in early November. "The prices are moving downward even faster than these publications can track."

The margin-destroying rapid downward price movements were coupled with another scourge by mid-fall: a lessening of demand. "The sales at times have been difficult," says one processor. "The mills are putting orders on hold and not taking material. Some are also taking in pig iron as a substitute," he notes.

The southern scrap buyer says once prime grades have taken the hardest hit. "Prime grades like shred and bushlings have fallen much more significantly than one and two heavy melt."

With shred prices down, auto shredding has virtually "ground to a halt" in his region, the buyer says. "It doesn’t even pay for the customer’s gasoline to bring in the hulks. It’s been pretty difficult with these numbers to convince people to sell scrap. Dismantlers are holding off."

For a year that began with the promise of continued strong pricing and demand, 1998 ultimately proved to be a crushing disappointment to the ferrous scrap industry.

As 1998 began, the momentum toward consolidation of the scrap industry that had built in 1997 looked strong and ready to result in a slew of further merger announcements. Indeed, the first five or six months of 1998 did bring more announcements from several active national and regional consolidators. One active consolidator—Philip Services Corp. of Hamilton, Ontario, Canada—did pull back from its buying activities in early 1998 as its internal corporate turmoil began affecting its ability to make more deals.

It was in the second half of 1998, however, when consolidation seemed to visibly lose much of its steam. Two deals that had been previously announced by Metal Management Inc., Chicago, were not completed during the second half of this year. And previously aggressive acquirer Recycling Industries Inc., Englewood, Colo., acknowledged that the difficulties in the ferrous scrap market were causing it to focus on operational activities rather than further purchases.

Deals were still being made in late 1998, with more regionally focused companies such as OmniSource, Fort Wayne, Ind., and Commercial Metals Co., Dallas, continuing to make occasional acquisition announcements. And in the paper recycling and municipal recycling arenas, such companies as KTI Inc., Gutenberg, N.J., and Wastemasters Inc., Dallas, continued to make acquisitions to broaden their recycling operations.

But what had looked at the beginning of this year like a powerful machine ready to mold the industry into a half-dozen giants has become far less menacing. Talk of consolidation currently simmers on a back burner while dealing with a difficult market is the most important issue facing scrap processors.

Those involved in the aluminum scrap and secondary aluminum industries appeared to see what was coming. As 1997 closed, what had been some positive price momentum for aluminum scrap stalled and then retreated slightly.

As the news from Asia worsened and demand in that part of the world shriveled, both pricing and North American demand for scrap aluminum held steady. Few in the metals industry, however, seemed confident that the Asian crisis would remain confined to its own hemisphere.

By mid-1998, price declines picked up speed. "I think the basic disappearance of the Asian markets caused the weakness," says Larry Mallin, chairman of Mallin Bros. Co. Inc., Kansas City, Mo. Mallin says the market was somewhat weak the entire year, but adds, "I would say that in May or June we really started seeing it."

Ansel Aberly, of SLC Recycling Industries, Warren, Mich., says pricing has been the greater concern rather than demand. "You can still sell your product, but you won’t like the price and you may not like the delivery terms. If you were to sell something today," Aberly said in early November, "it would likely be a latter December delivery for some of the items."

Mallin also said in early November that many consumers were "buying from hand to mouth. Several of the mills I’ve talked to are just booking January deliveries. They have material on hand for November and December."

When 1998 figures are tallied, it is indeed probable that less aluminum scrap will have been consumed compared to 1997. "I’m going to estimate scrap aluminum recovered in the U.S. at 3.5 million pounds for 1998, compared to 3.7 million pounds last year," says Patricia Plunkert, an aluminum commodity specialist with the United States Geological Survey (USGS), Reston, Va.

While the year will not be remembered fondly by aluminum scrap dealers, the market offered fewer headaches than other recycling industry segments. "It certainly has not been a good year, but it is not among the worst," says Mallin. "The difference being, the volume of the material being processed has not decreased. In other bad years, the volume went down as well as the price."

Copper Not Glowing Bright

Per pound, copper used to be the premier scrap product a trader or processor could deal in (not including precious and specialty metals). Throughout most of the 1990s, scrap copper consistently traded at $25 or even $35 per pound more than scrap aluminum, but in 1997 and 1998 aluminum not only narrowed the gap, but at times traded for more per pound than copper.

It may be too early to toll the death knell for copper as the premier scrap commodity, but a glut in primary supply and worries over the metal’s future applications in the telecommunications industry are certainly raising some questions.

"It’s a deteriorating market," SLC’s Ansel Aberly says flatly of scrap copper. "We have now almost a 12-1/2 year low."

As with aluminum, however, demand for scrap copper did not drop off the table in 1997. "You could sell your product," says Aberly, "that wasn’t a problem. The pricing was what hurt. There were life of contract lows on December copper in late October," Aberly notes.

Demand in certain segments may have been softening by late in the year, but Aberly is not pessimistic on the demand side. "The brass mills as of early November did not want material—that was the first time in recent memory. But you still have the tube mills and then the wire mills. There was even some export of scrap copper—it has reached a low enough price level to attract some buying in the Far East."

Copper scrap is still flowing through global industrial operations, but the price of buying and selling the red metal has declined significantly.

As with many of the metals segments, the paper recycling industry could pretty much see what was coming as the Asian crisis unfolded. For the past several years, paper mills in nations such as South Korea and Indonesia had become major purchasers of scrap paper generated in America.

When many of these mills became insolvent and were either idled or curtailed production, it was not difficult to predict what would happen next. "The Asian mills quit buying, some went out of business," recounts Joel Litman of Texas Recycling Surplus Inc., Dallas. "A lot of manufacturers of pulp flooded the market with pulp. The mills can then buy that at a discount, instead of the secondary fiber."

As 1998 headed toward the finish line, most grades of paper were drawing far less per ton from paper mills, and demand was also weak for several grades.

"It was just not a great year," says Litman. "We need some new horses. The corrugated market is very poor. Markets for pulp substitutes got progressively worse. It wasn’t a strong year to begin with, but then the markets got progressively worse."

Part of the problem facing packers in the secondary paper market can still be traced to the 1995 spike in prices, Litman believes. "I think, overall, there’s just a lot of collection going on. It kind of started in 1995 when the boom was hitting. Then the markets crashed, but the collection was still in place. It’s kind of been on a three year decline since then."

Another problem on the supply side may be occurring in Europe, where packaging and waste disposal regulations are prompting more and more countries to keep paper of all types out of landfills and heading into the secondary fiber market. At one point in 1998, the Bureau of International Recycling (BIR), Brussels, described Europe as being "awash in scrap paper."

Municipal Markets Below Curb Level

The overall drop in secondary commodity prices continued to put pressure on the performance of municipal recycling programs.

The decline in markets came at a time when many recycling programs were reviewing operations to assuage the red ink that was perceived to be flowing from them. While 1998 saw few head-on attacks on the notion of municipal recycling, many industry observers sensed a loss of public citizenry-led momentum to recycle.

Those arguing that post-consumer recycling made economic sense for communities got little help from the secondary commodities markets. The value of nearly every paper grade collected fell, as did plastics, aluminum cans, and—in the second half of the year—tin-plated steel cans.

"It certainly hasn’t been a banner year for markets," says Craig Barry, executive director of the Carolina Recycling Association, Raleigh, N.C. The depressed prices can make overseeing a municipal market a difficult task, says Barry. "If we had strong, consistent markets, planners would be better able to establish programs and know how to make projections."

Without those stable markets, municipal officials and recycling program advisors have been taking a look at variable cost aspects of programs, most notably collection and processing methods.

Robert Craags, senior director with the R.W. Beck & Associates Central States Office, Minneapolis, Minn., believes single-stream or double-stream collecting and processing is gaining preference in many communities. "I believe that is a trend that makes sense," says Craags. Commingled collection increases processing costs, Craags notes, and also places some commodities at a contamination disadvantage, most notably glass.

No matter what collection or processing method is used, plastic container processors faced a difficult market throughout the year. "Plastics recycling continues to be a challenge," says Craags, "but the growth of plastics in the waste stream means, I think, that we need to put effort into the research and development of recycling plastic."

But it is difficult to see who will fund that R&D when virgin plastic resins remain a plentiful and affordable commodity. "When you have so much capacity in virgin resins, it makes it very difficult for post-consumer plastic resins to compete," notes Barry.

If there is anything positive to note about a year where most markets turned sour, it would probably be in the "lessons to be learned" ledger.

Veterans of the scrap and recycling industries comment that the up-and-down nature of the commodities they trade in are well known and that the history is well recorded.

"I’ve been through it before—this is a cyclical business. It will remain a cyclical business," says SLC’s Ansel Aberly, who watched as his father entered the scrap industry in the Detroit area just after World War II. "Anyone who has been in this industry for the last 30 years has seen this," he adds.