Traders and processors of a variety of materials gather at the Institute of Scrap Recycling Industries Inc. (ISRI) Convention each year, but the organization’s roots lie partially in the scrap iron and steel market.
In general, when ferrous scrap demand and pricing is good, ISRI Convention attendance is good—as is the mood of attendees.
With that context in mind, it should be noted that at the 2006 ISRI convention, which took place the first week of April at the Mandalay Bay Resort & Casino in Las Vegas, a record 4,100 people attended, and the mood was one of deal-making between attendees as well as with industry suppliers that populate the convention’s exhibit hall.
Veteran recyclers know that in commodities markets, what goes up must also come down. But for now, a growing global economy is providing scrap recyclers with a ready market for any and all ferrous scrap they can bring into their facilities.
HIGH ALTITUDE. Throughout the 1990s, No. 1 heavy melting scrap surpassing $200 per ton seemed like a holy grail that scrap recyclers hoped someday might be attainable.
This decade, however, the grail has been grasped several times, and any mystery about what it might be like to trade ferrous scrap at more than $200 has been laid to rest.
Prices above the $200 mark have become so common for so long, the bigger question is to what extent will scrap recyclers be able to adjust if or when prices take a sharp downturn.
For the moment, this is not being anticipated (then again, when are sharp price changes ever anticipated?).
As noted in the ferrous department write-up on p. 10 of this issue, attendees of the Ferrous Spotlight session at the ISRI 2006 Convention & Exhibition heard analysts point to strong global demand and better steel company management as reasons why markets look good in the short-term.
Mark Parr of investment advisory firm KeyBanc Capital Markets, Cleveland, commented that steelmakers in North America had become better managed in recent years with the demise of "non-profit" companies such as LTV and Bethlehem Steel.
| Polishing Up a New Act |
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The 2005 Bankruptcy Act changes contain language that can benefit recyclers who have shipped material to a consumer that enters bankruptcy, attendees of the Institute of Scrap Recycling Industries Inc. (ISRI) 2006 Convention & Exhibition learned. Three attorneys from the firm of Thompson Hine, which has offices in seven U.S. cities plus Brussels, presented their overview of how the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may change the way scrap recyclers react when a customer of theirs enters bankruptcy protection. According to attorneys Robert Folland, Alan Lepene and Mark Weintraub, the 2005 Act "greatly expands" the rights of a company such as a scrap recycler that ships material into a mill shortly before it files for bankruptcy. In particular, if the scrap is identifiable and not commingled with other goods, recyclers have more time to take action to reclaim the material if they so choose. Recent case law is also shaping the circumstances under which a recycler can be identified as a "critical vendor" to a consuming mill. This status means the recycler can continue to receive payments in an uninterrupted fashion during the time the consuming mill operates under bankruptcy protection. The critical vendor status may also result in the bankruptcy trustee being ordered to pay old invoices to suppliers who have been designated with this status. Not all the recent changes are positive, however, as the 2005 law also allows a bankruptcy trustee to issue "demand letters" if the trustee determines that a supplier improperly received preferential payments that were not critical. The attorneys advised that sometimes such letters are "fishing expeditions" by trustees seeking cash flow, but that a recipient of such a letter also takes a risk by not responding to it at all. Weintraub was formerly an active ISRI member and an employee with scrap consumer and red metals ingot maker Federal Metal Co., Bedford, Ohio. He left the metals industry earlier this decade to practice law and now works for Thompson Hine out of its Cleveland office. The ISRI Convention was at the Mandalay Bay Resort in Las Vegas April 2-8. |
The steel industry’s ability to tweak its production rates has helped it better match supply with demand, giving the industry betting pricing power with its customers. While scrap sellers may worry that steelmaking consolidation gives the steel industry too much leverage, Parr noted that even recent market troughs in pricing "are higher than earlier market peaks."
The return of steel profitability is clear to see when looking at charts from the past couple of years, Karlis Kirsis of the consulting firm World Steel Dynamics, New York, says.
Kirsis said scrap supplies will remain tight in the foreseeable future. "The global supply [of scrap] may not be adequate at a reasonable price [throughout] the next decade."
Regarding the near-term, Kirsis predicted mills will pay from $225 to $270 per ton for No. 1 heavy melt this year, barring an unlikely "industry shakeout" scenario. Peak pricing may be occurring in the first two-thirds of the year, "possibly heading downward after the summer," he remarked.
On the demand side Europe may join Asia as a growth market in 2006, according to Christian Rubach of BDSV, a German scrap recycling trade association.
According to Rubach, an anticipated year of economic growth in Europe in 2006 should provide "a much better year for steel consumption," which is good news for the scrap industry since a healthy percentage of Europe’s steel is made with electric arc furnace (EAF) technology.
Globally, research by BDSV and Eurofer (a European steelmaking trade association) shows that "through 2013, steel scrap consumption will increase worldwide by 20 percent," Rubach told ISRI attendees.
A recovery in Europe’s steel production would be welcome news in a region where 2005 numbers showed a 3.9 percent decline in steelmaking in the European Union’s (EU) 15 nations and a 3.2 percent decline if statistics from the EU’s 10 new member nations are also included.
If ferrous scrap demand was intense in 2005 while Europe’s economy was stagnant, the bidding could become even more furious if nations like France, Germany, Italy and Spain post increases in annual production in 2006 (as opposed to the decreases they all recorded in 2005).
Early 2006 indicators show signs of promise. In February of 2006, Italian production increased 3.4 percent over February of 2005, French production was up 2.5 percent and German production inched up 0.6 percent.
The story in the first half of this decade, however, has been China, which means most eyes are still focused on this new economic powerhouse.
TRIPLE THREAT. While 2 percent and 3 percent increases in steel production are encouraging, they can seem paltry compared to the statistical odyssey that has occurred in China this decade.
As Kirsis pointed out during his presentation at the ISRI Convention, "Steel output in China has tripled from 2000 to 2006, from 120 million tons to 370 million tons."
Even though most of China’s new steel production uses less scrap-intensive integrated steel mill technology, such a dramatic increase in steelmaking feedstock has been felt across the board—for coke, iron ore and scrap.
Since ferrous scrap has supply limitations—a new mining venture cannot produce additional supplies—Kirsis said he believes there will be challenges ahead for those who make their livings processing and melting ferrous scrap.
"We look for steelmaking capacity to rise around the world," Kirsis told ISRI attendees. "Scrap will be in especially tight supply," he added. "The global supply may not be adequate at a reasonable price in the next decade."
Kirsis and World Steel Dynamics foresee favorable near-term global economic news, saying, "in China, the economy has shifted to an even faster growth rate in the past six months."
Steel production in China bears that out. In February of this year, China produced 29.5 million metric tons of steel, 17 percent more than was produced in February of 2005. As hungry as China has been for furnace feedstock in each of the past several years, its appetite may be even larger in 2006.
In the short term, Kirsis predicts mills will pay from $225 to $270 per ton for No. 1 heavy melt this year, barring an unlikely "industry shakeout." Pricing may peak in the first two-thirds of the year, "possibly heading downward after the summer," he said.
DEMOLITION TO THE RESCUE. With demand in place, the natural concern for processors and shippers of ferrous scrap is supply.
Throughout the past two years, scrap recyclers have wondered whether even high scale prices could help keep material flowing into their yards.
Recyclers in every region of the country report the cleanup of vacant urban lots, farmer’s fields, creek beds and hollows and other out-of-the-way places as peddlers look for anything made of metal to bring across the scale.
A growing concern for recyclers is the extent to which theft is beginning to become part of the equation, as an increasing number of alerts from local police departments and trade groups like ISRI and CARI (the Canadian Association of Recycling Industries) have been issued this year and last year. (See "Book ‘Em," starting on p. 230 of the March 2006 issue of Recycling Today or online at www.RecyclingToday.com.)
As of early 2006, scrap is continuing to flow into processing facilities, with part of the credit going to a thriving demolition industry.
For demolition contractors with good recycling habits, the past two years have paid off, and 2006 looks to offer similar favorable conditions.
"There is a lot more forgiveness in the job if you make an estimating mistake," says Brian Baumann of B&B Wrecking, Cleveland, regarding the healthy scrap metals markets of the past two years.
Dave Whitley of demolition firm Nuprecon, Snoqualmie, Wash., says that the proceeds of scrap metal have made many demolition estimates more palatable for clients. "It’s freeing up some projects that might not have been possible before," he comments.
Leonard Cherry of Cherry Demolition, Houston, also says the higher scrap pricing "has made demolition more cost-effective as a whole for our clients." He says the higher prices received for recovered steel, copper and aluminum is "ultimately a pass-through for our clients, and it makes it more appetizing for them to perform a demolition job."
Kroeker Inc., in addition to performing demolition jobs, also operates portable concrete crushing crews and a mixed materials recycling facility and has traditionally kept a close eye on any metals generated at its work site. He says of the recent high pricing, "It’s an additional reward to the way we do business."
To some extent, demolition contractors are also busiest when good conditions exist in the construction sector, and it appears that construction activity will remain healthy in 2006.
In comments made at the C&D World Expo earlier this year, Edward J. Sullivan, chief economist with the Portland Cement Association, Skokie, Ill., cited increased commercial construction activity and renewed highway spending as being likely for 2006. These projects not only produce demolition materials to be recycled, but also lead to greater consumption of concrete, steel and other heavy-duty materials. "For every $1 of construction activity now, we are using more and more concrete," Sullivan said, comparing this type of activity with residential construction.
The demolition industry may also receive a boost from the success of "brownfield" programs around the country that are targeting the revitalization of abandoned industrial and warehouse sites (See C&D news, p. 24 for more information.).
The U.S. EPA estimates that some 50,000 such sites have been or are in the process of being developed, but that some 400,000 to 950,000 others await attention.
When the demolition of old industrial and warehouse properties such as these do take place, they typically yield healthy amounts of scrap metals.
If the steelmaking furnaces of the world remain as hungry as they have been during the past year or two, scrap processors will welcome any demolition material they can bring into their facilities.
The author is editor of Recycling Today and can be contacted via e-mail at btaylor@gie.net.
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