Charting Sea Changes in Ferrous Scrap Prices

The overall iron and steel scrap industry is much like one of the cargo ships that carries scrap material from one port to another. When seas are calm, the ship sails placidly along. When the tides rise, the ship sails a bit higher and when the tides fall, the ship drops. Stormy seas may toss the boat around a bit, but in the final analysis the ship is sizable enough to weather most tempests.

Almost the same thing can be said for ferrous scrap. A wide variety of factors influences the price of scrap. Automotive and aircraft markets are major considerations. So is construction. The opening of new mills down the Mississippi Valley was a real boon to the marketplace. The current crisis in Asia has slowed trade in markets that rely on the Pacific Rim. An economist would note that such occurrences are typical in the everyday market economy. And, more often than not, the price of iron scrap does generally float along with the movement of the general economy.

"Steel scrap is bought, not sold," notes Bob Garino, director of commodities for the Institute of Scrap Recycling Industries Inc. (ISRI), Washington, D.C. Consumption increased each year in 1995, 1996 and 1997.

"The last several years have been very strong years for scrap consumption. It’s never been this high," he says, adding that he expects steel mills to remain busy at least through the first half of 1998, as well.

In the largest sense, the current flow of steel scrap is determined by the level of industrial production here and abroad. Busy steel producers are the keys to busy scrap markets. "As the international steel market goes, so goes the demand for scrap," Garino continues.

ISRI tracks a statistic called "apparent steel consumption" against purchased scrap. Apparent steel consumption is steel mill shipments plus net imports minus net exports. The 1996 U.S. market showed 125 million tons of steel consumption and 57 million tons of purchased scrap, for a 46% ratio. If one compares the 57 million-ton scrap figure against raw steel production in the U.S. (which was 105 million tons), the percentage increases to 54%. (Note that ISRI does not include home scrap in its ferrous scrap figures.)

Preliminary figures for 1997 put apparent steel consumption at 130.7 million tons and raw steel output at 107 million tons. The preliminary net domestic scrap figure is at 57.7 million tons, but may vary a tad when final numbers come in. In any case, it shows that the percentage of ferrous scrap consumed has remained strong in the current market. How did the market get where it is today?

The Bureau of Labor Statistics, Department of Labor, has tracked scrap prices for several decades. According to Tom Betsock, economist with the Bureau in Washington, D.C. the current index stands at 193.4. The baseline year is 1982, when the index stood at 100. "Remember, this is an index figure. Even though the index figure may sometimes be close to the dollar value of the material, don’t put a dollar sign in front of it," he says.

A comparative analysis reveals how closely the 1982-based Producer Price Index-Commodities and the 1986-based Producer Price Index-Ferrous Scrap track each other. This, of course, is what would be expected.

Tracking the growth of the Gross Domestic Product (GDP) is also useful. Viewing only the rise in overall GDP is apt to give an inaccurate view of what happened in any given market. While the GDP for the United States has been growing at a nice, steady pace — and has definitely benefited from the awesome power of compounding — the GDP is an overall market figure. Sizable as it is, the ferrous scrap sector of the GDP is a tiny part of the overall figure.

The GDP is the sum of expenditures less gross domestic income. This is different from the Gross National Product (GNP), which is a measure of the total value of all goods and services produced by permanent residents of a country, whether such goods or services are produced inside or outside the borders of the country. To be counted in the GDP, production must be made within the borders of the country. The United States, for example, has a larger GNP than GDP. Due to the extensive foreign investment a large amount of production takes place outside of the country’s borders (the GNP never can be less than GDP, however).

Everyone is aware of the swings in individual market segments. Other factors play a role, too. What happens internationally will have an impact on any nation’s GNP. The economic squall created by the current Asian crisis is a good example of how prices in the iron and steel scrap markets can be tossed around by a general storm. In this case, the market is taking a battering and scrap dealers, especially those on the West Coast who relied on Pacific Rim sales, are battening down the hatches.

The Asian situation is just the latest in a number of sea changes. In the late 1980s, the economy was sailing ahead of fair winds and the ferrous scrap markets enjoyed a serious run-up as the decade came to a close. The economy tapered off a bit in the early 1990s, and the steel scrap market also lost some of its steam. Things began to pick up again in 1993-1994, and once again the ferrous scrap markets experienced a surge, doing well until the Asian storm hit.

Most market observers see some heavy seas in the Asia-Pacific arena for a while, but nobody seems to be heading for the lifeboats. The general feeling seems to be that the domestic economy remains strong enough to overcome the offshore problems and that the Asian crisis, while severe, is not going to sink the ship.

As ISRI’s Garino points out, the electric arc share of the steel market increased significantly in 1997, up 3.5% over 1996. Integrated steel producers, mini-mills and foundries all continue to consume well here and abroad. U.S. steel makers have enjoyed good demand for steel products, so the demand for scrap remains strong.

"Steel makers are changing what they are consuming as raw materials," Garino says. "They are consuming more scrap at a time when things are good in the overall industry."

There is a wide variety of ferrous scrap materials, including stainless steel, carbon-steel and may of the other specialty steel alloys. While each has its own price pattern and special market conditions, the overall ferrous market tends to move almost in a lock-step with the supply and demand for primary iron and steel. The steel market is closely tied to the auto industry and to construction. Both are basic indicators of the strength of the general economy. When things are good, the building industry booms and people purchase new cars. Demand for iron and steel soars, and politicians and bankers congratulate themselves on the fine jobs they are doing.

While the paper and aluminum markets also move broadly along the lines of industrial supply and demand, this is in contrast to several other markets for recyclables where commodity traders get heavily involved and speculators are able to swing prices without any seeming apparent relationship to the underlying market factors. Many of the precious metals markets, for example, are pushed more by speculators and brokers than they are by underlying supply and demand.

One factor weighing heavily (literally) in ferrous scrap’s favor is the volume of material recycled. In absolute terms, ferrous materials represent the largest tonnage of any metal recycled — the California Integrated Waste Management Board (CIWMB) says more ferrous scrap is recycled than all other secondary materials combined.

In the recent past, 1996 was a key year for iron and steel scrap. Early in 1996, factory bundles were selling for over $160 a ton. A gradual decline in prices was noted throughout the spring, summer and fall. By the end of the year, the drop-off became more pronounced. In December, the price of bundles was in the $140 range and declining. The price of No. 1 heavy melting steel also fell, but not as sharply. It had started in the $140-145 a ton range and declined to near $130 by the end of 1996.

This was in marked contrast to the trend throughout most of 1995. Scrap prices had maintained fairly high levels throughout the year, the result of strong demand. The annual average for No.1 heavy melting scrap averaged about $130 per metric ton, or 4% higher than 1994. That figure parallels closely the increase in raw steel production for the same period. Output in 1995 was roughly 95 million tons, about 4% more than produced in 1994. Net shipments of steel mill products were roughly 89 million tons, versus 86.3 million tons in 1994, according to USGS figures.

Meanwhile, the price for nickel-bearing stainless was much higher in 1995 than in 1994. This reflected higher prices for nickel and molybdenum. The average price for nickel-bearing stainless was just $700-$710 per ton in 1994, but jumped to $1,100 a ton in 1995.

While the market for automotive scrap and other bundles is well established, the challenge of getting more steel into the recycling stream remains. CIWMB looked at the barriers to recycling and found transportation costs in rural areas are one major hurdle to overcome. Often, transportation costs can exceed the price paid for the metal itself.

Appliance rebate/pickup programs are being phased out due to high program costs and lack of supply of appliances. The cost to the public to have old appliances recycled is $20 to $40 per unit, CIWMB says. On top of that, some appliances contain hazardous components such as PCBs, oils and CFCs which require special handling before the metal component can be recycled. This adds to cost. In some states — California is one of them — there is no ban on land-filling appliances. When economic factors work against recycling, many appliances end up in the dump.

While land-filling is legal, illegal disposal of appliances in ditches, streams or sinkholes is common. Most local agencies lack the resources to halt this sort of disposal.

The government has gathered statistics on iron and steel scrap prices since 1947. There was a major change in the method of collection since the government moved in the late 1970s to go to an SIC-based system. SIC is the Standard Industry Code, and is used in many applications. The report of "Scrap and Waste Materials" is SIC-5093, and it includes scrap paper and nonferrous metals. The change to SIC reporting does not seem to have skewed or confused the overall impact of the statistics. "That has not changed the nature of the index," Betsock says. Prior to the changeover, figures were taken from several published sources, including trade publications. More recently, the government has based its figures on a statistical sampling based on data collected from several companies in the industry. The Bureau of Labor Statistics found that the prices they are collecting track well with monthly figures like auto bundle prices.

How long that close parallel will last remains open to question. There have been quite a few mergers in the steel industry over the past couple of years, and that trend shows no real sign of slowing down. "It is not having much impact today," Betsock says, "but two years down the road it may."

One factor, seen by some in the industry as unusual or even misleading, is that iron and steel scrap falls into SIC-5093, which is actually a code for the service area of the economy. Many economists — even a few within the government — question why ferrous scrap is not reported in the manufacturing sector. The argument is based in practicality. Recycling can be seen as a service to society, of course. However, since about half of the steel fabricated in the country today comes from scrap it would appear that iron and steel scrap certainly deserve a place along with coal and taconite as basic industrial commodities used by the manufacturing sector.

In any case, the place in the records where the numbers are reported really does not change the validity of those numbers one bit. In addition, the government is anticipating doing away with the SIC system in a couple of years. Although there will likely be a continuation of the reporting, it will be done under a different system.

(The author is an environmental writer and Recycling Today contributing editor based in Strongsville, Ohio.)

Sidebar

A QUESTION OF BALANCE

Are ferrous scrap metal prices entering a new era of stability and predictability? There are some in the scrap and steel industries beginning to argue such a case. One of the more frequently cited reasons in favor of scrap price stability is the increase in scrap substitute capacity.

A number of mini-mill operators throughout the world have invested in plants to make direct-reduced iron (DRI) or other scrap substitutes. While the amount of scrap substitute material being produced still makes up a small percentage of what is melted in electric arc furnaces, the material is gaining acceptance. Every year since 1989, worldwide DRI production has increased at a faster rate than world steel production, according to Midrex Direct Reduction Corp., Charlotte, N.C.

"For the ninth straight year, world production of DRI has increased at a faster rate than steel production. This is more significant than the actual increase and indicates DRI’s increasingly important role as a steel making feedstock for the global steel industry," writes Midrex vice president Frank N. Griscom in the company’s latest quarterly report. DRI plants are now found in more than 20 nations, and more are scheduled to come online in 1998.

Among the steel makers who have made the decision to invest in DRI plants as a means of providing an alternative feedstock to their mills are Nucor Corp., Charlotte, N.C.; Georgetown Steel, Georgetown, S.C.; Ispat Industries, Rotterdam, Netherlands; Hylsa S.A. de C.V., Monterrey, Mexico; and many Asian-based and South American steel companies.

John Correnti, president and CEO of Nucor Corp., says he sees scrap substitutes not as a replacement for ferrous scrap, but as an important counterbalance that can stabilize ferrous scrap pricing trends. "It still comes down to economics," Correnti told ISRI Annual Convention attendees earlier this spring. "If scrap goes down to $100 per ton, then there is no scrap substitute process that makes sense. If it goes to, say, $200 per ton, then they all do. It’s really a balancing act." —Brian Taylor