A wild ride

In late March and early April, as corporations and other large organizations changed their advertising messaging in the wake of the COVID-19 pandemic, many settled on the word “uncertain” to describe the new economic and social environment.

For buyers, sellers and consumers of ferrous scrap, that uncertainty is likely to lead to another term that is familiar in the commodities trade: volatility.

Governments around the world, following the advice of their public health agencies, have shown little reluctance in massively scaling back economic activity. This sudden application of brakes to economic engines already has resulted in steep drops in demand for steel, with ripple effects in global ferrous scrap supply and demand.

To the extent that the remainder of 2020 is predictable at all, a leading storyline almost certainly will involve how governments and corporations restart what has been idled. For steelmakers and scrap recyclers, how that storyline plays out will impact every aspect of their businesses.

One direction

As the speed of commerce in the U.S. slowed to a crawl in late March and early April, few economic sectors were left untouched. Following a pattern that had been established in China in February, the consumption of energy was an initial victim, followed quickly by metals.

The plunge in global energy consumption caused by COVID-19-related lockdowns and “shelter in place” orders has led to a widely documented decline in oil prices. The reaction in oilfields around the world was one initial domino that contributed to a decline in demand and pricing for metals.

In the automotive sector, unions wary of exposing their members to the virus and board rooms anticipating a lack of vehicle purchases in the near term reached the same conclusion in terms of idling assembly plants. Automotive component plants followed, continuing a ripple effect that worked its way toward steel output. That last link in the chain presents a difference between the market economies of the world and the state-owned enterprise output of steelmakers in China.

Pittsburgh-based U.S. Steel Corp. and several other steelmakers had to adjust output at their mills in an attempt to bring mill capacity in line with anticipated finished steel demand over the course of the next two months or so. Between March 24 and April 11, crude steel output in the U.S. fell by more than 32 percent, according to the Washington-based American Iron and Steel Institute (AISI). All the factors were in place for a drop in ferrous scrap prices except one—the all-important supply half of the equation.

Slowing to a trickle

Historically, when scrap processors see a severe monthly drop in ferrous scrap prices, they also expect to see accumulated scrap inventory in their yards. When supply outpaces demand, it gives mills negotiating leverage.

In early April, most processors were not reporting that to be the case. By mid-March, scrap yards instead were experiencing a dwindling of inbound material that in theory could more than match even a 32 percent drop in domestic finished steel output.

The one pipeline of scrap that processors tried to keep open was the peddler and small contractor trade. A processor based in the Midwest noted, however, that if scale prices were to fall in early April, that would serve to diminish those scrap flows further.

Although the Institute of Scrap Recycling Industries (ISRI), Washington, lobbied consistently to ensure recycling is considered an essential industry so scrap can keep flowing, some locations have closed owing either to state and local laws or corporate decisions.

If falling scrap demand has been met by an equal or even greater plunge in scrap supply, one might conclude that this form of equilibrium would keep pricing relatively stable.

In early April buying, that did not prove to be the case, with Fastmarkets AMM Midwest Index pricing showing roughly $25-to-$50 per ton price drops in the heart of the country.

According to reports in that publication and others, the low prices were met with resistance by many processors. This faction chose to sell very little scrap at April prices, speculating that mills with scant inventory would be forced back into the market in a big way when governments, companies and households take measures to reawaken the dormant economy, whether that is in May or later.

Bullwhips and bull markets

In mid-April, as COVID-19 casualty figures and economic data painted a sobering picture for many Americans, it was difficult for some to conceive of life after the coronavirus impact. By that time, however, acknowledgements were being made that planning for the postpeak-virus era was growing in importance, and government and business leaders alike signaled that they were shifting their attention.

Commodity and investment analysts had been predicting a “bullwhip” effect starting with China’s experience with COVID-19. Downward pricing was predicted March 2 by Jason Schenker of Austin, Texas-based Prestige Economics. At that time, Schenker mentioned the possibility of a “bullwhip effect,” in which “a small move of the wrist turns into a big crack extending beyond China.”

As COVID-19 “shelter in place” orders hit Europe and then North America, exchange pricing for copper and aluminum tumbled to lows not hit for several years. Prices for steel and stainless steel were similarly affected by those orders and rapidly disappearing oilfield activity.

By early April, another investment analyst and advisor was pointing to the possibility of the bullwhip cracking in the other direction once economies in Europe and North America follow China in returning to a post-COVID-19 setting.

April 1, John Browning of Shanghai-based BANDS Financial writes that Goldman Sachs had warned that the economy in the United States “will go through an unprecedented drop” in the second quarter of 2020 but then “will be followed by a recovery that would be the fastest on record.”

Browning also writes that supply cuts in mined ores and primary metals mean that if the bullwhip cracks back to intense demand, prices would rise sharply in the absence of adequate supply. He cites this April 1 observation from Australian bank Macquarie: “As base metals prices test lows and governments curtail activity, a growing number of production assets are going offline, temporarily or indefinitely.”

In his April 1 email to clients, Browning writes, “The message from the fractured supply lines in metals is that demand is falling, but supply is falling also, so that we must expect short but painful disruptions in available location quality and delivery date. If we were to add this to Goldman’s expectation of a sharp recovery in Q3, it would seem we have the ingredients for an incendiary inflationary cocktail in the commodity space.”

That scenario could create a feast after the famine for scrap recyclers. With a sharp recovery, processors ideally can receive attractive prices on any existing inventory. Following that, recyclers can put their supply elasticity benefit to work by drawing in increased peddler scale traffic as prices rise and metals producers seek feedstock. As those same processors and traders struggle in the current low-supply and low-price environment, the idea of such a rebound presents a glimmer of hope.

The author is senior editor with the Recycling Today Media Group and can be contacted at btaylor@gie.net.