Ferrous Scrap Stays Strong

Despite some softening of prices during the first quarter of 1995, all indicators point to a strong year for ferrous scrap.

After several difficult years, the market cycle appears to have reached a peak for ferrous scrap markets, where it is expected to remain for some time. Price softening during the first quarter of the year is generally interpreted as merely a temporary correction. The market is expected to continue strong at least through the balance of 1995 and into 1996, provided the economy as a whole does not weaken significantly.

"It looks like 1995 will be a very strong year," says John Jacobson, president of Jacobson & Associates, Swarthmore, Pa. "Eventually the cycle will end, but at this point our guess is that it won’t be until 1996 that we see any real weakness in steel production and steel scrap demand."

The price softening at the beginning of the year was just a "hiccup," he says, not a significant downward trend.

"There was a little bit of adjustment that occurred at the beginning of the year, kind of a hiccup from the all-out production and shipments and ordering that occurred at the end of the year," he explains. "This was really driven by price increases."

Although there can be substantial variation in mills’ scrap purchases from month to month and week to week, says Jacobson, both steel and scrap demand for the entire year is expected to remain strong.

"Orders have held up pretty well, and the economy looks fairly good despite interest rates moving up a little bit. The underlying fundamentals still look okay through this year."

The average scrap price will be up for the year, although not as much as during the past year, Jacobson predicts.

SLIGHT DOWNTURN?

Some others, however, interpret the softening of prices as an indicator of a slight market downturn.

"I don’t think ferrous will continue as strong as it has been," says Benjamin Blemker, president of the ferrous division of The David J. Joseph Company, Cincinnati. "I think you’re going to see a little softening -- you’ve already seen it, and it appears that it will continue."

There is a lot of scrap available, he adds, in part because the winter has been relatively mild. "Part of it is there is a lot of scrap being produced and there is a lot of scrap being sold, because people don’t want to hold onto it," says Blemker.

The softening started mid-January, and can be attributed to mild weather, strong industrial availability, importation of large quantities of pig iron and scrap substitutes, and better buying on the part of steel mills, he explains.

"I think the scrap market is reacting to a lot of scrap availability, so I think you’re going to see some continued downward pressure on the market through the first half of 1995," says Blemker.

But despite any negative predictions, the raw data on steel production and scrap consumption -- and even pricing -- paint a hopeful picture. At presstime, prices for No. 1 heavy melt scrap was running between $118 a ton and $148 a ton delivered.

And according to the Institute of Scrap Recycling Industries, Washington, raw steel production reached 98.1 million tons in 1994. Domestic steel scrap consumption in 1994 reached about 57.2 million tons, representing a 12.6-percent increase over 1993’s total of 50.8 million tons. At the same time, exports declined in 1994, reaching only 8 million metric tons, as opposed to 1993’s 9.3 million metric tons. In addition, world steel consumption is expected to reach 650.8 million metric tons in 1995, according to the American Iron and Steel Institute.

"The biggest area of growth we see in 1995 is that steel producers’ profitability will be up," says Jacobson. "They have successfully increased their prices and have been able to keep their costs under control as well."

The other significant trend industry observers expect is the increased use of scrap substitutes over the next year or more, due to higher scrap prices associated with higher demand and the shift towards producing more specialized products in electric arc furnaces.

"I think it’s a tremendously good thing for the scrap business," says Blemker. "The positive affect on scrap will be with quality. With the emphasis on better, cleaner, known chemistry scrap, it provides the mill with the ability to know exactly what they’re putting in their furnace. You can do that with scrap but it’s a little bit easier with a manufactured product such as iron carbide."

SHORTAGE UNLIKELY

With a number of new minimills starting up and additional capacity being added to several existing mills, there should be increased demand for scrap in the next year. Some in the industry have raised the possibility of a scrap shortage over the next few years, with increased demand outstripping supply.

"There are about three minimills that are going to open in the Midwest -- not even minimills but big electric furnace mills that are going to be using a lot of scrap iron," says Marty Davis, president of Midland Iron & Steel Corp., Moline, Ill. "So I can’t see how we’re going to have anything but almost a shortage as we look out over the next couple of years."

There will be continued demand for pig iron and various forms of DRI, says Davis, and with the new demand, the U.S. could become a net importer of scrap instead of a net exporter.

"The challenge to our industry is going to be to find the supply," he says. "Hopefully the U.S. manufacturing sector will continue to remain strong and will put the supply in our hands. But it’s going to be a challenge."

Others, including Jacobson, feel a scrap shortage is unlikely.

"Shortage to me simply means a higher price," he says. "I think it’s a little misleading to say that there’s not going to be any scrap around. As everyone in the scrap industry is aware, there is a lot of scrap available to be had. It’s a matter of what price you want to pay to get it out."

Blemker agrees that a scrap shortage is not likely. "We at the Joseph Company feel that there’s certainly enough scrap in the domestic market to satisfy that new demand," he says.

Because there are more DRI plants coming on line, more use of pig iron in mills, more recycling efforts adding to supply, and about eight to 10 million metric tons a year of scrap being exported that could stay in the U.S. instead, the possibility of a scrap shortage is remote, says Jacobson. But prices may rise as supply becomes tighter.

It will be possible to tap into materials formerly destined for export, as the global steel industry is expected to have a strong year for steel production in 1995, says Jacobson. "There will be increased demand from abroad in 1995, but I don’t think a lot of that will be fueled by U.S. scrap."

"We’re exporting something like 20 percent or more of the total scrap generation," adds Richard Burlingame, Cleveland-based steel industry consultant. "Those iron units don’t have to leave the country if the domestic industries want them badly enough."

Over many decades, U.S. exports of ferrous scrap have ranged from about eight million tons to as high as 14 or 15 million, he says.

Quite a bit of untapped ferrous scrap exists in the U.S., in non-industrial states, says Burlingame, but the effort it would take to retrieve it may not be cost-effective.

"It’s all unprepared, and they are hundreds or thousands of miles from a consumer," he says. "To semi-prepare it so it doesn’t kill you to ship it would be difficult. The yards today tend to be located in the greater metropolitan areas. That’s why I don’t think it could be factored into the availability."

But it could be done, says Burlingame, if the need was sufficient. As for DRI, there will certainly be demand for scrap substitutes, both near and long term, but the capacity to produce those materials is limited and will only grow slowly, he says.

"DRI, HBI, iron carbide -- all these things take huge investments," says Burlingame. "To put it in perspective, I think there’s 30 million tons of capacity worldwide of DRI. And the worldwide raw steel production, put on the same net ton basis, is about 750 to 800 million tons. So the total DRI is something like four percent of all the steel produced. It may burgeon, but it’s not going to blossom suddenly from four percent into 15 or 30. These are going to be incremental changes because those plants cost a lot of money. And in the meantime, scrap is going to continue to be in great demand."

FOREIGN DEMAND

The Far East is an area of strength in demand for 1995 and beyond, says Jacobson.

"China is an area where we expect continued growth," he explains. "They’re on a path to supersede the size of many other countries in terms of steel output production. So they’re sort of out on their own growth curve. It’s quite remarkable. They have a certain amount of leverage based on population."

Japan’s economy has reached the stage where growth in demand for steel has leveled off or is even declining, says Jacobson. At the same time, the country has built up a large infrastructure, giving it a larger scrap reservoir than ever before.

"So Japan has become less reliant on imported scrap and is really able to supply its own needs. That’s really what we would expect for the future, even with some additional electric furnace production."

Mexico, despite recent economic troubles, remains on a positive growth trend for steel and scrap, says Jacobson. However, scrap demand in Mexico is tempered by the country’s strong reliance on DRI.

"They of course have the second-largest company in the direct-reduced iron business, the Hylsa Co.," he says. "So although the direction of the Mexican steel industry is up, this won’t translate one-to-one to increased scrap demand."

If the CIS can develop its scrap collection and processing infrastructure sufficiently, material from that country could have an effect on the world scrap picture, says Burlingame.

"I think they might have a much higher scrap to hot metal consumption in that vast country," he says. "This might be a factor in the world market over next five or 10 years."

AUTOMOTIVE STRENGTH

The key assumption behind forecasts of continued strength in steel and ferrous scrap is that the automotive industry will remain strong at least through 1995, says Jacobson.

"That’s really the bellwether," he says. "If that starts to weaken, it’s going to indicate other pockets of weakness in the economy. It’s an interest-rate-sensitive area and would indicate maybe a weakness in construction, capital spending. It has a ripple effect throughout the industry."

Although there have been some forecasts that the auto industry may not achieve the same impressive growth rates it reached in 1993 and 1994, no indications of weakness have yet appeared, says Jacobson.

Any softening in the automotive sector is more due to interest rate hikes than to overall demand for automobiles, Blemker adds.

"The people we talk to are still reasonably bullish on the future," he says. "There’s a little uncertainty on interest rates and the impact they’re going to have on business, but overall it looks pretty good."

STEEL PERSPECTIVE

Although a shortage of open-top gondola cars for transporting scrap has been a problem over the past few years, railcar availability has not yet been a problem during the current transition period between classifying these cars as free running and giving railroads control over them, according to Dick Jaffre, vice president of raw materials and transportation for Chaparral Steel Co., Midlothian, Texas.

"We haven’t seen much effect at this time in terms of availability of gondola cars both for shipping steel and receiving scrap," says Jaffre. "It’s not clear what the long-term effect will be. But so far the availability of cars for moving material has been adequate."

Scrap prices have reached high levels, he says, but this is partly due to factors present every winter, including a curtailed ability to collect and process scrap due to some inclement weather.

"Weather has been very fair, so you’ve seen prices ease a little bit," says Jaffre. "The peak appears to have been reached for the moment, and there seems to be a correction going on. That’s still going to leave scrap at traditionally high levels, in current dollar terms."

The case could be made that, adjusted for inflation, scrap prices are not actually that high, says Jaffre. By the same token, while steel prices have gone up, they have not really kept pace with inflation, he says.

"So what we and many other minimill producers of long products have seen is that as a percentage of our selling price, scrap has been on the rise for the past ten years," he says. "I think we have somewhat leveled out on that relationship for the moment. The price of scrap should ease, but not dramatically. I really don’t see a $50 a ton decline, or a $30 a ton decline, even."

Prices went up, in part, due to expectations of supply tightening because of bad weather, says Jaffre. There were also expectations of greater disruption due to the gondola control issue. The current price correction, then, is due to the realization that the winter is likely to continue to be mild, and it has become clear that giving railroads control over gondolas is not causing significant disruptions in scrap flow.

"There does reach a point where the market gets oversupplied, and I think you’re a little bit at that point," he explains. "There’s a lot of pig iron being imported into this country, and that’s kind of keeping the cap on the price of the prime industrial grades. "

The steel industry is running at 93 to 95 percent of capability, says Jaffre, providing a healthy demand for scrap.

"I don’t see any reason at this point to fear any kind of dramatic economic retreat," he says."Generally speaking, unless there’s a real retreat in economic activity that takes the steelmaking rate into the mid-80s from the low to mid 90s -- and this may happen briefly in the summer because of summer shutdowns -- steel demand looks good for 1995."

The flat-rolled steel business has been going strong recently, enjoying significant price increases, "far more than the increases in the price of scrap," says Jaffre. This has not been the case with long products.

"What’s interesting is that there’s additional flat-rolled capacity coming on stream that will depend heavily on scrap," he says. "That’s going to add flat-rolled capacity and at the same time add demand for scrap. So that’s going to buoy the scrap market even if the edge comes off the flat-rolled market."

NOTHING SPECTACULAR

Although the scrap industry continues to enlarge its capacity, increase its efficiency and develop processing equipment incrementally, Burlingame does not expect any great breakthroughs in ferrous scrap processing technology in the near future.

"In the late 1950s when the first automobile shredder was built and operated successfully and economically, that was a spectacular breakthrough in scrap processing," says Burlingame. "But I don’t know of anything coming of that magnitude."

But even without huge breakthroughs, the industry continues to improve, and markets are expected to remain strong for the foreseeable future.

"The good years in scrap are going to exceed the poor years by a significant margin for a long time," says Burlingame. "I think we can depend on more prosperity in demand overall for quite a while."