Ferrous Supplement -- A Murky Market

Domestic ferrous scrap markets continue to see prices not seen in years. Bankruptcy filings continue to filter through the domestic steel industry, with more than 20 filed over the past three years. A number of these struggling steel companies, most notably LTV Steel Corp., Cleveland, have closed down.

This downward trend doesn’t appear to be abating any time soon. While the federal government is looking to put some tariffs in place to restrain the "dumping" of steel from outside North America, movement of ferrous scrap is inching along.

It is not an environment that holds great opportunities for many scrap processors. The offshore market, on the other hand, holds some allure for companies that have access to important waterways. The ability to shift some tonnage offshore has, and continues to be, an area of great interest for many scrap processors. However, the actual shipping of the material is limited to only a small percentage of companies with both the size to make exporting work, as well as access to the waterways and deep water ports needed to effectively move material offshore.

At the same time, the slumping global economy has resulted in sharply reduced freight rates. While lower costs to ship material had been a big advantage for some exporters, the cost to ship material is starting to climb, cutting into a profitable condition for shippers.

While some export markets hold promise in the short term, many of these sectors remain susceptible to the difficult market conditions being seen in the U.S. An overall slide in the world economy has been taking a major bite out of the scrap industry in general. However, the outlook for 2002 could be better, although the optimism is far from unanimous. Some vendors say that their naturally optimistic outlook stems from the law of averages that next year will be better than the last two, but this is despite the lack of any substantial, concrete signals that things are getting better.

The difficulties being seen now will ease back as the steel industry starts to strengthen. One large ferrous scrap processor says that he is hearing that activity has picked up on the East Coast. This move, along with the decline in imports of scrap from Europe into the United States should create a better balance for the ferrous scrap market in the U.S.

While next year holds some promise, 2001 was a year that scrap processors staggered through. According to recent figures from the U.S. Department of Commerce, exports of No. 1 heavy melting scrap dropped by close to 80 percent in September 2001 from figures for the same month in 2000. The sharp drop, some speculate, was the nadir of the economic cycle.

The drop for September added to the overall woes felt through the year. According to the U.S. Commerce Department, total shipments for the first nine months of 2001 are down close to 5 percent from figures the same time the previous year.

While export markets struggled during the first half of the year, there has been anecdotal evidence that some nascent improvements in scrap shipments are starting. South Korea, the largest consumer of U.S. ferrous scrap, is starting to place larger orders. And China, which backed out of the market during the second half of 2001, seems to be moving back into the market. This, one exporter notes, is part of a trend by Chinese mills to develop a much better rapport with processors.

There has been some speculation that early in 2002 there could be an increase in exports. One large export shipper said that there is optimism creeping into the market. This, he said, "should give the (export) market a short term pop."

However, this improvement may be short lived. The East Coast exporter speculates that any strength in the export market would be limited by the possibility of increased ferrous shipments picking up from Black Sea ports in the former CIS countries, as well as increased interests from scrap substitutes such as hot briquetted iron, pig iron and direct reduced iron.

While the exporter feels total shipments out of the U.S. in 2002 will be greater than 2001, in all likelihood export totals will essentially be flat for 2002.

A wild card in the overall mix continues to be China. Imports to this country shot up around 100 percent last year, one exporter notes. While imports are likely to be strong again in 2002, most feel that China will not post such a strong jump in total imports from the U.S.

The continued strength in demand for ferrous scrap into China, however, will continue as the country looks to modernize its steel industry, replacing many of the open-hearth furnaces for electric arc furnaces (EAFs).

The trend will benefit the U.S. to a degree, although, one exporter notes, it is likely that the U.S. portion of this share will decline as other regions of the world fight to ship more material to China.

Robert Philip, president and CEO of Schnitzer Steel Industries Inc., Portland, Ore., says that while EAF mini-mills in Asia continue to grow, demand for scrap from the U.S. and Europe will continue to increase.

While the U.S. will be a beneficiary of this steady demand, Philip also sees competition increasing from countries in the former Soviet Union.

Asian Advances

One factor for the increased shipment of ferrous scrap from CIS countries to Asia is that the quality of the material from this region is fairly good, Philip says.

Another reason is that the price of scrap landed in Asia is essentially the same from Europe as it is in the U.S., preventing any price advantage from either region.

Detlef Mueller, president of U.S. Ferrous Trading Inc., Greenwich, Conn., says that in much of 2001, Black Sea port activity was dead, although it is starting to come back.

Mueller would not forecast any outlook for 2002, citing an avalanche of various industry-related and non-industry issues that all go into the market for ferrous scrap, including such issues as exchange rates, freight rates and the monetary policies of various countries.

Schnitzer’s Philip sees volatility in the export market for 2002 unless there are significant changes in some external factors, including the specter of terrorism that has curbed some movements.

While other exporters see the Asian market, with the exception of China, as muted for 2002, Philip sees some of the more mature Asian countries becoming growth areas for exporters who are committed to the offshore market. At the same time, while the reputation of China has been of a buyer that jumps in and out of the market, depending on the price of scrap, Philip sees China as becoming more of a steady buyer. Chinese mill buyers are looking for longer-term relationships, he notes. They want commitments, abiding by contracts, with consistent, loyal, quality shippers.

"They have become more sophisticated. They are beginning to be the types of buyers who are in it for the long term," says Philip.

Mexico in a Holding Pattern

The Mexican market at one time looked like one of the growing avenues for U.S. ferrous scrap exports. However, Mexican steel producers are being hit harder than U.S. producers in the current shake-out. "What I am hearing is that there won’t be any significant buying any time next year (2002). The dollar is too high for Mexican mills to buy U.S. scrap," says one recycler.