Mixed Markets

With a new year now on the agenda, optimism is renewed for an economic recovery and a more friendly global business environment than what companies experienced in late 2008 and in 2009. Thanks to government investment programs and a mild return of confidence in the worldwide economy, some signs of a recovery have been seen in several business sectors, including the scrap metal industry.

However, while American ferrous and nonferrous scrap dealers hold out hope for brighter prospects of a full market recovery in 2010, they are aware that they are not out of the woods, as manufacturing production has yet to return to normal levels.

“Industrial generation is very slow,” says Cap Grossman of St. Louis-based Grossman Iron & Steel. “I don’t know how to forecast for 2010. I keep asking colleagues and friends in the business, and they are also left scratching their heads. It’s tough to try to predict volume if you cannot get a handle on what the demand for new steel is going to be.”

To paint a global picture of the scrap metal environment, Recycling Today tapped into reports from contributors to Recycling Today Global Edition (www.RecyclingTodayGlobal.com) to gauge current and future demand for recovered metals in markets in North America, Europe, China and the Middle East.

FINDING FERROUS MARKETS
Should the industrial sector of the American economy continue to struggle, exporters of ferrous metal will likely still have end markets for their material overseas.

Ruggero Alocci of the Italian ferrous trader Alocci Rappresntanze Industriali reports an increase in business activity toward the end of 2009. “It is a pleasure to end the year with some good news from the market,” Alocci says.

Business seems to be on a growth footing. Destocking is ongoing, and industrial production is generally growing.”
During November 2009, Italian mills had low scrap inventories as production remained relatively low, Alocci says. He adds that as dealers and consumers agreed on prices, deliveries and demand increased, which led to larger quantities of scrap being imported from France and Germany.

“The better demand increased the pig iron prices to $340 per ton CIF (cost, insurance and freight) for January shipments. New offers for February and March deliveries are reported at higher prices,” Alocci says. “It is too early to say the recovery has started, but if the same signals are present in January, something better could be expected for 2010,” he adds.

A similar uptick in ferrous scrap markets can be seen in Russia. Scrap dealers in that country experienced higher prices for steel scrap toward the end of 2009, at about $200 per ton, according to Andrey Balashov of TYOR Commerical Inc.

While the prices for ferrous scrap are increasing in Russia, the country’s industrial production varies depending upon region. “In South Russia, some of the steel mills have been shut down. In Central and North Russia, they are all working, and in fact, they have quite good sales for their products,” Balashov says.

For those Russian mills still operating, Balashov says they must settle any outstanding debts before buying more scrap material. Mills that are buying are making payments, but with at least a 20- to 30-day delay, he says.  

“On average, the steel mills that are continuing to work have one month of material in stock, which is approximately 300,000 tons for one steel mill,” says Balashov. “That means they have to continue buying and that sales are being made to build stocks for the whole winter.”

As the Russian domestic ferrous scrap market showed a slight rebound in November and December 2009, so too did export demand for Russian scrap. Balashov says dealers have started sales to Turkey and Europe as prices have risen, which has increased competition in the ports and caused shipping rates to drop.

Entering 2010, Balashov remains optimistic that the recovery will continue, especially as new government investment programs continue to encourage industrial production. “Consumption of steel scrap in Russia should even grow,” Balashov predicts. “At the least we will have an acceptable level of steel consumption in Russia, enough to keep at least 60 percent of capacity for the steel industry, which means we will stay alive.”

Finally, American exporters of ferrous scrap will avoid competition for sales from some traders in the Middle East, specifically in Saudi Arabia. “We cannot export shredded steel from Saudi because it is banned,” says Salam Sharif of Sharif Metals, based in the United Arab Emirates. “We tried to get export licenses out of Saudi, but they were not willing because they said there are three major steel mills in the kingdom. So long as the metal can be consumed domestically, they don’t see a major reason to give export licenses.”  

STRUGGLING SPREADS
Nonferrous scrap dealers have pinpointed scrap sale prices that are inconsistent with the traditional price spreads derived from the London Metal Exchange (LME) and Commodity Exchange (COMEX) as a major reason their markets are struggling. While nonferrous markets for certain commodities in particular areas of the world remain strong, several international scrap traders noted disagreement between sale prices quoted based on normal LME spreads and those that consumers were willing to pay.

Fernando Duranti of Italy-based Leghe & Metalli took note of these conflicting prices while attending the Bureau of International Recycling Autumn Roundtables in Amsterdam. “There was a lot excitement at the event because people wanted to buy, and people wanted to sell,” Duranti says. “The people selling were quoting speculative prices based on the LME, and the buyers were quoting prices that actually reflected the real value of what they wanted to buy, whether it was copper, brass, aluminum, zinc or tin. There was always a difference between the buyers’ and sellers’ price of at least $200.” Duranti says consumers and scrap traders refused to make concessions of $200 or more.

Because the LME prices are speculative, seemingly linked to the belief that industrial production will soon ramp up, consumers of nonferrous scrap seem content to maintain a holding pattern using material they have stocked rather than paying at prices that are tied to LME pricing—prices deemed speculative by some buyers. As a result, scrap generation also suffers. Copper stockpiles on the LME provide evidence of this trend.

“According to our data, copper futures have risen by more than 100 percent so far in 2009, which not only paints a bullish outlook for the market ahead, but also brings fresh confidence to investors” says Jane Young of Ling Tong Metal Information Co., a China-based provider of nonferrous scrap metal information. “However, the inventory of copper continues to swell. As of mid-November 2009, copper stockpiles at the LME warehouses had exceeded a level of 420,000 metric tons, the highest level since April.” Young adds that in China, the world’s largest copper consumer, stocks have also surpassed 100,000 metric tons at the Shanghai Futures Exchange.

Scrap dealers who are making sales are doing so with considerable price concessions. David Chiao of China-based Uni-All Group Ltd. offers this observation: “Before summer No. 1 copper scrap was something like 15 cents premium over the COMEX and LME. Now No. 2 copper is something like 60 cents under the COMEX.”

Ultimately, if the global economy continues to rebound and the demand for finished products returns, as expected, the industrial sector will be forced to purchase material off the LME or from scrap dealers when they exhaust their stockpiles, which theoretically should help to increase prices.

“The global economy is turning around,” says Young. “The real estate sectors, equity markets and financial markets in many countries are already showing signs of recovery. The sound economic prospects bring support for the metal markets. What’s more is that LME copper is very strong now. That strong LME price will guide all other industry metal prices to move even higher.”

NONEXISTENT NONFERROUS
Because of widening spreads between the LME and scrap prices and low demand from consumers who are struggling to book orders, nonferrous scrap dealers reported difficulty in finding end markets for material.
“For nonferrous metals, the supply is there, but the buyers are not,” says Duranti. “The buyers buy just enough to survive. The brass and copper industries in Italy are only operating at 60 percent of capacity.”

Similar struggles are being experienced in China, specifically in the Foshan copper scrap market. “In the face of copper producers’ poor demand, recycling companies have had to sell material at small losses,” according to a report by TopRecycle, a Chinese nonferrous market information company.

While the current copper scrap market conditions are unfavorable, dealers doing business in China have reason for mild optimism. Producers may soon need to purchase material after using their stockpiles to satisfy the demand for products resulting from the Chinese government’s investment in the country’s infrastructure.

“Although the Chinese have invested nearly $500 billion into the country’s infrastructure, the effect on secondary metals is not there,” says Chiao. “The first group that will see those benefits are the primary producers. They will get direct benefits from the stimulus program, and I think the secondary markets will get the second tier of benefits.”
Chiao adds that several of his brass mill customers are operating at about 30 percent of their capacity.

Copper is not the only nonferrous market struggling; the aluminum and stainless steel markets are also starved for demand.

In Italy, Duranti reports that auto manufacturer Fiat had sold a record number of cars in September and October 2009 and was likely to set another sales record in November. However, he says the record auto sales have had little impact on Italy’s aluminum scrap market prices. Duranti says prices remain around the $1,800 per ton level. 
The market for stainless steel scrap continues to be weak as well, particularly in China and Italy. Young reports that both prices and sales for stainless steel scrap are struggling in China in light of low industrial production.

“As everyone knows, product and raw material bear a close relationship. If the sales for end products are sluggish, demand for the raw material is also weakened,” Young says.

She adds that demand is weak because of the aforementioned price spreads between the LME and quoted stainless steel scrap prices. She says dealers prefer to stockpile scrap materials for awhile rather than sell at reduced prices.

In Italy, stainless steel production is remarkably lower than the historical average for the time period, according to Dr. Sandro Giuliani of Guiliani Metalli SRL. While Giuliani says the Italian stainless steel industry had preserved some demand compared with the rest of Europe, the tide is turning and it is reflected in decreased production.
“The immediate cause of the decreased production are long periods of shutdown, but the real causes are very poor orders and uncertain prospects for the future,” he says. “The restocking phase of intermediate dealers, which had enabled the stainless scrap industry to draw some breath, is now over.”
 
The author is assistant editor of Recycling Today magazine.