Heading Toward the Peak

In fact, the first business day of the year 2000 in Asia saw record stock market indicators in Hong Kong, Singapore and India. That welcome news meant not only that the Y2K bug had not bitten the Asian markets, but also that those economies had recovered nicely and no longer appeared to represent a drag on global commodities markets as they did in 1998. (The most important Asian economy, Japan’s, is still scratching its way back to its former vigor.)

The smoothness of the Y2K transition was in step with the steady climb of ferrous scrap prices, and many traders are optimistic that smoothness will also mark the commodity’s peaking and a subsequent “soft landing” in a comfortable trading range.

 NEAR-TERM CONFIDENCE

Few traders or dealers are willing to make predictions very far down the road in the volatile world of ferrous scrap. Those willing to make short-term predictions, however, are fairly optimistic in their outlooks for the first quarter of 2000.

“What we’re hearing is that markets will continue to move forward in the first quarter; after that you just don’t know,” says one Southern scrap buyer. “There seems to be strong demand from the mills, and the mills are running at high capacities and have good orders on their books,” he adds.

The consensus seems to be that the steady climb of ferrous prices throughout 1999 up from the $73 per ton valley reached in late 1998 was based on improved market fundamentals.

“I would think 2000 would be a very good year, but not excellent [for ferrous scrap dealers],” says Bill Heenan, president of the Steel Recycling Institute, Pittsburgh. “For pricing, I think the year will be less volatile than it was in 1998 or even 1999,” he adds.

“The market’s much firmer all over,” says Don Zulanch, senior vice president at Cohen Brothers Inc., Middletown, Ohio. “Our prices have gone up both on the buy and sell sides,” he says of conditions in late 1999.

Another Ohio scrap trader, Jim “Mac” Macaluso, vice president of the ferrous division of Sims Brothers Inc., Marion, Ohio, says ferrous pricing “looks to be strong” in the first quarter of 2000, but cautions that “it’s kind of hard to look past the first month.”

Macaluso refers to 1999 as “a good year,” noting that the supply of scrap from industrial customers remained consistent. “The auto industry was always busy; they didn’t slow down with the steel industry, so our tonnage coming in has been very consistent.”

In the southern U.S., Jack Vexler of Monterey Iron & Metal, San Antonio, says the market in his region is lagging somewhat behind conditions in other parts of the country. “We have not moved up $30 per ton, but more like $15,” he says. “We’ve moved up about half of what the other markets have.”

He is hopeful, however, that improved demand from export markets will soon begin affecting demand and pricing in his region. “I’m half-way expecting a pleasant surprise from Mexico, but as we speak it hasn’t occurred yet. Their economy is going full tilt and unemployment is low, so you would think they will need scrap.”

Vexler adds that “if the Pacific is buying again and if you have Mexico buying, you could literally see $20 to $40 per ton added over the course of a couple of months, catching us up with everyone else. It’s an optimistic scenario, but very possible.”

POSITIVE TRENDS

Some of the optimism expressed toward ferrous scrap in 2000 can be traced to what is being predicted for the global economy and because of economic and scrap trading trends established in the second half of 1999.

“Obsolete scrap pricing has been sufficient to maintain collection efforts,” said John L. Neu, president of Hugo Neu Corp., New York, in his remarks at the Fall Convention of the Bureau of International Recycling. “Prompt industrial scrap generation has been robust as the metal working industry has been operating at very high levels. Both conditions will continue unless there is some major unforeseen economic setback,” Neu remarked.

Another factor that may be affecting prices in the eastern U.S. is the onset of glitches in the railroad freight sector. Though it is not a welcome development, rail woes (such as promised gondola cars not arriving or arriving several days late) have caused some mills and dealers to bid up prices on rush deliveries (made by truck) of ferrous scrap.

Not surprisingly, the logistical problems are occurring in the wake of a merger in the Class I Railroad sector. In 1999, Norfolk-Southern and CSX Corp. began assuming the operations of the former Conrail. As with another major takeover—that of Union Pacific absorbing Southern Pacific in late 1996—the transition has not gone smoothly, according to several scrap dealers.

“People are having a hard time getting cars, and the delivery times of cars are very slow,” says one Great Lakes region processor. “If the flow of scrap was better, the price per ton for ferrous scrap may not be quite as high,” he adds.

Neu also referred to rail operations in his remarks on the state of the U.S. ferrous scrap industry. “Another recent inflationary factor is the consolidation of the railroads, which has not gone terribly well from an operational standpoint and has created false car shortages and slow-moving shipments resulting in spot [scrap] shortages,” he told BIR attendees.

The operational area affected has been fairly wide, as the three railroads involved in the buyout serve most of the U.S. east of the Mississippi River. “We have one account that has temporarily stopped shipping by rail; the railroad claimed a shortage of cars and one of our requests could not be filled for three days,” says a Southern scrap trader. “There have been a couple of instances where we had to increase our trucking to make up for a shortfall of rail cars. When the railroads have a monopoly, you’re pretty much stuck.”

Even in Texas, Vexler says that “rail service is sadly wanting. It’s poor. You spend a whole lot of time getting nothing done with the railroads, but you’ve got to have them.”

The resurgence of overseas economies has been another (and more welcome) major factor in the upward movement in ferrous scrap prices. As noted by Neu in his remarks to the BIR, demand for scrap from other parts of the world in mid-1999 helped put the market back on its feet. “The U.S. mills that have now become used to scrap flows from the docks of the U.S. East Coast and Europe will have to replace these units by either increasing the amount of melting products other than scrap, such as pig iron and DRI, or they will increase their purchase price for this scrap to compete with the non-domestic demand.”

Speaking in late October of 1999, Neu said, “we have already seen this happen as recently as 60 days ago when the demand from Mexico, South America and Southeast Asia increased and U.S. East and West Coast exporters were able to conclude business and lower the stockpiled inventories accumulated at the end of 1998 and the first half of 1999.”

Noting that the growing melting capacity of U.S. electric arc furnace (EAF) steel mills could soon make the U.S. a net importer of ferrous scrap, Neu predicted that the pressing demand for steel scrap could keep prices at the higher end of the trading range. “If we carry this to its logical conclusion, any increase in world demand—especially from Korea, Taiwan and Southeast Asia—should precipitate a price increase for scrap exported from the U.S. and Europe.”

FOLLOW THE STEEL

The future demand for ferrous scrap is tied directly to the future demand for steel. Fortunately for scrap dealers, steel industry forecasts for 2000 are calling for sunny skies in most parts of the world.

According to figures maintained by the International Iron and Steel Institute (IISI), Brussels, 1999 marked a year of stability for steelmakers. After 11 months, global steel output in 1999 was running 0.3% ahead of the 1998 rate. North American, Western European and South American steel producers were running behind their 1998 production figures. Eastern European and Asian steelmakers, though, were churning out more steel, with China, Russia and the Ukraine leading the way.

The 0.3% increase could be dwarfed by the 3% growth in production being predicted by the IISI for 2000. In North America, most of the news in terms of melting activities of mills and foundries also appears positive.

“I think 2000 should be pretty good,” says Bill Heenan of the domestic steel industry’s prospects. “One of the things that we saw in steel was that 1999 was a mirror of 1998. The first six months of 1998 were very good, then the next six were bad. It was the opposite in 1999. I think what you’ll see in 2000, based on order books, is that auto companies have reached a new level of North American production of 16 million units; appliance demand is good; housing starts are good; and as the federal transportation act funding kicks in, that large market for steel will improve.”

The structural steel used by highway and bridge builders—ranging from steel beams to concrete reinforcement bar—has at times been in short supply during the peak road construction seasons in the northeastern U.S. and Canada.

“I hear from the mills that in the structural market, they can’t produce enough products,” says the Southern scrap buyer. “They can’t produce it fast enough, and that was a segment hit hard by imports.”

Heenan points out that the construction industry (40%) and the automotive industry (25%) are steel’s two most important markets, and both are projecting healthy steel consumption patterns.

Regarding the construction segment, Heenan says, “That segment uses structural, rebar, plates and other forms of steel. A lot of light-gauge flat-rolled steel goes into decking, although people tend to think of the I-beams first.”

Export limitations agreed to by Russia are apparently being enforced, meaning that domestic steel producers have access to a greater share of the booming steel market.

Macaluso notes that a strike has affected output at one mill in his region, but “everybody else’s melt rates are up.” He adds that, “the auto industry is looking for another good year in 2000, and that usually rolls back to us that the scrap is going to flow.”

Dealers can also measure the demand for steel by observing the activity of their scrap-generating clients. “Every manufacturing business we’re associated with has increased production—some by 25%,” says the Southern scrap buyer.

John Neu also noted the growth of the EAF steel sector—including several recent plant start-ups and expansion projects—as a major factor affecting ferrous scrap demand. “Today, EAF production averages about 46% of total U.S. steel production, and the tonnage amount of EAF-produced steel will continue to grow based on the success of these new installations,” he remarked.

Barring an overall economic recession, the relative health of the steel industry and the rebounding of ferrous scrap demand from overseas markets bodes well for ferrous scrap processors heading into 2000. “All the signs point to a positive year,” says Heenan.   

The author is editor of Recycling Today.