High-pressure front

Meteorological forecasting is considered to have advanced significantly in the past several decades, but there are enough inaccurate predictions that few people count on the five-day forecast as an absolute.

Considering the recent trend line of metals pricing and the current forecasts for 2016, recyclers who would like to see pricing rebounds soon are probably hoping economic forecasters maintain a similar track record.

When forecasts go wrong, either on the meteorological or economic front, the culprit likely is unanticipated changes in conditions. In the weather realm, those changes take place in the atmosphere. In the global economy, changes in conditions can occur anywhere for an infinite number of reasons.

In the overall metals sector in 2016, the changes—whether anticipated or not—may need to take place on the supply side.

THE ABUNDANT STEEL CONUNDRUM

When it comes to the relentless downward path of ferrous scrap pricing experienced throughout most of 2015, the culprit was almost unanimously considered to be the overabundant production of steel in China.

While China’s government issues statistics indicating it experienced 7 percent gross domestic product (GDP) growth in 2015 and is on track for similar growth in 2016, it is increasingly clear that the nation is not consuming steel at the same pace it was earlier this decade.

At the same time, China’s steelmakers—many of them state owned—did not react to the new market realities as steel consumption dropped. Even though steel output in China declined by about 2 percent in 2015, that still resulted in tens of millions (by one estimate 300 million) tons of finished steel in inventory and flooding export markets.

The ripple effect on steel prices and ferrous scrap prices globally was acute. In the United States, ferrous scrap pricing started 2015 in the $350 per ton price range and finished the year losing more than half of its value, trading in the $160 range.

For ferrous scrap prices to rebound in 2016, the global output of steelmakers will have to more closely match consumption. Only if excess global capacity is scaled back are steelmaking furnaces in the U.S. likely to operate at a higher utilization rate and demand more scrap.

Industry analyst Timna Tanners of Bank of America Merrill Lynch predicts conditions will stabilize enough for hot rolled coil steel prices to rise by as much as 25 percent in 2016, moving from their current $380 per ton range to $475 by the end of the year. It would mark some of the first steel price increases since steelmakers in the United States began decrying a tide of imported steel that began hitting our shores in 2013.

Securities analyst Mike Norman, who writes for TheStreet.com, notes in an early December 2015 column that electric arc furnace (EAF) steelmakers such as Commercial Metals Co. (CMC) and Nucor Corp. remained profitable even through a difficult 2015, meaning scrap-fed EAF steel producers are poised to invest to ramp up production and gain market share when the right conditions are in place.

Tanners’ prediction is not shared by all forecasters, however. The Economist’s Global Forecasting Service (GFS) does not see hot rolled coil steel prices moving above $380 per ton in 2016 and actually has them slumping back to $353 by the year’s fourth quarter.

“The steel industry will remain plagued by overcapacity,” writes GFS. “Global utilization rates have been as low as 70 percent in 2015. Even with some restructuring in China and closures in other markets, we expect it to rise only as far as 75 percent in 2016-17, resulting in no pricing power for mills.”

That is a scenario that will offer very few pathways to higher average prices for ferrous scrap in 2016.

NO RERUNS, PLEASE

The two biggest end markets for aluminum in the United States, the transportation and construction sectors, both enjoyed healthy conditions in 2015, creating steady demand for finished and semifinished aluminum. That has been the good news for aluminum scrap dealers and processors.

However, a source of concern that has emerged this decade is that the aluminum industry in the U.S. is seeing an intense level of competition from low-priced, imported Chinese aluminum, similar to what has been plaguing the steel industry.

Whether caused by global excess capacity or simply by a return to supply-demand balance after years of Chinese consumption growth, aluminum pricing drifted steadily lower through the first 11 months of 2015. (December pricing was not finalized at press time.)

London Metal Exchange (LME) average monthly pricing for aluminum alloy started the year with a $1,818.81 per metric ton (82.5 cents per pound) average value in January. November’s average monthly price checked in at $1,575.71 per metric ton (71.5 cents per pound), for an 11-month decline of 13.3 percent.

As the aluminum industry tried to manage through a declining price environment in 2015, U.S. aluminum output also declined throughout the year. Primary aluminum production, as measured by the Aluminum Association, was down in each of the first 10 months of 2015. In the January-October time frame, production fell from 1.44 million metric tons in 2014 to 1.35 million in 2015, a decline of 5.8 percent.

Secondary alloys producers fared a little better, producing 700,000 metric tons in the first nine months of 2015, down 1.9 percent from the 714,000 metric tons produced in the first nine months of 2014.

As U.S. output declines in a healthy economy, the Arlington, Virginia-based Aluminum Association clearly states on its website what it sees as the culprit: “Today, as China’s economy has begun to slow, and less of the metal is being absorbed domestically, there is a severe oversupply of Chinese-produced metal. This oversupply is driving a dramatic increase of imported Chinese aluminum into the United States.”

The Aluminum Association says, according to its data, “U.S. imports of semifabricated aluminum products from China grew 115 percent between 2012 through 2014 [and the] trend is continuing.”

In its aluminum industry forecast for 2016 and 2017, The Economist’s GFS notes that while U.S.-based Alcoa has announced capacity cuts in reaction to perceived global oversupply, “The lack of any clear reductions in output from China is weighing down on market sentiment, pushing metal prices inside and outside of China back down to their lowest levels since 2009.”

In its October 2015 “Commodity Markets Outlook,” the Washington-based World Bank also points to Chinese overcapacity as an aluminum price suppressor. “There have been closures of high-cost capacity, including within China, but these fall short of the growth in new low-cost capacity in China, resulting in a global surplus,” the report states. “Further cuts are required to balance the market, but closures are expensive and often slow to materialize in part due to local government pressures in China to sustain employment.”

The World Bank forecasts the average aluminum price will drop to $1,533 per metric ton (69.5 cents per pound) in 2016, down from $1,764 (80 cents per pound) in 2014 and a projected $1,603 (72.7 cents per pound) in 2015. The metal will fare only slightly better in 2017, predicts World Bank, averaging $1,557 per metric ton (70.6 cents per pound) in value.

Participants in the aluminum supply chain, from the largest producers down through the smallest scrap dealers, will hope to avoid what sounds like a replay of the steel industry’s lingering overcapacity in their sector.

SEEING RED

As with the steel and aluminum sectors, the biggest factors affecting copper demand and pricing focus on China. As with the other two metals, China’s demand for copper has waned from its peak years earlier this century.

The price of copper suffered from China’s slack demand throughout 2015, falling 17.3 percent from a January 2015 average LME value of $5,814.33 per metric ton ($2.64 per pound) to $4,807.02 ($2.18 per pound) in November.

If price stability is considered preferable to further deterioration, forecasts for 2016 and 2017 are slightly more hopeful in the red metals sector than for aluminum.

The World Bank, which predicted copper would close 2015 with a $5,324 per metric ton average price ($2.42 per pound), sees 2016 and 2017 offering slightly higher average prices: $5,341 per metric ton ($2.43 per pound) in 2016 and $5,371 ($2.44 per pound) in 2017.

The Economist GFS forecast points to a global copper industry more willing to curtail supply as a reason for the price stability. “After exceeding 250,000 metric tons in 2013-14, the global refined copper market surplus will drop in 2015, and the market will fall into a deficit in 2016-17 as cuts in miners’ production will moderate the pace of increase in refined copper output,” The Economist’s GFS forecast says. “Increasing concerns about profitability among producers could lead to more closures than currently expected, which would further negate the effects of slowing demand.”

The notion of global supply scaling back to meet China’s curtailed (or at least leveled off) demand for all metals is poised to remain the primary condition affecting whether 2016 and 2017 predictions are an accurate forecast or whether recyclers will be reaching for their sunglasses on what was supposed to be a rainy day.

The author is the editor of Recycling Today and can be contacted at btaylor@gie.net.