In Demand

R ecyclers cannot read a trade magazine or attend an industry conference without
picking up on the important theme that the growth of China’s economy is sparking a huge demand for secondary commodities.

In the commodities markets, where there is strong demand, rising prices almost always will follow, and that has been the case for the past 10 months in the ferrous scrap market.

Price indexes show clearly that ferrous scrap prices have risen throughout 2003. Scrap recyclers are now watching to see if the market has peaked and, if so, how long it will stay at the upper end of its trading range.

HAPPY RETURNS. After enduring a low price-per-ton market from 1998 through most of the next four years, ferrous scrap recyclers have been pleased to see the return of a potentially higher-margin market of more than $100 per ton.

"It’s a lot more fun—absolutely," says one Southern recycler of participating in the ferrous market when it is at the higher end of its trading range.

"It’s always a lot more enjoyable when prices are up," agrees James Macaluso of Sims Brothers Inc., Marion, Ohio.

The export market is getting much of the credit for lifting the scrap markets to their current heights, although some indicators are pointing to a domestic rebound as well.

"There is big demand from the export market, but there is solid regional demand as well," says John Sacco, president of Sierra Iron and Metal Co. Inc., Bakersfield, Calif. Sacco says much of the demand regionally comes from the Tamco mill in Rancho Cucamonga, Calif., as well as mills in northern Mexico.

Macaluso notes that the ripple effect of exporters seeking more scrap gave the market its initial boost. "To me, the export side is just another consumer, and it’s a consumer that right now is very strong," he remarks. "Everything is supply and demand."

Some forecasters have predicted that the ferrous scrap market may have hit its price ceiling, although these predictions may have come before the early October boost in steelmaking production in the U.S.

According to steel production figures gathered by the American Iron and Steel Institute, Washington, steelmakers in the U.S. increased their output in each of the first two weeks of October.

The overall amount of steel being made in the U.S. continues to trail 2002’s rate, but those looking for an economic rebound in the U.S. are hopeful that the 6 percent jump in steel production in just two weeks could signal that rebound.

Such a scenario was presented by Peter Marcus of World Steel Dynamics, Englewood Cliffs, N.J., at the Institute of Scrap Recycling Industries Inc. (ISRI) Commodity Roundtables in September.

Marcus presented a forecast through 2010 showing growing shortfalls of ferrous scrap and other steelmaking feedstocks.

He cited overall supply constraints that, coupled with a booming Chinese steel industry, will make for a lack of steel furnace feedstock relative to global demand.

Marcus said that even though much of the new Chinese capacity consists of blast furnaces, a shortage of iron ore capacity will cause buyers at these mills to seek more scrap from an obsolete scrap reservoir that is already straining to feed the world’s electric arc furnace (EAF) mills.

That shortage is already showing this year, by Marcus’ calculations, with a theoretical shortfall of 36 million metric tons of obsolete scrap in the market in his "most likely" scenario, followed by shortages of 40 million metric tons next year, 45 million metric tons in 2005 and 50 million tons by 2010.

Marcus sees higher pricing for both steel and scrap continuing through the decade. "World Steel Dynamics places the odds at 65:35 that steel shortage conditions will recur by early 2004," he stated. "And, if there is a shortage, steel prices may rise volcanically. Steel buyers may fear ongoing metallics shortages."

Marcus did not provide a dollars-per-ton figure on where ferrous scrap price averages might head, but he did note that ferrous grades currently being exported to China for as much as $189 per ton could go even higher. "I could imagine a temporary spike to $220 per metric ton for #1 heavy melting steel" delivered there, he remarked.

Marcus admitted that World Steel Dynamics also predicted such a shortfall for the late 1990s, which did not occur. "We missed," he said, citing several factors that forestalled the shortage, including the outpouring of scrap from the former Soviet Bloc nations and China’s preference for blast furnaces instead of EAF mills.

REMAINING WARY. Despite some sunny forecasts, recyclers remain alert to the fact that market peaks do not last forever, and they will be closely watching the market for signs of tapering off.

"Some of us feel this is a bubble that could burst anytime," says Sacco. "You just never know what could happen in China. This demand is nice, and as long as China is buying, that will keep the market strong. But God forbid there is a hiccup there; it will be felt over here quickly and it could be drastic."

The Chinese economy was the topic of another Roundtable session in September, with at least one speaker also sounding warnings about the Chinese juggernaut.

Freelance journalist Adam Minter, currently a Shanghai resident, told Roundtable attendees that the economic boom in China is driven by public spending, backed by fiscal policies and a banking system that are not market-based. "As soon as the public spending stops, the demand for your scrap stops," Minter declared.

Economists and business planners throughout the world are trying to predict whether the public spending will gently ease back and be replaced by consumer spending and private sector investment, or whether it will brake suddenly and cause economic distress.

As things stand, China has become a market driver in basic materials markets, meaning future market conditions for recyclers could be predicated on developments in China as much as they are on developments in North America.

And ongoing growth in China is far from certain, as the thinking of central planners could change rapidly. Central planners may already think that the nation’s steel industry has over-reached in its steelmaking capacity.

Market plunges cannot be anticipated beforehand, or everyone would speculate successfully. "It only takes one time to get burned thinking the scrap market is going to stay high forever, and you remember it," says Macaluso.

ON THE HOME FRONT. Domestically, increased steelmaking could signal an economic rebound, or it could be a slight seasonal adjustment dictated by temporary auto industry demand.

Also worrisome for scrap recyclers is the health of the manufacturing economy in North America, relative both to scrap consumption and scrap generation.

On the supply side, Sacco says, "The manufacturing base has so dwindled in the U.S. that it is a key factor. The supply side is tough."

The decrease in industrial scrap generation seemed to cut across regional lines for the past two years, although rebounds may occur differently within various regions. The Southern scrap recycler believes he sees evidence of a turnaround.

"I think it was in the July timeframe that we started to see local industries pick back up," he remarks. "Their businesses had been depressed, and the Iraq War really caused a slowdown, but a lot of our industrial scrap sources started picking production back up in the late summer."

In Ohio, Macaluso notes, "You can only buy what’s out there" in terms of industrial scrap. "If there is a demolition job that we can bid on, that is the type of opportunity we are out there looking for."

Higher ferrous scrap prices have also brought out increased peddler trade in some regions, seeing the return of a market segment that some recyclers worried was disappearing.

The recycler in the southern U.S. notes that in the 1997 and 1998 heyday of high prices, peddlers "became used to getting $117 per gross ton for scrap—it was a common price at that time, [and] customers started looking for that."

After several years of not finding prices anywhere close to that level, the recyclers says some scrap-peddling customers "are glad to see" the current scale prices.

In Ohio, Macaluso notes a similar renewal of interest in bringing in obsolete scrap items. He says idled farm and quarrying equipment is a source of scrap from the rural townships and counties surrounding Marion, and some of this scrap was allowed to rust in the fields during the extended price trough.

Overall, 2003 has provided a more enjoyable business climate for ferrous scrap traders than did the previous four years.

While chasing an inadequate supply of scrap can at times be frustrating, processors and shippers of ferrous grades are pleased to be dealing in a higher trading range and glad to have a consuming market hungry for their product.

The author is editor of Recycling Today and can be contacted via e-mail at btaylor@RecyclingToday.com.