ISRI Frames Commodity Debate

Strong growth in the steel housing mar-ket during the next 10 years will require significant amounts of zinc for galvanizing. According to Larry Parkinson, plant manager of Interamerican Zinc Inc., Adrian, Mich., and the lead/zinc committee chairman for the Institute of Scrap Recycling Industries, Washington, 55 percent of all zinc currently goes to galvanized steel, and by the year 2000, 25 percent of all zinc will be used for galvanizing framing in the steel housing market.

"The steel housing market will explode," says Parkinson. "This is a huge opportunity for both steel and zinc. If only one half of the housing market is converted to steel framing it would consume about 4 million tons of steel." In comparison, the U.S. automobile industry uses 3.5 million tons of steel per year.

Presently, there are around 50,000 steel homes in the U.S., with the majority of new steel houses planned for California and Florida.

It is expected that the use of steel for building homes will increase dramatically for several reasons: the price of lumber continues to rise due to decrease forest reserves; steel framing offers significant building advantages because it is stronger than wood, will not warp and is immune to insect infestation; and because steel is 100 percent recyclable and has a better overall consistency than wood.

After several strong years, markets for ferrous scrap have begun to drift down. Looking beyond the fundamentals, Steve Wulff, vice president of planning for The David J. Joseph Co., Cincinnati, says that today’s economic expansion is looking mature, and that 1994 was the peak. He sees two themes for ferrous markets – renewed competitiveness and predictions that demand will exceed supply.

According to Wulff, U.S. capacity to melt scrap doesn’t exceed the demand. "What will happen to the new capacity?" he asks. "Domestic trade holds more risk than hope, with low-priced imports. Some of the planned new capacity won’t be built, as it may be becoming an oversupplied market. In the long term, the market is a severe disciplinarian."

If it is too expensive to use scrap, mills will use scrap substitutes, says Wulff. He suggests that scrap substitutes could represent a threat to scrap, after all. "What limits scrap prices is the availability of scrap internationally," he says. "If substitutes are available, that serves to cap prices. Scrap is threatened metallurgically because you can’t make high value products from scrap."

There are now 100,000 tons of direct-reduced iron imported into the U.S., and plants currently planned or under construction in the U.S. and South America may eventually produce as much as 15 million metric tons per year.

"Better scrap is sometimes melted than is theoretically needed," says Wulff. "Some mills have used the lower grades of scrap to save money. But there are sources, such as scrap cars, which can be tapped for more low-residual scrap, if it is separated from other grades. Scrap processors can sit and watch DRI plants take over, or we can be proactive. Mills need and want our help."

The picture for aluminum is a "confusing" and "perplexing" one, according to Joseph Viland, president of Wabash Alloys, Wabash, Ind. As proof, Viland refers to remarks that were recently delivered at a conference on aluminum held by The Aluminum Association, Washington. At the conference three economists spoke. The first one said that the aluminum market and associated pricing would decline; the second one said that the market would stay basically unchanged; and the third one said that by the end of 1996 aluminum would cost $2.00 a pound.

The London Metal Exchange price of aluminum is a good indicator for pricing primary aluminum – not for pricing scrap aluminum, according to Viland. "We know that the price of scrap drives the price of secondary aluminum alloys," he says, "but the price of scrap is not directed by the LME price."

Viland supported his pricing statement by showing a historical perspective of LME and scrap prices for aluminum. During 1995, the variance of LME to scrap prices averaged more than 16 cents a pound. "That tells me that aluminum scrap is not tied to the LME price, but to the supply and demand for that commodity," he says.

Concerning the outlook for aluminum, Viland pointed to the growing usage of aluminum by automobile manufacturers which is expected to total 5 billion pounds by the year 2001 for North America.

Because of this increase in demand, less aluminum scrap will be exported, and more aluminum will be needed to fulfill domestic capacity.

Copper scrap has been tight since the beginning of the year but is picking up, according to Frank Whitlake, copper industry consultant. Major expansions various mills are leading to an increase in scrap demand. The brass mill industry outlook is favorable, as is the outlook for the copper tube and fittings sector.

"Fundamentals remained firm in 1995," says Whitlake. "We are now witnessing a market in transition – a surplus will emerge. Mine production will affect supply, as we see increased production from privately-owned, world-class mines in developing countries. Eventually, inventories will rise an prices will drift lower."

With the LME warehouses established in the U.S. in 1995, hedge funds will continue to exaggerate price movements, but there will be lower prices in the future.

Although copper stocks are currently at 2.5 weeks consumption, this amount should increase to 11 weeks and prices around 60 cents by the end of 1999, says David Waite, director of business development for Rudolf Wolff & Co., New York.

Japanese and Chinese copper demand has been picking up, he says. "If Japanese copper snapped back to its peak, this would run down the surplus," says Waite. "China has been going through a serious cash crunch during the last several years. But now the government is easing up on exchange and foreign trade."

In addition, the huge domestic Russian economy is starting to pick up after years of decline, and any pick up in Russia would have a significant impact on world copper markets.