Tri-polar syndrome

Competing tariffs and other trade barriers have caused major disruption to global trading markets for paper and plastic scrap, as well as for ferrous and most types of nonferrous scrap. The turmoil also has affected stainless steel scrap trading, but the sector entered the fray starting from a much lower base.

Traders of ferrous scrap and stainless steel industry analysts say numerous factors have combined to produce a sector in which finished stainless and semifinished materials trade globally, but feedstock increasingly has stayed close to home.

Statistics gathered by the Brussels-based International Stainless Steel Forum (ISSF) seem to back up this notion of three main regions with little interaction: Nearly all stainless steel scrap generated in Europe stays there, and the same is true in North America. China’s stainless steel producers, meanwhile, have imported far less scrap in the past 10 years compared with other metal sectors in that nation.

Sources Recycling Today contacted, as well as panelists at the Bureau of International Recycling (BIR) 2018 spring convention, see very little occurring to change those circumstances this year.

Unfortunate disconnection

The price of nickel, as measured by the London Metal Exchange (LME), rose impressively in the first half of 2018. That potentially could have brought good news to stainless steel scrap processors and traders. Instead, traders say they saw few opportunities to cash in on the lofty market.

In the past 18 months, China’s government has taken clear measures to reduce its reliance on imported scrap, including a ban on many types of stainless steel scrap.

For traders of most other scrap, the new restrictions end an era of unprecedented global activity that saw secondary raw materials move in massive amounts from North America and Europe to China.

China’s stainless steel sector grew just as fast as its copper and aluminum sectors from 2000 to 2017, but stainless steel producers there found an alternative feedstock in the form of nickel pig iron.

Nickel ores and concentrates from nearby nations, including Indonesia and the Philippines, replaced imported scrap in most stainless melt shops in China. This tempered the type of booming export market that was enjoyed by traders of aluminum and copper scrap.

Traders held out hope that environmental factors or melt shop yield considerations might yet spark a stainless scrap buying boom in China, but two circumstances now seem poised to prevent that: the Chinese government’s sharp anti-imported scrap measures and investments being made to upgrade nickel ore in Indonesia (shifting emissions formerly created in China).

While other scrap sectors were globalizing and sending tens of thousands of shipping containers of material around the world in the past two decades, the stainless steel sector remained regional in nature.

The local nature of the stainless steel scrap market was one factor panelists at the Stainless Steel & Special Alloys Committee meeting discussed at the 2018 BIR World Recycling Convention & Exhibition, which took place in late May in Barcelona, Spain.

In a panel discussion at the meeting, moderator Barry Hunter of Boonton, New Jersey-based Hunter Alloys LLC expressed concern about consolidation within the stainless steel production center, pointing to the existence of “two major mill” companies in both the U.S. and Europe.

Stainless scrap has “very limited elsewheres” it can go, said the veteran trader Hunter. “I think mills today are getting scrap for a discount because of a ‘captive audience’ for domestic scrap.”

Trouble with the blender

Contacted by Recycling Today in early July, Hunter spells out several historical trends that, in his opinion, have caused the stainless scrap market to be where it is in 2018. As he did in the BIR panel, Hunter points to industry consolidation as a crucial factor.

Europe and North America have more than two producers of stainless steel, but two of them have had an outsized influence on stainless steel scrap flows, Hunter says.

Spain-based Acerinox and Finland-based Outokumpu invested in large capacity mills at seaport locations in their home countries. These mills, with advanced melt shop technology, soon helped the firms become dominant players in Europe, he says.

The two companies’ successful methods were then exported to North America. Acerinox invested in the North American Stainless (NAS) complex in Kentucky, while in 2012 Outokumpu purchased a stainless mill in Alabama that had been built by Germany’s ThyssenKrupp.

On both continents, the two companies have absorbed scrap, using locations on sea or river ports to secure the supplies they need. In addition to soaking up regional volume, they also have changed the nature of stainless scrap grades, Hunter says.

Prior to the dominance of Acerinox and Outokumpu in Europe, traders in the U.S. “had been shipping clean segregated [stainless scrap] grades to Europe,” he says, often to small and midsized mills in nations like Italy and Germany.

The purchasing needs of the two new mills, however, revolved around blends, Hunter says. “As furnace sizes grew, buyers and sellers would write a contract with how much contamination the mill could tolerate for a good yield,” he comments.

As NAS (and then the Outokumpu mill in Alabama) emerged as major buyers in the U.S., those same purchasing methods grew in North America.

Soon, rather than small loads prepared for specialty melts, processors in the U.S. were preparing material for “barges and blends, at 1,000 tons of volume. You could have any [stainless alloy] in them,” says Hunter. The measuring stick, he adds, changed from segregating alloys to merely staying under limitations such as 0.05 percent copper or 0.025 percent tin.

“West Coast shippers have a little more competition with buyers in India, Taiwan, Japan and South Korea, but a lot of U.S. stainless scrap is landlocked.” – Barry Hunter, Hunter Alloys LLC

Processors relying on this blend have few options other than “the big two” producers, and, in the eastern half of the U.S., they have “no real export competition [from] Europe,” he says. “West Coast shippers have a little more competition with buyers in India, Taiwan, Japan and South Korea, but a lot of U.S. stainless scrap is landlocked.”

Subsequently, Hunter concludes, “The mills today are probably able to buy scrap—in North America and Europe—using the highest discount levels that I’ve ever seen. It used to be around 90 percent of the nickel value from the month prior. Today, you’re looking at below 80 percent—and there’s no other place else to go with the scrap.”

Notes of optimism

While stainless scrap traders may have missed out on China’s “gold rush” and North American processors missed out on China’s bidding up of stainless scrap prices, positive aspects of the market remain.

The good news comes largely in the form of volumes and healthy and growing markets for finished stainless steel products and for nickel.

At the BIR meeting in Spain, analyst Olivier Masson of U.K.-based Roskill Information Services Ltd. said stainless steel output has demonstrated growth this decade and the previous one at a combined average rate of 5.4 percent. Annual output has risen by a multiple of “about 2.5 times since the year 2000,” he said.

Figures from the ISSF point to Asia (and China in particular) as the source of much of that growth, but the Western Hemisphere also has chipped in to stainless steel growth story this century.

Stainless steel melt shop production in the ISSF’s Americas region grew from 2.29 million metric tons in 2002 to 2.93 million metric tons in 2016—a 28 percent rise, or 1.66 percent annually on average.

While this pales in comparison with China’s growth, it is a better scenario than what Europe has experienced in the same time frame. In the ISSF Europe/Africa region, melt shop output declined from 8.21 million metric tons in 2002 to 7.7 million metric tons in 2016, a drop of 6.2 percent.

As noted earlier, nickel pricing was on an upward swing in the first half of 2018. While this trend may be tied in part to a healthy stainless steel sector, much of the positive momentum is attributed to electric vehicle (EV) batteries.

Masson said he thinks nickel demand will rise with increased EV sales, “but I generally think we need to be looking at the expectations” in that market and whether “established sectors might be more important” in determining nickel demand, including the oil and gas sector.

Several panelists at LME Asia Week in Hong Kong were slightly more bullish on nickel pricing tied to the EV market.

Guy Wolf of London-based commodity brokerage Marex Spectron said nickel pricing “still has residual strength in our estimate,” adding that its use in EVs may be “a little bit of a red herring [but is] positive for psychology” in the nickel market.

“I don’t think the EV story is a red herring,” said Robert Hawkes of Goldman Sachs International, London. “If you’re in that business, you need to lock in prices now. You don’t know where [metals] prices will be in five years.”

Although the stainless sector and the EV industry may not be directly connected, scrap processors likely should keep one eye on EV sales momentum to help determine the direction of scrap commodity’s value.

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