Rock Solid

Worrying can be a way of life for scrap dealers, who when the markets are low can worry whether they’ll be ready for when markets finally improve.

For most of the past two years it is the flip side of that coin that those with worrying tendencies have been concerned about: With markets so good, will they be ready to handle the change when prices come back down to Earth?

Based on global economic conditions, there are some market fundamentals that would seem to ease those concerns in the near term. The warp speed economic growth of China is being joined by heated economies in other Asian nations—including India, with the world’s second largest population.

However, if there is one lesson commodities market veterans can teach younger players, it is to expect the unexpected.

STRIVING IN ASIA. No coverage of the commodity markets for the past five years has been complete without mention of the phenomenal growth in China’s manufacturing sector.

Steel has been a vital material in the Chinese manufacturing and infrastructure boom. And even though Chinese steelmakers have preferred less scrap-intensive integrated steelmaking technology rather than electric arc furnace (EAF) methods, the tremendous burst in overall steel production has still driven increased demand for ferrous scrap each of the last several years.

Statistics from the International Iron and Steel Institute (IISI), Brussels, indicate no signs of a slowdown in China. Steelmakers in China produced more than 50,000 metric tons of crude steel in the first two months of 2005, compared to 40,700 metric tons in the first two months of 2004. That 22.9 percent increase far outpaces global growth of 6.2 percent, according to the IISI.

Most other major steel producing nations showed modest gains in steel production, with the expanded family of the European Union (which now includes 25 nations) showing a 1.6 percent gain for the early portion of 2005. Italy is among the top performers thus far in 2005, while the U.K. is showing a slowdown.

That percentage increase was identical to the 1.6 percent gain demonstrated in the United States, and just below a 1.9 percent gain in South Korea. Japan, Canada and Australia are among the nations showing a slowdown in steel production in early 2005 vs. their early 2004 production rates.

An economic report released by the World Bank in early April proposes that the global economy hit a peak of sorts in 2004 and that leading indicators are signifying some cooling down in the global economy for 2005.

The organization’s annual Global Development Finance Report is predicting that the U.S. economy will grow in 2005, but at a slightly slower pace than in 2004. Similarly, the report sees the global economy slowing in 2005 and into 2006.

A few days after that report, however, news of a potential cooperative trade agreement between China and India could cause a refiguring of the global economic short-term outlook.

Delegates from both nations signed a statement pledging to promote economic ties and to attempt to work out demarcation disputes along their mountainous border region.

While China’s manufacturing economy has boomed as it has upgraded its transportation and utility infrastructures, India’s manufacturing growth has been comparatively modest.

A pact with China could provide fuel to India’s infrastructure, as well, if it begins to trade more with its northern neighbor.

Global demand should continue to keep steel and ferrous scrap prices high, at least one forecaster predicts. An April report from Goldman Sachs cites steel demand in China and the U.S. as the reason steel pricing will remain aloft in 2005.

The investment company’s European analysts see the overall global scene helping not only U.S. and Chinese steelmakers to profitability, but also European firms, such as Germany’s ThyssenKrupp, the U.K.-Dutch Corus Group and Arcelor, with significant holdings in France, Luxembourg and Spain.

The same Goldman Sachs forecasters predict China’s gross domestic product will rise 8.8 percent this year, ensuring the nation will continue to import rather than to export steel.

THE HOME FRONT. In terms of local (domestic) scrap generation and demand, 2005 has not provided any indications of a sharp drop in its early months.

Scrap dealers are all too aware of the roller coaster nature of the commodities markets, and many are no doubt nervously awaiting a sudden drop.

Among the reasons for concern would be the health of the two remaining U.S.-based automakers. Both General Motors and Ford Motor Co. have reported plunging profit expectations for 2005.

Securities analysts assessing GM’s and Ford’s plights point not only to declining market share, but also to weighty health care and benefits costs for current employees and retirees.

The blame assigned to benefit and pension costs is reminiscent of the steel industry shakeout of the previous few years, when long-time steel industry names, such as Bethlehem Steel, National Steel and Weirton Steel, disappeared.

Few are suggesting that either GM or Ford are in imminent peril, but if major overhauls of the two companies takes place, it is safe for scrap suppliers to question whether they will be able to churn out as many vehicles—and thus use as much sheet steel or as many cast iron engine parts as they did in the early part of this decade.

In the first quarter of 2005, North American vehicle production was down about 3.6 percent, according to industry statistics gathered by trade publication Ward’s Auto World.

The 160,000 fewer vehicles produced in that time span represents that many fewer cars and trucks made in the United States, Canada and Mexico, adding up to several tens of thousands of tons less of steel being consumed.

The construction economy remains fairly healthy across the board, keeping demand for structural steel and reinforcing steel solid. New home construction generally brings about demand for new steel-clad appliances as well (washers, driers, refrigerators, air conditioners, HVAC systems, etc.), providing a home for sheet steel and small motors.

Scrap-melting electric arc furnace steel mills in the United States largely reported good results in 2004, and early indications for 2005 also seem positive.

Steel Dynamics Inc. (See "Dynamic Approach" in the March 2005 issue of Recycling Today), Fort Wayne, Ind., enjoyed a record year for revenue and income in 2004, as did Nucor Corp., Charlotte, N.C., the world’s largest EAF steelmaker.

THE MATERIAL WORLD. Having looked at steel’s traditional markets, the next logical question might be whether these markets will remain devoted to steel as a material.